FINRA Seeks Major Expansion of TRACE Reporting

Proposal Would Bring Transparency to Primary Market, Government Agency and GSE Debt

Washington, DC — The Financial Industry Regulatory Authority (FINRA) is proposing a major expansion of its Trade Compliance and Reporting Engine (TRACE) to include debt issued by federal government agencies, government corporations and government sponsored enterprises (GSEs), as well as primary market transactions in new issues. Currently, TRACE reports real-time pricing and trade volume information only on corporate bonds trading in the secondary market.

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."

Examples of GSEs are FannieMae, FreddieMac and the Federal Agricultural Mortgage Corporation. The federal agencies and government corporations issuing debt include the Tennessee Valley Authority, the Federal Home Loan Banks and the Financing Corporation.

TRACE was established in July 2002 to bring transparency to the corporate bond market. It was fully phased in by February 2005, offering real-time, public dissemination of transaction and price data for all corporate bond trades — including intra-day transaction data and aggregate end-of-day statistics (most active bonds, total volume, advances and declines and new highs and lows).

Retail investors have free access to this data at www.finra.org/marketdata. Similar information will be disseminated for government agency, corporation and GSE bonds.

As part of its effort to demystify the corporate bond market and make it truly accessible to retail investors, FINRA has developed a comprehensive online learning center where retail investors can become familiar with the full range of bond types and bond markets. Smart Bond Investing is available at www.finra.org/smartbonds.

The SEC is expected to publish the TRACE expansion proposal and seek public comment in the near future. If the proposal is approved, FINRA will publish a Regulatory Notice setting an effective date no more than 180 days following publication of the notice.

FINRA, the largest independent regulator for all securities firms doing business in the United States, is dedicated to investor protection and market integrity through comprehensive regulation. FINRA touches virtually every aspect of the securities business — from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and firms.

For more information, please visit our Web site at www.finra.org.