Quotation and Trade-Reporting Requirements for Members Dealing in High-Yield Bonds
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Senior Management |
EXECUTIVE SUMMARY
On November 9, 1992, the NASD® submitted rule proposals to the Securities and Exchange Commission (SEC) regarding quotation and transaction reporting requirements for members trading high-yield, fixed-income securities. The SEC is expected to act on these rules in the next few months, and members that trade high-yield bonds, especially dealers, brokers, and brokers' brokers, should contact the NASD now to find out what their new quoting and trade-reporting obligations will entail. For further information and a copy of the rule filing, contact Market Data Services at (301) 948-6162.
BACKGROUND AND DESCRIPTION OF REQUIREMENTS
The NASD is proposing regulatory requirements for members that participate in the high-yield, fixed-income securities market. The proposed trade-reporting rules will require members to report transactions in all high-yield bonds traded over-the-counter to the NASD for regulatory purposes and will also require real-time trade reporting for securities included in the Fixed Income Pricing System (FIPS). The NASD has developed FIPS to facilitate the collection, processing, and dissemination of real-time, firm quotations for 30 to 50 of the most liquid bonds in the top tier of high-yield, fixed-income securities. FIPS also provides for hourly dissemination of high/low trading ranges and accumulated volume in each bond quoted in the system.
High-yield bonds are classified as bonds that have been rated by Standard & Poor's as BB+ or lower, and FIPS will require brokers and dealers in the top 30 to 50 high-yield bonds to participate in the quotation system. The NASD has established an advisory committee to develop a list of the top-tier securities based on volume, price, name recognition of the issue, research following, and representation from diverse industry groups.
The NASD will assign a unique symbol identifier to each bond quoted in FIPS and trade reported to the NASD. The identifiers will be configured as mnemonics that relate to the issuer and the specific bond series and will be available on-line to FIPS subscribers and also in hard copy from the NASD so that members may distinguish between bonds with the same or similar due dates.
Broker and Dealer Obligations for Quoting FIPS Bonds
Members holding themselves out regularly as brokers or dealers in high-yield bonds quoted in FIPS will be required to participate in FIPS and transmit their quotations to the system for dissemination to the public. Dealer quotes may be one- or two-sided but must be continuous and firm to all members submitting offers to trade at the quoted prices and sizes.
Quotations submitted by members must reflect a minimum size of 100 bonds ($100,000 par value) and be in increments of 1/8 percentage points.
Participants may trade at prices other than those quoted, but all quotes must be reasonably related to the prices at which those executions occur.
Registered dealers may enter quotes directly into FIPS or may use a registered broker's broker. Dealer quotations entered directly will be identified as such in FIPS; dealer quotations entered through a broker's broker will appear on the FIPS screen as the broker's quotes and the dealer's identity will remain anonymous to other participants and the public.
However, each individual dealer will be able to use FIPS to see its own quote reflected in the broker's quote. For example, if a broker received two dealer quotes for 100 bonds each, priced at 98, FIPS would reflect a single quote of 200 bonds at 98 from the broker. Both FIPS dealers would be able to "pierce" that broker quote, however, and see that 100 bonds reflected their own quote and the other 100 bonds were from another unidentified dealer.
Members will be able to view FIPS quotations through a FIPS terminal, and quotations will be disseminated to non-members through securities information processors, or vendors, so that they will be generally available to investors. The operating hours of the quotation system have been established as 9:30 a.m. to 4 p.m., Eastern Time (ET), to mirror the equity market hours.
Reporting Transactions in High-Yield Bonds
Members will be required to submit trade reports on all transactions in FIPS securities (those top-tier securities quoted in FIPS) within five minutes after an execution, from 9 a.m. to 5 p.m., ET. In addition, members will be required to report information on all transactions in high-yield bonds to the NASD for surveillance purposes. Trade reporting for non-FIPS securities may be accomplished any time during the trading day, but no later than 5 p.m., ET, of trade date.
FIPS Functionality and Equipment
The NASD will make FIPS quotation and summary transaction information available to investors and the public through securities information vendors. The data feeds to these vendors will include dealer and broker quotations on the FIPS bonds as well as aggregate transaction information, including hourly and daily summaries of high and low execution prices and accumulated volume in the FIPS securities.
Brokers and dealers in FIPS securities will be required to obtain a FIPS device or terminal to input, update, and view their quotations. All members trading high-yield bonds will be required to make contact with the NASD for real-time or end-of-day reporting of trades — either through dial-up or leased-line connections, computer interface, or by using the NASD's FIPS service desk. In addition, FIPS functionality will provide specialized dealer and broker screens tailored to the high-yield market, allow members to use their existing equity Computer-to-Computer Interface (CTCI) lines for trade reporting, and provide interfaces with member in-house trading systems.
Questions regarding members' obligations or equipment needs may be directed to S. William Broka, Vice President, Trading and Market Services at (202) 728-8050.