As the financial landscape continues to evolve, regulatory agencies are committed to ensuring transparency and stability in markets. One such initiative is FINRA’s Trade Reporting and Compliance Engine (TRACE).
A series of approved amendments to TRACE reporting take effect in 2023, designed to bolster market surveillance and enhance investor protection. Recognizing the importance of comprehensive and timely data, the approved amendments introduce additional data elements, stricter reporting timelines and require more granular details related to certain transactions.
Amendments to Require Identification of Portfolio Trades
As of May 15, 2023, members must append the portfolio trade modifier if reporting a transaction in a corporate bond:
- executed between only two parties,
- involving a basket of corporate bonds of at least 10 unique issues (i.e., individual corporate bonds counted using security identifiers such as CUSIPs or TRACE symbols), and
- for a single negotiated and agreed upon price for the entire basket; including those scenarios where the final price is determined by applying a uniform spread to all the securities in the basket.
Note: Where the parties simply aggregate individual prices without further negotiation, including where the parties apply different spreads or other varying methodologies to determine the prices for individual securities in the basket, the basket trade would not be considered to be executed for a “single agreed price”.
Additional information, including further clarity on the various scenarios where the “new” portfolio trade modifier may/may not be applicable, can be obtained by reviewing Regulatory Notice 22-12 and FINRA’s TRACE FAQs.
Enhancements to TRACE Reporting for U.S. Treasury Securities
FINRA has also adopted amendments to Rule 6730 (Transaction Reporting), requiring members to report transactions in U.S. Treasury securities to FINRA’s TRACE as soon as practicable but no later than 60 minutes from the time of execution. The shortened reporting timeframe went into effect on May 15, 2023.
In addition to the shortened reporting time, FINRA has also adopted two additional amendments to Rule 6700 series with an effective date of November 6, 2023:
- Members are required to report electronically executed transactions in U.S. Treasury securities to TRACE in the finest increment captured by the system used to execute the transaction, subject to an exception for members with limited trading volume in U.S. Treasury securities. (The exception above is noted in the new Supplementary Material .07 which defines a “member with limited trading volume in U.S. Treasury Securities” as a member that executes transactions in U.S. Treasury securities of $10 million or less in average daily par value, computed by aggregating buy and sell transactions, during the preceding calendar year.)
- Revision of TRACE Frequently Asked Questions (FAQs) to standardize price reporting for Treasury bills and Floating Rate Notes (FRNs) by requiring all transactions to be reported using the dollar price. Under existing FINRA guidance, members may report the execution price for Treasury bills and FRNs as either the discount rate or discount margin, as applicable, or using the dollar price, expressed as a percentage of par.
Additional information can be obtained by reviewing Regulatory Notice 22-27 and FINRA’s TRACE FAQs.
These approved amendments to TRACE reporting mark a significant step forward in enhancing financial transparency and investor protection. To ensure continued compliance with TRACE reporting requirements and recently adopted and proposed amendments, firms should:
- thoroughly review and understand the recently adopted TRACE reporting amendments;
- update their internal policies and procedures to incorporate the changes introduced;
- enhance their data collection and reporting systems to capture the additional data elements required by the amendments; and
- perform testing and quality assurance to ensure that their systems and processes are functioning correctly and producing accurate reports in accordance with the requirements.
Trade reporting continues to be a focus area for FINRA, and firms can expect to see more regulatory enforcement. Oyster Consulting’s trade reporting experts will review and test your reporting practices, including TRACE and CAT reporting. To remediate specific issues, our team of experts can also provide a targeted approach.
About The Author
Jose Fernandez
Jose’s executive experience includes responsibility for the overall coordination and ongoing improvement of operational support functions and processes including Client Onboarding, Operational, Counterparty and Market Risk, Regulatory Compliance, Audit, Profit/Loss management and reporting, Vendor Management and Technology.
