Proposed Changes Would Require Reporting within One Minute of Execution
On August 2, 2022, the Financial Industry Regulatory Authority, Inc. ("FINRA") proposed to amend FINRA Rule 6730(a)(1) (the "FINRA Proposal") to reduce the Trade Reporting and Compliance Engine ("TRACE") reporting timeframe for transactions in "TRACE-Eligible Securities"1 currently subject to a 15-minute outer limit reporting timeframe to one minute.2 The one-minute outer limit reporting timeframe would apply to most transactions in corporate and agency debt securities,3 asset-backed securities ("ABS")4 and agency pass-through mortgagebacked securities ("MBS") traded to-be-announced ("TBA") for good delivery ("GD"),5 but it would not apply to a list or fixed price transaction or takedown transaction,6 transactions in certain securitized products7 and U.S. Treasury Securities transactions.8 FINRA would continue to make information on these reported transactions publicly available immediately upon receipt. The FINRA Proposal requests comment on whether it is appropriate for FINRA to reduce the reporting timeframe for such transactions to one minute in light of the technological advances since adoption of the 15minute reporting requirement in 2005, as well as the potential transparency benefits of more timely trade reporting.9 Comments are due by October 3, 2022. Also on August 2, 2022, the Municipal Securities Rulemaking Board ("MSRB") proposed to amend MSRB Rule G14(a)'s outer limit reporting timeframe on transactions in municipal securities from 15 minutes to one minute (the "MSRB Proposal"),10 noting the potential benefits of harmonizing MSRB trade reporting requirements for municipal securities with FINRA requirements for other fixed income securities.11 Comments are also due by October 3, 2022.12 In light of the similarity between the FINRA Proposal and the MSRB Proposal, this Legal Update focuses on the FINRA Proposal.
TRACE provides post-trade transparency to market participants and provides regulators with critical data to support regulatory policy decisions and market surveillance and oversight.13 Information on transactions in TRACE-Eligible Securities has been subject to immediate public dissemination since January 2006 and expanded to additional transaction types over time.14 Likewise, over time, the reporting timeframe has been reduced from
75 minutes at TRACE's launch in 2002, to 15 minutes in 2005.15 Currently, FINRA Rule 6730(a)(1) generally requires reporting a transaction in a TRACE-Eligible Security as soon as practicable, but not later than within 15 minutes of execution.16
The FINRA Proposal arises from the SEC's post-trade transparency agenda, in connection with which SEC Chair Gary Gensler remarked earlier this year that TRACE and MSRB trade reporting "has not kept pace with changes in our markets and with technological advances."17 Chair Gensler therefore called for improvements to posttrade transparency by shortening the reporting timeframes from 15 minutes to one minute.18
Overview of the FINRA Proposal
The FINRA Proposal would amend FINRA Rule 6730(a)(1) to provide that:
- For transactions executed on a business day at or after 12:00:00 a.m. ET through 7:59:59 a.m. ET, firms would be required to report the trade the same day, no later than one minute after the TRACE system opens;
- For transactions executed on a business day at or after 8:00:00 a.m. ET through 6:29:59 p.m. ET (i.e., standard TRACE system hours), firms would be required to report the trade as soon as practicable, but no later than one minute of the "time of execution,"19 except that, for transactions executed on a business day less than one minute before 6:30 p.m. ET, firms would be required to report the trade no later than one minute after the TRACE system opens on T+1 (and, if reported on T+1, designated "as/of" with the execution date); and
- For transactions executed on a business day at or after 6:30:00 p.m. ET through 11:59:59 p.m. ET, or for trades executed on a Saturday, a Sunday, a federal or religious holiday, or other day on which the TRACE system is not open at any time during that day, firms would be required to report the trade on T+1 no later than one minute after the TRACE system opens (and must designate the trade "as/of" and include the execution date).
FINRA believes the proposed reporting timeframe reduction will "improve transparency and allow investors and other market participants to obtain and evaluate pricing information more quicklycreating a qualitative increase in market transparency for these securities."20 In FINRA's view, "[r]educing the reporting timeframe will solidify the benefits of the technological advancements that have occurred since 2005 by requiring timelier reporting in the rule."21
In its economic impact assessment relating to the FINRA Proposal, FINRA found that 81.9% of trades in TRACEEligible Securities currently subject to the 15-minute reporting timeframe were reported within one minute of execution.22 FINRA acknowledges that the FINRA Proposal would likely result in costs for firms to implement changes to their operational processes and technology systems in order to comply with the new timeframe, including establishing or enhancing automated reporting systems or opting to use a third-party reporting system.23 The FINRA Proposal may be particularly impactful for certain types of firms and products; for example, FINRA found that, for trades in TRACE-Eligible Securities currently subject to the 15-minute timeframe, ABS were reported the slowest (52% reported within one minute), followed by equity-linked notes and agency debt securities (77% and 75% of trades, respectively, reported within one minute).24
FINRA requests comment on various aspects of the FINRA Proposal, including the potential implications of the proposed one-minute reporting timeframe across the types of TRACE-Eligible Securities, by trade size and by firm type (such as those with limited trading volumes). FINRA also requests information regarding expected compliance costs, operational challenges, potential changes in market participant behavior and market liquidity, and the appropriate implementation period.
The proposed one-minute outer limit reporting timeframe under FINRA Rule 6730(a)(1) and MSRB Rule G-14(a) aligns with the SEC's agenda to improve post-trade transparency in fixed income markets. For this reason, FINRA and the MSRB likely seek to adopt these rule changes as proposed. Because shortening the reporting timeframes is likely to present operational and technological challenges, firms should identify required process and technology changes early, especially since FINRA and the MSRB may adopt an aggressive implementation schedule for their respective proposals.