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TRACE reporting is a system managed by FINRA to ensure transparency in the fixed-income market. It requires real-time reporting of transactions involving corporate bonds, agency debt, asset-backed securities, and more. For debt buyers, TRACE is not just a compliance requirement but a critical tool for accessing market data, evaluating trade execution, and ensuring fair trading practices.
Debt buyers can streamline TRACE compliance by using tools like Debexpert, which simplify transaction management and ensure accurate reporting. Staying compliant with TRACE not only avoids penalties but also promotes a transparent and fair trading environment.
TRACE encompasses a wide range of U.S. dollar-denominated debt instruments that must meet FINRA's reporting requirements. Let’s break down the key categories of securities that require TRACE reporting.
Corporate bonds make up the largest group of TRACE-eligible securities. This category includes investment-grade bonds, high-yield bonds, and convertible debt instruments. Regardless of their credit rating, these bonds follow consistent reporting standards, ensuring transparency across the board.
Agency debt securities are another important category. These include debt issued by U.S. government agencies and government-sponsored enterprises (GSEs). TRACE reporting requirements for these securities help maintain clarity and openness in this critical segment of the fixed income market.
Asset-backed securities (ABS) and mortgage-backed securities (MBS) are also included under TRACE. These instruments, which package various types of debt into tradeable securities, require the same level of reporting transparency as corporate bonds.
In November 2023, FINRA expanded TRACE eligibility to include U.S. dollar-denominated foreign sovereign debt, provided these securities meet FINRA's specific requirements. For those dealing with these instruments, verification is straightforward: the securities must be in U.S. dollars and comply with FINRA’s TRACE guidelines. The TRACE website and the TRAQS web browser offer accessible lists of TRACE-eligible securities for easy verification.
Next, we’ll look at exemptions and unique cases that refine these reporting requirements.
While TRACE reporting covers a broad range of transactions, certain securities and situations are exempt. Understanding these exemptions can help debt buyers streamline compliance and avoid unnecessary reporting.
Money market instruments with maturities of one year or less are not subject to TRACE reporting.
Auction, repo, and reverse repo transactions are also exempt. Auctions already provide pricing transparency through competitive bidding, and repo transactions involve short-term financing arrangements that don’t require TRACE reporting.
Certain proprietary position transfers fall into a unique reporting category. For example, in cases of mergers or acquisitions where the transfer isn’t part of a trading or investment strategy, reporting to TRACE is required, but FINRA does not publicly disseminate the data. Both parties involved in these transfers must report them, but the information remains private.
Transactions "substantially unrelated to the current market" are also excluded from reporting requirements.
These exemptions simplify the reporting process by eliminating unnecessary steps.
For specific questions about securities or transactions, debt buyers can contact FINRA Market Operations at 866-776-0800 for assistance with the Post-Trade Data Management (PDM) system. Additionally, any TRACE reporting issues can be self-reported to FINRA’s Market Regulation Department at BondReporting@Finra.org. To stay compliant, debt buyers should review FINRA Rule 6700 for detailed requirements and keep up with any regulatory updates that might affect eligibility criteria.
Debt buyers participating in TRACE-eligible transactions are required to submit detailed information to ensure transparency in the market. Brokers must report these transactions within 15 minutes during business hours (8:00 AM–6:30 PM EST, Monday through Friday). If a transaction occurs near closing or outside these hours, it must be reported within 15 minutes after the system reopens. Once submitted, the TRACE system instantly makes the transaction data available to the market.
Each TRACE submission must include ten key data points:
For newly issued debt securities, issuers are also required to provide a notice summarizing critical details such as par values, maturity dates, coupon rates, and any associated fees. To maintain compliance, FINRA encourages firms to self-report any late or incorrect TRACE submissions by contacting BondReporting@Finra.org.
These stringent requirements help ensure accurate submissions and adherence to TRACE guidelines.
TRACE uses a dual-reporting system to create a complete audit trail of eligible transactions. Each FINRA member firm involved in a transaction must report its side, even if third-party services are used to handle submissions. This means debt buyers are responsible for submitting their portion of the transaction and must properly identify their registered broker-dealer counterparties using the correct MPID.
In cases involving multiple parties - such as when an introducing broker (IBA) forwards an order to an executing broker (EBB) - each firm must report its specific role. For example, the EBB reports a principal sell to the IBA, while the IBA reports both an agency buy from the EBB and an agency sell to its customer. This dual-reporting requirement also applies to international transactions that involve changes in beneficial ownership. Hedge funds functioning as FINRA members or as subsidiaries of registered broker-dealers are subject to the same obligations under the Rule 6700 series.
Internal crosses must be reported as two separate transactions - a purchase and a sale. Since TRACE does not support riskless principal transactions, these must be reported with a "Principal" capacity. Additionally, transfers of proprietary positions during mergers or acquisitions, if not part of a trading or investment strategy, must also be reported, though FINRA does not disseminate such transactions.
It’s important to note that TRACE obligations apply exclusively to FINRA member firms. Non-member entities, while potentially involved in reportable transactions through their FINRA-member counterparties, are not directly required to report.
The following section will detail the step-by-step TRACE reporting process.
To begin the TRACE reporting process, you’ll need to authorize a firm representative and complete all required agreements with FINRA. The first step is onboarding to FINRA's Account Management System and designating an Account Administrator by submitting the FINRA Entitlement Agreement ("FEA").
After authorization, your next move is to become a TRACE reporting participant. This involves using the Participant Data Management (PDM) system to review and certify the terms of the FINRA Transparency Services Participation Agreement ("FPA"). This step is essential for accessing the necessary reporting tools.
FINRA offers two main ways to submit TRACE reports: the FIX protocol and TRAQS (Trade Reporting and Query Service). Smaller volume traders often rely on the TRAQS application, while firms with higher transaction volumes typically use the FIX protocol for automated trade reporting.
All execution times must be submitted in Eastern Time, formatted in military time or universally coordinated time (UTC), depending on your chosen reporting method.
Before you can go live, your firm must complete the TRACE Member Test Script, regardless of the reporting method. If you plan to report through a FINRA member clearing firm, vendor, or service bureau, it’s important to contact the clearing firm for guidance on correcting errors and managing rejected trades.
Once your reporting methods are in place, it’s critical to adhere to the required timeframes to stay compliant.
TRACE reporting deadlines differ based on the type of security being traded. Current guidelines require corporate bonds, agency debt, and ABS to be reported within 15 minutes, while CMOs/REMICs and Treasury bonds must be reported within 60 minutes.
However, changes are coming. Starting October 8, 2024, the SEC has approved a rule to shorten reporting times for most fixed-income and municipal securities to just one minute after execution. This new rule is expected to take effect approximately 18 months after the SEC’s approval.
According to FINRA data from 2022, 83% of trades in TRACE-eligible securities that currently have a 15-minute reporting window were already being reported within one minute of execution. FINRA estimates that the new rule could speed up reporting for as much as 16.4% of annual trading volume.
There are exceptions for certain cases. For example, firms with limited trading activity - defined as fewer than 4,000 transactions in TRACE-eligible securities during one of the prior two calendar years - qualify for extended timeframes. Additionally, trades executed manually or requiring manual data entry fall under a manual trades exception. Initially, these trades must be reported within 15 minutes, with the timeframe gradually reduced to five minutes over three years.
If any reporting issues arise, firms are required to self-report problems to FINRA's Market Regulation Department via email at BondReporting@Finra.org. The firm originally responsible for the report must resubmit corrected data.
Next, let’s address the protocols for non-member and principal transactions.
Non-member affiliate transactions require specific reporting procedures. When dealing with non-member affiliates, firms must use the value "A" to identify the contra party as an affiliate. Additionally, the value "A" must be included in the Special Processing Indicator to indicate whether the affiliate trade is subject to dissemination, as outlined in FINRA Rule 6730(d)(E).
Principal transactions come with their own set of challenges. If a trade is executed through a proprietary account, it qualifies as a principal trade. TRACE does not support riskless principal reporting, so these trades must be reported as "Capacity = Principal", even if the transaction’s economic function is similar to a riskless principal trade.
For cross-border transactions involving changes in beneficial ownership, specific rules apply. For instance, if a bond is transferred from a domestic FINRA member firm to a foreign affiliate or subsidiary, with a change in beneficial ownership, the domestic broker-dealer must report the transaction as a sale to the foreign entity. Similarly, if a foreign affiliate sells bonds to a domestic FINRA member firm, the domestic firm must report the purchase.
Corporate control transactions also fall under TRACE reporting requirements. For example, when one member acquires another’s assets and merges trading operations, both parties must report any transfers of proprietary positions for regulatory purposes. These transfers, however, are not subject to dissemination.
Finally, ensure that registered broker-dealer counterparties are identified using the correct MPID. If your firm has multiple MPIDs, select the appropriate one for each transaction.
For debt buyers, maintaining accurate TRACE reporting is non-negotiable. FINRA emphasizes that firms must prioritize precise transaction reporting to minimize the need for corrections. Accuracy from the start is the cornerstone of effective compliance.
Time management is critical as reporting windows become increasingly stringent. Currently, 83% of trades subject to the 15-minute reporting window are already being reported within one minute, according to FINRA. Staying within these tight timeframes requires diligent adherence to procedures and readiness for regulatory updates.
Some firms may qualify for extended reporting timeframes. If your firm reports fewer than 4,000 TRACE-eligible transactions during one of the prior two calendar years, you may be classified as having "limited trading activity", which allows for extended deadlines. For manual trades, the reporting window starts at 15 minutes in the first year, reduces to 10 minutes in the second year, and eventually narrows to five minutes.
Properly identifying registered broker-dealer counterparties is another critical step. Use the correct Market Participant Identifier (MPID) to ensure accurate counterparty identification. For transactions executed on non-business days, refer to FINRA Rule 6730(a)(5)(D) for specific reporting guidance.
If reporting issues arise, proactively self-reporting them to FINRA's Market Regulation Department at BondReporting@Finra.org demonstrates a commitment to compliance and can mitigate potential penalties.
FINRA is considering amendments that would classify repeated late reporting as a Rule 2010 violation unless there is "reasonable justification". Even small timing errors can snowball into significant regulatory challenges.
Here are some common mistakes to watch out for:
Strengthening internal controls is a proactive way to address these issues and maintain compliance.
Strong internal controls are the backbone of effective TRACE compliance. Beyond ensuring compliance, they also prepare your organization for broader regulatory demands.
"With everything else we have to do to run a successful business, compliance is probably one of the largest business expenses".
Centralized documentation is a key element of internal controls. Using a shared document management system ensures that all compliance-related documents are accessible and consistent across your organization.
Regularly updating your compliance systems is equally important. By keeping your processes aligned with new regulations and conducting root cause analyses when issues arise, you can address systemic problems rather than just treating symptoms.
Mock audits are another valuable tool. These practice runs, especially when conducted by independent third-party auditors, can uncover blind spots that internal reviews might miss. Additionally, implementing uniform monitoring systems, such as scoresheets for transaction reviews, helps ensure consistent evaluations and early detection of potential compliance issues.
Finally, a well-thought-out corrective action plan is crucial. Addressing and fixing process failures promptly demonstrates a commitment to compliance and reduces the likelihood of repeat violations.
Navigating the TRACE reporting process can be challenging, but leveraging the right technology makes compliance much easier. When working with TRACE-eligible debt portfolios, having a reliable platform can simplify operations and ensure adherence to FINRA's transparency and documentation standards. Debexpert’s online debt trading platform is built with features tailored to help debt buyers manage these complex transactions effectively.
Debexpert simplifies TRACE-eligible debt transactions by offering a comprehensive marketplace that connects banks, lenders, and institutional buyers with a variety of debt types. These include consumer debt, real estate notes, auto loans, and medical debt - many of which may require TRACE reporting.
The platform provides portfolio analytics and expert market valuations, offering valuable insights into asset worth. Buyers can choose from multiple auction formats, including English, Dutch, Sealed-bid, and Hybrid, allowing flexibility in how they approach acquisitions. Additionally, Debexpert’s online tracking system keeps a detailed record of buyer activity, ensuring transparency and compliance with TRACE reporting standards.
Debexpert goes beyond transaction management by offering tools specifically designed to support compliance. Sensitive documents are protected through encrypted file sharing, while real-time encrypted messaging ensures secure communication. The platform also tracks every stage of debt portfolio marketing, from initial listing to final sale, providing full visibility into the process. With a mobile app, users can access critical portfolio analytics and trade data on the go, ensuring they stay informed and prepared at all times.
Debexpert’s structured approach to managing debt portfolio transactions aligns seamlessly with TRACE reporting needs. The platform records buyer-seller interactions to ensure accurate counterparty identification. During the auction setup, essential details like pricing, timing, and participant information are captured - information that directly feeds into TRACE reporting fields. Buyers can browse portfolios online, review masked files and supporting documents, and communicate with sellers, creating a thorough record of due diligence. For those managing multiple TRACE-eligible transactions, Debexpert’s centralized system ensures efficient organization and consistent reporting, making compliance less cumbersome.
TRACE reporting serves as a critical component of compliance for debt buyers. The strict 15-minute reporting window demands precision and reliable systems to ensure adherence. As FINRA explains:
"The Trade Reporting and Compliance Engine (TRACE) is the FINRA-developed vehicle that facilitates the mandatory reporting of over-the-counter transactions in eligible fixed income securities".
This regulatory system enhances market transparency and safeguards investors, making compliance a necessity for maintaining operational integrity.
Compliance with FINRA Rule 6700 is fundamental for debt buyers aiming to meet TRACE requirements. TRACE offers vital pricing transparency and up-to-date information on bond market activity, including prices and trading volumes. It mandates FINRA member firms to accurately and promptly report over-the-counter transactions involving fixed-income securities.
Debt buyers should routinely review their TRACE report cards to spot and address potential reporting issues before they escalate into regulatory concerns. If errors occur, self-reporting these problems to FINRA's Market Regulation Department is a proactive step that reflects strong compliance management.
Staying informed about regulatory changes through FINRA notices and updates is equally important. This ensures that reporting practices remain aligned with evolving rules. Additionally, firms should retain records of problem ticket numbers issued by NASDAQ Technical Support as evidence in case of system-related issues.
By adhering to these practices, debt buyers can build a solid framework for compliance while preparing to integrate advanced technology into their operations.
Technology plays a pivotal role in simplifying and streamlining TRACE compliance. In today’s debt trading landscape, platforms like Debexpert offer automated solutions that align seamlessly with TRACE requirements. These platforms ensure that critical transaction details are captured during the auction process, reducing manual errors and enhancing accuracy.
Debexpert’s centralized system efficiently organizes multiple TRACE-eligible transactions, making it easier for debt buyers to manage diverse portfolios. Its real-time tracking and secure documentation features support the accuracy and timeliness required for TRACE reporting.
Investing in comprehensive technology platforms that combine transaction management with compliance tools is a strategic move. When paired with proper training and robust internal controls, these solutions lay the groundwork for sustained success in meeting TRACE compliance standards.
To get ready for the upcoming 1-minute TRACE reporting requirement, set to take effect in October 2024, debt buyers should prioritize setting up real-time reporting systems. These systems need to automate data submission efficiently to meet the stricter deadlines while ensuring accuracy and timeliness.
It's also important to develop robust internal processes to double-check data accuracy before submission. Alongside this, make sure your team receives regular training to stay informed about the new regulations. By planning ahead and using the right tools, you can make the transition smoother and avoid unnecessary disruptions.
Debexpert provides a suite of tools to make TRACE compliance easier for debt buyers. Among its offerings is real-time compliance tracking, which ensures your reporting stays accurate and current. The platform also features portfolio analytics to help you better understand and manage your debt portfolios. On top of that, it offers secure document management for handling sensitive files with confidence and flexible compliance tools that adjust to the scale of your business, streamlining the TRACE reporting process.
Debt buyers face several hurdles when it comes to TRACE reporting. These include ensuring transactions are reported accurately and on time, handling complex and extensive data requirements, and keeping up with shifting FINRA regulations. If these challenges aren't managed effectively, they can introduce compliance risks.
To address these problems, debt buyers should focus on a few key areas. First, investing in strong data management systems is crucial. Staying updated on regulatory changes is equally important, as is providing regular compliance training to their teams. Additionally, adopting automated technology solutions can simplify the reporting process, cut down on errors, and ensure TRACE requirements are met. By doing so, debt buyers can reduce regulatory risks and maintain compliance with greater ease.
More than a decade of Ivan's career has been dedicated to Finance, Banking and Digital Solutions. From these three areas, the idea of a fintech solution called Debepxert was born. He started his career in Big Four consulting and continued in the industry, working as a CFO for publicly traded and digital companies. Ivan came into the debt industry in 2019, when company Debexpert started its first operations. Over the past few years the company, following his lead, has become a technological leader in the US, opened its offices in 10 countries and achieved a record level of sales - 700 debt portfolios per year.
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