September 15, 2020

Submitted electronically to: [email protected]

Jennifer Piorko Mitchell
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506

Re: Regulatory Notice 20-24 – Proposed Changes to TRACE Reporting Relating to Delayed Treasury
Spot and Portfolio Trades

Dear Mrs. Mitchell,

SIFMA1 is pleased to respond to FINRA’s Regulatory Notice (RN)2 regarding TRACE flags for portfolio trades and delayed treasury spot trades. These proposals, if they became rules, would implement recommendations of the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC), and we write this letter to express our high-level comments on the proposals. As a general matter, SIFMA supports the enhancement of TRACE to provide transparency to market participants, when such transparency is appropriately balanced with the impacts on liquidity and reasonableness of compliance burdens that any particular proposal creates. In this letter we set out some initial views, questions, and requests for further details of SIFMA members on the proposals in the RN. As you will see, while we believe there are positive aspects to the proposals, some of our members have expressed concerns about the utility of them. We hope that FINRA takes our comments into account, and is able to return to the market with more information and clarification to help build a broader base of support for the proposals in the RN. We look forward to a continued dialog on this RN.

1. Portfolio Trading Flag

The RN explains that the proposed portfolio trading flag would allow market participants to “better identify trade prices that may not reflect the market price if the bond was priced individually.”3 Our members see two aspects of this proposal: (1) the identification of portfolio trades vs. other kinds of trades and (2) the identification of potentially off-market trades.

We agree that this proposal would make it easier to identify the type of transaction – that a trade was a portfolio trade – since they would be tagged as such. However, some of our members have noted that it is fairly easy, generally speaking, to identify portfolio trades today without the usage of a specific modifier, so the proposal would provide somewhat limited new information to market participants in this regard. Other members noted that this may be beneficial to smaller market participants, as well as market observers and researchers, who may not have systems in place to actively screen for these types of transactions.

The other aspect of the proposal relates to identification of potentially off-market trades and we agree that the modifier may flag a trade that was traded off-market. Generally, the portfolio trading flag would alert users of the data to take care to consider whether or not the flagged trades are off-market.

The key word used above is ‘may’ – indeed the price in a portfolio trade may or may not be off market. The proposed indicator is not definitive. Some of our members have questioned the appropriateness of a flag that does not provide definitive information regarding the price that is reported and have expressed concern that a false impression of being off-market could be created by the flag. Other members noted that it should not be assumed that a portfolio flag would designate that a bond trade was off-market, but rather provide context that the trade price may have been determined in a different manner than a single bond trade.

TRACE already incorporates a special price modifier that is required when trades are executed off market for various reasons (e.g.: NERIs (FAQ 3.4.12), bonds trading flat (FAQ 3.1.40), where prices are very high or very low (FAQ 3.4.26)), and provides an unequivocal signal to data users. Today dealers are expected to review each line item in a portfolio trade to determine if it is off market, and if so, set the special price indicator to ‘yes’. A potential benefit of this proposal could be to reduce the compliance burden for dealers if the portfolio trade indicator would supplant the need for the dealer to also do a line by line review of a large trade for the purposes of the special price indicator. Related to this, FINRA should confirm that the modifier would be taken into account in fair pricing reviews and dealers would not face undue burden to explain why a price on a portfolio trade was off-market, given the nature of these transactions.

An additional concern that some of our members have raised is that this proposal would start to shift TRACE away from being a price transparency tool (e.g., size, quantity, time of execution) into a tool that provides trading strategy details (e.g., how a trade was executed). Some members who are active in this market expressed concerns regarding the potential impact on liquidity and potential disclosure of member or client trading strategies, while other members active in the market did not believe this was a material concern with the appropriate definition of a portfolio trade, given those active in the market are already aware of their occurrence. As FINRA knows, both dealers and their clients view trading strategy information as proprietary and sensitive, and the potential for exposure of such information could cause participants to alter how they trade and potentially have impacts on market liquidity. We would appreciate FINRA addressing this concern in subsequent publications, and consideration of whether there are ways to mitigate it.

1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).
2 Available here: https://www.finra.org/sites/default/files/2020-07/Regulatory-Notice-20-24.pdf
3 Proposal at 12.