On August 1, 2013, FINRA issued a new set of FAQs relating to its TRACE system.15 In one question, FINRA stated that a firm commitment from a broker-dealer or a customer to purchase a new issue debt security when it is issued, prior to a final pricing or determination of the final material terms of the new issue, does not constitute a transaction that must be reported to TRACE.
Citing FINRA Rule 6710(d), FINRA stated that, for purposes of TRACE trade reporting, the "time of execution" for a TRACE-eligible security occurs when the parties have a "meeting of the minds" regarding the material terms of the transaction. Material terms include price, coupon and quantity of the security, without which there can be no time of execution and, therefore, no requirement to report the firm commitment to TRACE.
FINRA’s advice appears to apply in the context of a variable price reoffering, where a dealer receives various firm commitments to purchase a security at varying prices within a range of public offering prices and underwriting discounts previously disclosed to investors. In these offerings, the aggregate principal amount of the offering is typically not known until the end of the marketing period. Accordingly, a TRACE report would not have to be filed until all of the commitments in the variable price reoffering have been made, and the aggregate principal amount has been determined.
The FAQ also reminds underwriters of these offerings that they should be clear in their communications regarding the final terms of the trade and how those terms will be conveyed between the parties.