Expanding the TRACE PT Indicator to Member Affiliates

Summary

SIFMA provided comments on FINRA’s recent proposal to expand the usage of the non-member affiliate—principal transaction indicator (“PT indicator”) to also include member affiliates.

Excerpt

1. Summary

SIFMA supports FINRA’s proposal to expand the use of the PT indicator to member-affiliate transactions. This will make TRACE data more useful as it will allow for the suppression of duplicative trade reports that add noise to the data feed but do not provide additional transparency information. This letter addresses the following topics:

• SIFMA supports this proposal to expand the scope of the PT indicator
• SIFMA supports the “reasonable belief” standard
• FINRA should not penalize good-faith errors with respect to the PT indicator in a situation where a member trades same price, same day with both a member affiliate and a non-member affiliate.
• FINRA should provide at least 12 months for member firms to implement this rule
  change but should also allow for early adoption once the amendment is effective.

2. Discussion

a. SIFMA supports the expansion of the scope of the PT indicator

FINRA’s proposal is sensible. The PT indicator is currently used for trades with non-member affiliates where there is both a back-to-back affiliate trade and a corresponding trade with another party on the same day at the same price. Trades reported with this indicator – the back-to-back leg – are suppressed from dissemination. Thus, duplicative trades between affiliates which merely facilitate a market trade with another party, which do not provide any transparency value, do not clutter the TRACE data feed and potentially mislead users of that data about the level of activity in a certain bond. As footnote 5 notes, “FINRA determined that dissemination of these trades does not provide investors with useful information for pricing, valuation or risk evaluation purposes, and may in fact be distortive.” SIFMA agrees.

FINRA’s proposal recognizes that the same scenario occurs with broker-dealers’ member affiliates. If a broker-dealer executes a back-to-back, same-day, same price trade with a member affiliate, pricing information is the same as in the non-member affiliate context – meaningless, duplicative information that could cause confusion or misperception of the true market for a bond.