On October 31, 2013, the US Financial Industry Regulatory Authority (FINRA) filed with the US Securities and Exchange Commission (SEC) a proposed rule change to amend FINRA Rule 6700 Series and the related Trade Reporting and Compliance Engine (TRACE) dissemination protocols to disseminate additional Asset-Backed Securities transactions and, concomitantly, to reduce the reporting periods for such securities. FINRA also proposes (i) to re-name as "Securitized Products" the broad group of securities currently defined as "Asset-Backed Securities," (ii) to re-define the term Asset-Backed Security more narrowly to mean the specific securities that FINRA proposes to disseminate in the proposed rule change, (iii) to make other definitional changes and (iv) to incorporate technical and conforming amendments to the FINRA Rule 6700 Series and FINRA Rule 7730 in connection with these amendments, as well as with provisions that have expired. On November 20, the SEC issued notice of the proposed rule change (designated SR-FINRA-2013-046) for publication in the Federal Register and, as a result, comments thereon are due within 21 days after such publication.
FINRA believes that the proposed narrower definition of Asset-Backed Security is consistent with industry usage. In addition, to clarify the scope of the term, FINRA proposes to specifically exclude three types of instruments from the term Asset-Backed Security: (i) Agency Pass-Through Mortgage-Backed Securities that are traded to be announced (TBA)1 or in Specified Pool Transactions;2 (ii) SBA-Backed ABS3 traded TBA or in Specified Pool Transactions; and (iii) Collateralized Mortgage Obligations (CMO).4
Currently, FINRA requires that virtually all transactions in US dollar-denominated debt securities, except US Treasury securities, foreign sovereign securities and municipal securities, be reported to TRACE, and most transactions reported are subject to dissemination immediately upon receipt of a transaction report. Securitized Products were the last major group of securities to be added to TRACE. After studying the liquidity and trading characteristics of various classes of Securitized Products, FINRA began to disseminate Securitized Products in phases, beginning with the dissemination of two very significant segments: TBA transactions and Specified Pool transactions in Agency Pass-Through Mortgage-Backed Securities and SBA-Backed ABS.
FINRA proposes that transactions in Asset-Backed Securities, as re-defined, be disseminated—including Rule 144A transactions in such securities—to increase transparency in the bond market, and particularly in the market for Asset-Backed Securities. FINRA has reviewed substantial amounts of transaction data for Asset-Backed Securities since reporting began on May 16, 2011. The Asset-Backed Securities market is considered a largely institutional market. In 2012, the average daily par value traded in Asset-Backed Securities was $5.8 billion, which was approximately the same size of the market in publicly traded Non-Investment Grade corporate bonds. Although the size of the Asset-Backed Securities market is comparable to the market for publicly traded Non-Investment Grade corporate bonds, there are substantially fewer trades in Asset-Backed Securities.
FINRA believes that the proposed additional price transparency in the Asset-Backed Securities market will enhance the ability of investors to identify and negotiate fair and competitive prices for Asset-Backed Securities, noting that dissemination of Asset-Backed Securities transactions may assist both buy- and sell-side market participants in price discovery when pricing and trading such securities.
As re-defined in proposed FINRA Rule 6710(cc), the term “Asset-Backed Security” means a type of Securitized Product collateralized by any type of financial asset, such as a consumer or student loan, a lease, or a secured or unsecured receivable, but excluding: (i) an Agency Pass-Through Mortgage-Backed Security as defined in paragraph (v) traded To Be Announced (TBA) as defined in paragraph (u) or in a Specified Pool Transaction as defined in paragraph (x); (ii) an SBA-Backed ABS as defined in paragraph (bb) traded TBA or in a Specified Pool Transaction; and (iii) a Collateralized Mortgage Obligation as defined in paragraph (dd).
In proposed Supplementary Material .01 to FINRA Rule 6710, FINRA provides additional guidance regarding the scope of the defined term “Asset-Backed Security” and states that Asset-Backed Security shall include, but is not limited to:
securities collateralized by the following types of assets and securities: credit card receivables; automobile loans and leases; student loans; home equity loans and home equity lines of credit; aircraft leases; automobile floor plan and wholesale loans; motorcycle loans and leases; recreational vehicle loans; manufactured housing loans; commercial loans; tranches of other Asset-Backed Securities; reinsurance; timeshare obligations; loans or other financial instruments generating a stream of payments and guaranteed as to principal or interest (or both) by the Small Business Administration (traded other than TBA as defined in paragraph (u) or in a Specified Pool Transaction as defined in paragraph (x)); collateralized debt obligations; collateralized bond obligations; collateralized loan obligations; and Non-Agency Backed Commercial Mortgage-Backed Securities as defined in paragraph (ff).
For more information about the topics addressed in this Legal Update, please contact J. Paul Forrester or your regular Mayer Brown lawyer.
1. The terms Agency Pass-Through Mortgage-Backed Security and To Be Announced (TBA) are defined, respectively, in FINRA Rule 6710(v) and FINRA Rule 6710(u).
2. The term Specified Pool Transaction is defined in FINRA Rule 6710(x).
3. The term SBA-Backed ABS is defined in FINRA Rule 6710(bb).
4. FINRA proposes to define the term Collateralized Mortgage Obligation in proposed FINRA Rule 6710(dd).