By John M. Jascob, J.D., LL.M.
Securities industry groups have expressed concerns about the scope of FINRA’s recent proposal to require members to report secondary market transactions in U.S. Treasury securities to the Trade Reporting and Compliance Engine (TRACE). In separate comment letters to the SEC, the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI) offered general support for the proposal, stating that expanding TRACE reporting to Treasuries would provide greater clarity to regulators while helping to ensure an efficient and competitive market for all investors. The organizations each expressed concern, however, that the proposal may result in an incomplete view of the secondary Treasury market because FINRA’s rules by themselves cannot capture transactions executed by market participants that are not registered as broker-dealers.
FINRA proposal. In the wake of the "flash crash" in Treasury securities in October 2014, an interagency working group led by the Treasury Department analyzed the conditions that contributed to the unusual volatility as well as the structure of the overall Treasury securities market. After the Treasury Department solicited public comments on the need for structural changes, the Treasury Department and the SEC asked FINRA to consider a proposal to require member broker-dealers to report Treasury cash market transactions to a centralized repository.
FINRA’s proposal would amend the TRACE rules to require the reporting of transactions in all Treasuries with the exception of savings bonds, generally on a same-day basis. In response to public comments, however, FINRA proposed to add transactions in U.S. Treasury Securities to the list of transactions for which information will not be disseminated to the public.
SIFMA’s comments. SIFMA noted that the recent evolution of the Treasury market has included significant participation by entities that are not subject to FINRA’s reporting requirements, such as unregistered principal trading firms (PTFs), banks, and unregistered trading platforms. Without reported transaction-level data from these entities, any analysis of the U.S. Treasury market would be necessarily limited and incomplete. As a result, SIFMA expressed concern that the current proposal will not give regulators a complete picture of the current Treasury market. Accordingly, SIFMA believes that the Treasury Department and other agencies should determine the most efficient and cost effective way to develop a consistent reporting regime that encompasses all relevant market participants—including unregistered PTFs.
SIFMA also expressed concern that any analysis concerning the benefits of public dissemination of the data will be undertaken while incomplete data on the market is available. SIFMA suggested that the Treasury and the other agencies continue to engage in discussions with the full spectrum of market participants and other stakeholders before any decisions are made on public dissemination. SIFMA also urged Treasury and other official sector stakeholders to carefully consider and balance any potential benefits of public dissemination against its potential costs, including costs related to overall market liquidity.
ICI’s comments. The ICI echoed SIFMA’s comments, saying that the proposal will provide the official sector with only partial information about the U.S. Treasury cash market because not all intermediaries in the market are FINRA members. In addition, some significant intermediaries, including certain unregistered PTFs with potentially high levels of trading activity, face little or no regulation. The ICI cautioned regulators against using the data acquired through TRACE reporting to develop rules that would change the structure of the Treasury market. In the ICI’s view, fundamental changes to market structure such as trading halts, circuit breakers or the public dissemination of trading data have the potential to disrupt the operation of the market if they are implemented prematurely or unnecessarily.