TRACE

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Contents

Overview

Source: Finra website

The Trade Reporting and Compliance Engine is the FINRA developed vehicle that facilitates the mandatory reporting of over the counter secondary market transactions in eligible fixed income securities.

All broker/dealers who are FINRA member firms have an obligation to report transactions in corporate bonds to TRACE under an SEC approved set of rules.

SEC approves access to historic TRACE data and related fees

Background & Discussion

Transaction-level information on publicly traded TRACE-Eligible Securities is available in real-time as the transactions are reported to TRACE (TRACE Market Data). However, transaction-level information is not available in TRACEMarket Data, or otherwise publicly available, if such information is not disseminated as provided in Rule 6750(b).2

Currently, for each transaction the data released as TRACEMarket Data includes, among other fields:

  • bond identifiers (FINRA symbol and CUSIP number);
  • date/time - execution time for current day’s transactions, execution date and time for as/of trades and reversals;
  • price;
  • yield;
  • quantity, subject to certain volume limits or caps3;
  • contra-party type (customer or dealer) & buy or sell side indicator (in TRACEMarket Data, only the sell side of an inter-dealer report is subject to dissemination);
  • various modifiers, indicators (e.g., the trade was executed at a special price; the settlement does not followmarket convention) and administrative messages.

The fees FINRA charges for TRACE data are set forth in Rule 7730. FINRAmakes the real-time TRACE Market Data available to professional users for a fee, while Non-Professionals have access to transaction-level data at no charge at www.finra.org/ market data and other publicly accessible Web sites.4

Historic TRACE Data

FINRA believes that it is important to provide access to historical transaction-level data, particularly for research purposes. EffectiveMarch 31, 2010, transaction-level data for transactions in all TRACE-Eligible Securities reported to TRACE since July 1, 2002, except Rule 144A transactions, will bemade available as Historic TRACE Data. Historic TRACE Data will include transactions that, at the time of reporting, were not subject to dissemination, such as Non-Investment Grade corporate bond transactions. (As a group, such transactions were reported to TRACE as of July 1, 2002, but were only later subject to dissemination.) Also, Historic TRACE Data will include certain transaction-level information—such as actual trade volume (or size)—that currently is not publicly available for larger transactions.

The release of Historic TRACE Data is subject to the following protocols:

  • transaction data must have aged at least 18 months before FINRA will include it in Historic TRACE Data. For example, when historic data becomes available on March 31, 2010, TRACE corporate bond transaction data from2009 will not be available at that time, because the data was captured and created less than 18months ago.
  • Historic TRACE Data will not include the identity of any broker-dealer that is a party to a transaction.

TRACE may collect asset-backed securities data

Securities firms may be forced to report trading data for asset-backed securities after the opaqueness of that market helped create the worst financial crisis since the Great Depression, the U.S. brokerage industry’s main regulator said.

The Financial Industry Regulatory Authority’s proposal for expanding its Trade Compliance and Reporting Engine to securities including mortgage bonds and collateralized debt obligations doesn’t include a plan to publicly disclose the information, the regulator said today in a statement.

Finra’s pursuit of price and volume data for transactions involving asset-backed bonds follows the Securities and Exchange Commission’s approval this week of a complete broadening of Trace to “agency” notes and new corporate debt, which expanded a system that Wall Street brokers say has made it harder to trade bonds while cutting into their profits.

“For regulators, there is a demonstrated need for ABS market information,” Finra Chief Executive Officer Richard Ketchum said in the statement. “Greater disclosure around these securities directly linked to the credit crisis will allow for more effective oversight with a deeper understanding of market dynamics.”

The Obama administration, in its June outline for steps that may be needed in an overhaul of the financial system, and former SEC Chairman Arthur Levitt have called for an expansion of Trace to asset-backed securities after uncertainty about their values helped cause investors and lenders to question the health of banks and investment funds.

‘Right Direction’

“I guess it’s a step in the right direction,” Levitt, who serves on the board of directors of Bloomberg LP, the parent company of Bloomberg News, said in a telephone interview today.

SEC approval on ABS data would leave Finra with trading information on all parts of the U.S. debt market aside from Treasuries and money-market instruments, allowing it to better detect fraud, market manipulation and other illegal activity, according to today’s statement. Finra would get data on about 70 percent of U.S. notes, including municipal bonds under a separate system, up from 27 percent before the expansion already approved gets put into effect in March, Finra said.

Trace, which started in July 2002 and was fully phased in by February 2005, provides trading details to anyone with an Internet connection. The information includes the most-active bonds, volume, advances, declines and new highs and lows.

Data Disclosure

Finra said its proposal doesn’t call for making public the asset-backed data initially because the market differs so much from trading in company bonds, so it needs to better assess whether doing so would be beneficial. Under certain circumstances, disclosure could lead investors to “erroneous conclusions” about the value of securities or reduce liquidity in the market, according to Steven Joachim, Finra’s executive vice president for transparency services.

“Our bias is toward transparency,” he said in a telephone interview today. “But we need to study and understand what the potential impacts are before we do it.”

The new Trace data on agency debt and new corporate issues will be made available to the public. When Trace was inaugurated for secondary trading in corporates, Finra began by collecting data, and only later made it publicly available. The expansion to new issues and the more than $2.7 trillion of U.S. agency debt, such as the borrowing of mortgage-finance companies Fannie Mae and Freddie Mac, won’t come with such an observation period.

Objections From Brokers

Brokers represented by the Securities Industry and Financial Markets Association and Regional Bond Dealers Association objected to that expansion in comment letters, saying it would impair market liquidity. After Trace, so-called bid-ask spreads on corporate bonds fell, which dealers say made securities firms more reluctant to hold inventories of the debt and thus made it harder for investors to trade.

Kumar Venkataraman, a finance professor at Southern Methodist University in Dallas, estimates that corporate-bond traders lost $1 billion in fees from mid-2002 to mid-2003, or about $2,000 a trade, according to a study published in 2007 in the Journal of Financial Economics. At the same time, Trace price disclosures have helped smaller dealers better compete with larger ones, he said in a telephone interview today.

“We have learned more transparency has helped reduce transaction costs and improved price discovery,” Venkataraman said. “As much as it’s a process to improve the efficiency and quality of the markets, it’s also political process, so this may just be the prudent first step that needs to be done to take the final step” of disclosing the data.

One consideration for whether Trace disclosure makes sense for a certain market is whether there’s a “fungiblity of assets” in it, meaning “the price of one is a good basis for the price of another,” Finra’s Joachim said earlier this week.

“For portions of the market that are illiquid and where things like credit ratings haven’t been as consistent, there’s a question of whether the prices would be fungible enough,” he said.

The latest Trace expansion would include mortgage securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae, as well as so-called 144A debt sold to institutional investors. Data for 144A corporate bonds is currently collected and not disclosed. Regulators aside from Finra and the SEC would need to get Finra’s permission to view the new data, Joachim said.

While credit-default swaps remain excluded from Trace, officials who are studying improving that market have considered using the system or a similar one to track trades, among other ideas, he said.

On October 1, FINRA submitted a proposal to the SEC to expand TRACE to include all asset-backed securities (ABSs), including mortgage-backed securities and collateralized debt obligations. FINRA is proposing to initially only collect ABS transaction data. After detailed analysis and observation of the market, FINRA would determine whether dissemination of ABS data is appropriate.

TRACE expansion covers agency backed securities

  • Source: FINRA

TRACE Expansion—Agency Debt and Primary Transactions

On September 29, the Securities and Exchange Commission (SEC) approved a major expansion of TRACE to include debt issued by federal government agencies, government corporations and government-sponsored enterprises, as well as primary market transactions in new issues.

The expansion into agency debt becomes effective on March 1, 2010. Details about the expansion and its implementation are available in FINRA Regulatory Notice 09-57.


Source: Finra's TRACE will report on government bonds as well E-Commerce Journal, March 10, 2009

The Financial Industry Regulatory Authority (FINRA) proposes to expand its Trade Compliance and Reporting Engine (TRACE) to include debt issued by federal government agencies, government corporations and government sponsored enterprises (GSEs) and primary market transactions.

Approval of the proposal by the Securities and Exchange Commission (SEC) would nearly double the number of bonds included in TRACE reporting. Roughly 25,000 government agency, corporation and GSE bonds would become TRACE-eligible, in addition to the approximately 30,000 corporate bonds now on TRACE. Retail investor activity in the government agency and GSE bond markets is believed to be comparable to retail activity in the corporate bond market.

“We believe that transparency is an extremely important ingredient for investor participation in a market,” said FINRA Executive Vice President Steven Joachim. “Based on our experience with corporate bonds, this expansion should help all investors – especially retail investors – get better prices, because TRACE has shown that transparency helps to reduce bid-ask spreads. Most important, expanding TRACE into these bond markets will enhance market integrity for all participants and will help protect retail investors by putting better sales and pricing information in their hands.”

Gates, March 19, 2010

Small dealers claim large dealers circumventing reporting

The Regional Bond Dealers Association asked the Financial Industry Regulatory Authority and Federal Reserve to end reporting of so-called agency debt trades until bank-affiliated brokers also must comply, saying some are seeking to avoid disclosures.

Current protocol “creates an unlevel playing field and, worse, severely limits the amount of price transparency available to investors and other market participants,” the Washington-based group said today in an e-mailed statement.

Agency debt represents a $2.5 trillion market of corporate borrowing by government-linked companies such as Fannie Mae and Freddie Mac, or federal agencies. The top underwriters this year are UBS AG, Barclays Plc, JPMorgan Chase & Co. and Deutsche Bank AG, according to data compiled by Bloomberg.

Finra, the U.S. brokerage industry’s main regulator, this month added agency debt to its Trade Compliance and Reporting Engine, known as Trace, which provides real-time data on prices and volumes to anyone with Internet access. Trace began for corporate bonds in 2002, and Finra last month won approval from the U.S. Securities & Exchange Commission to begin collecting, though not disclosing, trading data for securitized debt.

“On the very day Trace was expanded, a number of financial institutions began taking steps to ensure that agency trades were handled by entities which, because of their status as banks, were beyond the reach of Finra’s rules,” the regional dealer group said in its statement.

Susan Stawick, a Fed spokeswoman, said the central bank would respond to a letter the group said it was sending to the regulator once it is received. Brendan Intindola, a Finra spokesman, and spokesmen for UBS, Barclays, JPMorgan and Deutsche Bank didn’t immediately return telephone messages seeking comment.

The Regional Bond Dealers Association’s board includes executives from Stone & Youngberg LLC, Fifth Third Securities Inc. and Duncan-Williams Inc. The group represents 34 firms including Raymond James Financial Inc., Wells Fargo & Co., Stephens Inc. and First Southwest Co., John Teall, an association spokesman, said in an e-mail.

Currently, most banks report their agency-debt trading under Trace, which carries fees, creates administrative costs and cuts into the amount of market information available exclusively to an individual firm, Mike Nicholas, the trade group’s chief executive officer, said in a telephone interview. The association’s members have been told by some bank competitors with whom they do business that they are taking steps to opt out and others may do so later, he said.

Banks haven’t used the loopholes allowing them to run trades through units that aren’t subject to Finra’s requirements in the trading of company debt because “bank regulations prohibit the number of corporate-bond transactions a commercial bank can undertake,” Nicholas said. “That’s why it’s all of a sudden become an issue because with government agency issues, you don’t have the same restriction.”

TRACE volumes

Daily aggregate data

Highest trading days (in $ millions)

  • 1. May 27, 2009 $28,454
  • 2. May 7, 2009 $27,208
  • 3. October 6, 2004 $26,132
  • 4. May 6, 2009 $26,111
  • 5. January 17, 2007 $25,594

FINRA's third quarter 2010 TRACE Fact Book tables are now available.

The TRACE Fact Book is intended to give a historical perspective of the over-the-counter (OTC) U.S. corporate bond market. Published annually, the Fact Book includes data from 2002. In 2009, FINRA began providing quarterly updates—in spreadsheet format—in addition to the full annual Fact Book.

References

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