Starting next year, FINRA members will have to report their U.S. Treasury transactions — savings bonds are exempted — to the self-regulatory organization.
The SEC has approved the Financial Industry Regulatory Authority’s proposal to require FINRA members to report transactions in U.S. Treasury securities, with the sole exception of savings bonds, to TRACE, FINRA’s trade reporting and compliance engine.
July 10, 2017 is the implementation date for the bond-trade reporting requirement, says FINRA, the nonprofit industry organization that says it oversees 3,895 securities firms with 641,761 brokers.
“At this time,” the SEC notes, “FINRA will not disseminate information on transactions in Treasuries and will not charge fees on reports for Treasuries.”
In other words, “collected information on trades will be available only to regulators, and not shared publicly,” as Bloomberg News put it.
TRACE, developed by FINRA, “facilitates the mandatory reporting of over-the-counter secondary market transactions in eligible fixed income securities.”
This latest deployment of TRACE capabilities is a result of the “unexplained volatility in the Treasury market in October 2014,” the SEC says, recounting how that volatility resulted in the creation of an interagency working group which, the following year, “proposed four ‘next steps’ in understanding the evolution of the market. Included among these steps was an assessment of the data available to regulators and to the public regarding the cash market for Treasuries.”
That volatility was dubbed a “flash crash” by both financial practitioners and the media.
The 2014 volatility was, by most accounts, just one of several sharp roller-coaster rides in the securities markets, dating back to 2010, when high-speed trading, automated buying and selling, and, arguably, a 30-something British man who traded in futures from his parents’ house in London (and currently faces extradition to the U.S., charged with wire fraud, commodities fraud and market manipulation), and possible other factors, caused the Dow to lose (and regain) nearly 1,000 points in the space of a few minutes.
An October 2016 flash crash, to cite another example, dropped the price of British sterling more than six percent against the American dollar, again within minutes.
After each flash crash, studies have been undertaken and new rules have been proposed, as part of a seemingly unending effort to regulate evolving and changing markets.
The 2014 flash crash roiled the bond market and the newly enacted TRACE program requires players in the multi-trillion bond market to report their trades to a “centralized repository”; namely, FINRA.
Part of the impetus for TRACE is simply to gather data.
After the 2014 crash, a report, attributed to the New York Federal Reserve, the SEC, the U.S. Treasury and the CFTC, noted the “unprecedented number of short positions [that] unwound … as well as a decline in order book depth, and changes in order flow and liquidity provision,” according to a CNBC account. That report also focused on the “heightened level of self-trading during portions of the event window,” according to the business-news network.
“Self-trading,” as FTF News readers will know, occurs when a single player takes both sides of a trade, “so that no change in beneficial ownership results.”
At the beginning of this year, a Treasury request for information (RFI) sought public comment on structural changes in the U.S. Treasury market and their implications for market functioning, particularly requesting comment on “official-sector access to data regarding the cash market for Treasuries and whether dissemination of Treasury market transaction data to the public would be beneficial.”
That RFI led to the FINRA “centralized repository” TRACE initiative, first proposed this past July.
“TRACE will provide an effective structure for FINRA members to report trades in Treasuries so that more information about this important market is available to regulators,” Steven A. Joachim, FINRA’s executive vice president of transparency services, says in a statement. “The new requirement will significantly enhance the ability of FINRA and other regulators to understand trading activity in Treasury securities.”
In an October 2015 speech, SEC Chair Mary Jo White signaled that the time for registration and regulation had come for high-frequency trading (HFT) firms, saying that “it is essential that our collective regulation of this critical market keeps pace with dramatic changes in the Treasury market,” according to a report by The Financial Times. “Regulators should seriously re-evaluate the extent to which unregistered firms that represent such a large portion of cash Treasury volume need to be subject to an appropriate regulatory regime.” she added.
FINRA characterizes itself as the “largest independent regulator” for securities firms doing business in the United States. TRACE, developed by FINRA, is the “vehicle that facilitates the mandatory reporting of over-the-counter secondary market transactions in eligible fixed income securities,” the authority says.
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