Transaction Reporting And Quotation Obligations Under The Fixed Income Pricing System (FIPS)

Executive Summary

On April 11, 1994, The Nasdaq Stock Market, Inc., began operation of the Fixed Income Pricing System^SM (FIPS^®) for members trading highyield bonds. FIPS was created to facilitate the over-the-counter (OTC) trading of high-yield, corporate debt securities rated BB+ or lower by Standard & Poor's Corporation. The goals in the creation of FIPS were similar to those which led to the creation of The Nasdaq Stock Market^®—to increase information and transparency in the marketplace, thereby encouraging investment and growth. As the list of bonds requiring FIPS reporting continues to expand, members are reminded of their reporting and quotation obligations.

Reporting Transactions (Market Place Rules 6240A And 6240B)

FIPS securities may be classified into two categories:

The obligation to report transactions on FIPS securities depends on the role of each party in the trade. In transactions between:

• A FIPS dealer and a FIPS broker's broker—only the broker's broker reports the trade.



• Two FIPS dealers—only the sellside dealer reports the trade.



• A FIPS participant and non-participant—only the FIPS participant reports the trade.

Quotation Obligations (Market Place Rule 6230)

If you are actively trading in one or more FIPS mandatory bond(s) as a FIPS dealer as described in Market Place Rule 6230, you may be obligated to enter and maintain firm quotations into the FIPS system. The failure to quote in accordance with the FIPS rules may result in disciplinary action.

FIPS participants must continuously display firm bids/offers in the FIPS mandatory bonds in which they are actively trading. Quotations may be one- or two-sided and must be reasonably related to the prevailing market in each bond. Quotes must reflect a minimum size of 100 bonds ($100,000 par value) and be in increments of 1/8 of a point. FIPS dealers may enter firm quotations into FIPS under their own names or through a FIPS broker. Quotes entered under a dealer's own name will be identified as such; all others will bear the name of the broker with the dealer remaining anonymous.

A FIPS broker must transmit all quotes received from FIPS dealers to the FIPS system for dissemination to all FIPS participants and to the public through market data vendors (via the Bond Quotation Dissemination Service (BQDS) data feed).

Please Note: If you are not actively trading in a particular FIPS security and only execute trades to accommodate customer orders, you still have an obligation to report these trades to the National Association of Securities Dealers, Inc. (NASD^®).

Common Questions

The following questions may arise regarding the reporting of FIPS trades:

Question: If I believe that my firm is not a FIPS dealer or broker's broker, do I have to report a trade in a FIPS security to the NASD?

Answer: Yes, all transactions in FIPS securities must be reported, subject to limited exceptions. The reporting guidelines are set forth according to mandatory or non-mandatory bond categories. This would include all firms that trade high-yield bonds for their own (inventory) account and/or that execute trades on behalf of customers. Any trade executed by a firm in a FIPS bond must be reported to the NASD.

Question: What securities are eligible for quoting in FIPS?

Answer: FIPS securities are OTC high-yield, fixed-income corporate debt securities rated BB+ or lower by Standard & Poor's Corporation. It is also possible that a non-rated issue may be a FIPS-eligible security.

Question: If I am a broker/dealer who is a correspondent of a clearing firm, will my clearing firm report the trades on my behalf?

Answer: Not necessarily. The obligation to report falls on the shoulders of the firm that executes the trade, whether it be for inventory or to accommodate a customer order. Most clearing firms will not assume the responsibility to report trades they did not execute on behalf of their correspondents. It should not be assumed that the clearing firm is reporting your trades in FIPS securities.

Question: As a compliance officer, am I required to monitor the reporting of all FIPS transactions—especially on those desks that, in the normal course of business, may not consistently trade high-yield bonds?

Answer: Yes, all compliance officers should be certain that every part of their firm is reporting FIPS trades. Many traders assume that, in a normal course of business, the highyield trading desk is reporting all of the firm's FIPS transactions and the firm's obligations to the rules are being fulfilled. This may not be completely accurate. For example, there are high grade desks that trade crossover bonds and utility desks that trade bonds that are rated BB+ or lower. These desks may be located in different areas and/or different floors in a particular firm. The firm is obligated to report all of its FIPS transactions, regardless of the desk that trades the bonds.

It is imperative that all Compliance Officers, Head Traders, and all corporate traders be aware of the reporting obligation, regardless of which desk trades a FIPS bond, so that the firm remains in compliance. Failure to report FIPS trades as required may be grounds for disciplinary action by NASD Regulation, Inc.

Attached is a reprint of the letter that went out to all FIPS participants on June 3, 1998, concerning the recent increase in the number of bonds in our database.

The list of additions referenced in the letter below is attached in this Notice. This list of additions, as well as the entire list of FIPS bonds, can be obtained by calling Joanie Rizzo at (212) 858-3975. The entire list can also be accessed through our FIPS Web Site located at www.nasdaqfips.com. In order to ensure that you are in compliance with the reporting of all FIPS bonds, you must review the entire list. Many of these bonds may be traded by other trading desks within your firm.

Please familiarize yourself with the FIPS Web Site and utilize it for obtaining lists and other information, as it will eventually become the primary source of FIPS system changes. The fax system is both cumbersome and expensive, so we will be moving toward a paper-free, timely method of contacting FIPS participants via the Web Site, hopefully before the end of the summer. Once the new method is in place, those of you who require contact through the fax system may continue to have that option at a fee to be determined.

If a daily e-mail subscription containing the complete list of FIPS mandatory and non-mandatory issues would be of interest to your firm at this time, please send us an e-mail at [email protected].

As always, if you have any questions or concerns regarding FIPS, please contact:

Nasdaq^®

General Questions
Justin Tubiolo
(212) 858-4419

Technology Questions
Jim Schroder
(212) 858-4321

FIPS Service Desk
Cheryl Glowacki
(203) 385-6373

FIPS Subscriber Services
Stacey Galullo
(800) 777-5606

FIPS Literature/Fax List Inquiries
Joanie Rizzo
(212) 858-3975

MarketWatch and TradeWatch
(800) 211-4953
or (301) 590-6890

NASD Regulation^SM

Regulatory Questions
Stephen Simmes
(301) 590-6451

June 3, 1998

Dear FIPS Participant:

I want to alert you to an upcoming significant increase in the number of bonds subject to trade reporting on the Fixed Income Pricing System^SM (FIPS^®).

As you know, a very large percentage of high-yield bonds have come to market as 144A issues. When these private placements are exchanged for like publicly traded securities, they become subject to FIPS reporting and National Association of Securities Dealers, Inc. (NASD^®) oversight. Please be aware that approximately 450 such issues will be added to the FIPS database and faxed to you in increments over the next several weeks.

We have made every effort to contact every FIPS Participant Firm for a current fax number and the name of at least one designated FIPS responsible party, but it is the obligation of each Participant Firm to advise us of any changes in fax number or contact person. If you do not receive any faxes over the next several days, please call Joan Rizzo at (212) 858-3975 to verify your fax number.

Enclosed is a complete list of the exchanged 144A issues that will become eligible for reporting on FIPS. The entire list of FIPS bonds can be viewed and printed from the FIPS Web Site at www.nasdaqfips.com. From the homepage, click on "Issue Data," then enter your FIPS Workstation user ID and password. (Service Desk Participants can obtain a FIPS Web Site user ID/password by contacting Subscriber Services at (800) 777-5606.) For the full list, select one of the "Full List" files in the "Download" section of the Issue Data page. If you do not have Internet access, the full list can be obtained in hard copy by calling Joan Rizzo at (212) 858-3975.

Members are again specifically reminded of their reporting obligations under NASD Market Place Rules 6240A, 6240B, and 6230, which mandate timely reporting of all trades in FIPS listed bonds. Failure to report FIPS trades as required may be grounds for disciplinary action by NASD Regulation, Inc.

As always, members with questions regarding FIPS reporting or quotation obligations are urged to contact me at (212) 858-4419, Jim Schroder, Assistant Director, at (212) 858-4321, or Stephen Simmes, Market Regulation, at (301) 590-6451.

Sincerely ,

Justin Tubiolo
Director, Fixed-Income
Trading and Market Services