A 5274  - June 7, 2001
P&S 4844

TO: ALL PARTICIPANTS

ATTENTION: MANAGING PARTNER / OFFICER, OPERATIONS PARTNER / OFFICER, DIRECTOR OF OPERATIONS, DATA PROCESSING MANAGER, MANAGER P & S DEPARTMENT, COMPLIANCE OFFICER

SUBJECT: NSCC SPECIFICATIONS AND SYSTEMS INTERFACE TO NASD TRACE SYSTEM

In an effort to achieve improved price transparency for OTC corporate bonds, the NASD has mandated reporting of interdealer (street side) and customer OTC corporate bond trades to its TRACE system. The NASD, in its attached Letter to the Industry on TRACE dated June 1, 2001, http://www.nasdr.com/trace_letter.htm includes a specially developed reporting interface between NSCC and the NASD.

NSCC developed the interface at the request of participants to accommodate compliance requirements with the trade-reporting mandate imposed by the NASD. NSCC’s application eliminates the need for duplicate participant trade submission of street side trades and leverages existing data communications links to facilitate the reporting of customer trades. The NSCC corporate bond reporting flow will be similar to the process currently utilized for the reporting of municipal trades to the MSRB. Today, participants already utilize NSCC to comply with the price transparency requirements of the MSRB.

This Important Notice describes the NSCC interface, provides NSCC’s trade input formats for TRACE and outlines the NASD’s implementation timeframes.

Participants can utilize the NSCC Fixed Income Transaction System (FITS) multibatch capability to comply with TRACE. The majority of participants submit corporate bond trades to NSCC via multibatch. Participants currently submitting to FITS via a single, end-of-day batch must convert to multibatch to utilize the NSCC TRACE interface. Participants not utilizing multibatch, must contact their Relationship Manager and the DTCC Participant Test Group at (212) 855-5630 as soon as possible to make the necessary testing arrangements for participation.

NSCC will increase the frequency of batches processed intraday and will forward submitted street side and customer corporate bond trades to the NASD. NSCC will provide details on these changes in future Important Notices in order for participants to determine the frequency of their submissions to NSCC.

Street side: All TRACE data elements will be added to the FITS input formats using available filler fields. The Datatrak system IDs for T input, 17030 (non RJE), 17037 (RJE), As Of input, 17441 (non RJE) and 17447 (RJE), will be modified accordingly. The TRACE data elements are highlighted in bold on the layouts.

Customer: NSCC will develop new Datatrak system IDs (29695 non RJE and 29696 RJE) for participants to report customer trades to the NASD. These formats are similar to the MSRB customer trade input formats utilized for municipal customer trade submissions. The revised formats are attached at the end of this notice.

1. Participants who plan to utilize NSCC to report trades to the NASD are required by NASD mandate to make testing arrangements by November 1, 2001.
2. Actual system testing will be available December 3. The NASD and NSCC are working to have a test system available earlier and will issue future notices detailing arrangements.
3. The NASD expected effective date of the TRACE system and the associated rules for reporting and dissemination is Friday, February 1, 2002.

As price transparency requirements become more stringent, NSCC will provide participants with a real time trade reporting interface to the NASD and MSRB through the use of Government Securities Clearing Corporation’s (GSCC) Real Time Trade Matching System (RTTM). In addition, the MSRB has announced its schedule for real-time reporting of municipal securities transactions utilizing NSCC’s future real time processing systems. For additional information, please refer to the MSRB’s May 29, 2001, notice requesting comment on its plan for real-time transaction reporting in the municipal securities market at www.msrb.org. NSCC and GSCC will continue to work with the NASD and MSRB to support future industry pricing initiatives.

Later this year, DTCC and the NASD will be holding training seminars to review TRACE and NSCC interface requirements. Seminar details will be forthcoming. In addition, a procedural document will be provided to participants referencing various transactions (including correction processing) along with system processing instructions for TRACE compliance.

Questions on NSCC’s interface to the NASD TRACE system can be directed to your Relationship Manager, Anthony Pietanza, Director at (212) 855-5682 or the undersigned at (212) 855-5683.

Ed Fanning
Vice President, Product Marketing & Development

On January 23, 2001, the Securities and Exchange Commission ("SEC") approved proposed rules that will require National Association of Securities Dealers, Inc. ("NASD®" or "Association") members to report over-the-counter (OTC") secondary market transactions in eligible fixed income securities to the NASD and subject certain transaction reports to dissemination. The Trade Reporting and Compliance Engine ("TRACEsm") is the NASD-developed vehicle that facilitates this mandatory reporting. The rules, referred to as the "TRACE Rules," will be contained in the new Rule 6200 Series. The full text of the TRACE Rules is set forth in NASD Notice to Members 01-18, Appendix A. The TRACE Rules provide the following:

1. fixed income transactions that must be reported under the new TRACE Rules are those OTC secondary market transactions involving a "TRACE-eligible security";
2. the term "TRACE-eligible security" means all United States dollar denominated debt securities that are depository-eligible securities; Investment Grade and Non-Investment Grade (as defined in the TRACE Rules); issued by United States and/or foreign private corporations; and: registered with the SEC; or (2) issued pursuant to Section 4(2) of the Securities Act of 1933 (Securities Act) and purchased or sold pursuant to Rule 144A under the Securities Act;
3. the term "TRACE-eligible security" specifically excludes debt securities that are not depository-eligible or are in physical form; sovereign debt; development bank debt; mortgage- or asset-backed securities, collateralized mortgage obligations, and money market instruments;
4. exempt from reporting are transactions that are part of a primary distribution; transactions in listed debt securities that are both executed on, and reported to, a national securities exchange; and transactions in which the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the debt security (e.g., to allow the seller to make a gift);
5. a member that is a party to a transaction involving a member and a non-member, including a customer, in a fixed income security that is a TRACE-eligible security must report the transaction to the NASD within one hour and 15 minutes of the time of execution;
6. when the party on the sell side and the party on the buy side of a transaction in a TRACE-eligible security are both members, both members must report the transaction to the NASD within one hour and 15 minutes of the time of execution;
7. the NASD will disseminate transaction information relating to transactions in the following two types of securities:

a. a TRACE-eligible security having an initial issuance size of $1 billion or greater that is Investment Grade at the time of receipt of the transaction report (except those securities that are issued pursuant to Section 4(2) of the Securities Act and purchased or sold pursuant to Rule 144A under the Securities Act); and

b. a TRACE-eligible security that is designated as a Fixed Income Pricing SystemSM (FIPS®) Mandatory Bond ("FIPS 50 security") immediately prior to the time that the FIPS rules (the current Rule 6200 Series) are rescinded; and

8. dissemination in the securities transactions referenced in 7 above will occur immediately after the transaction information is received by the NASD.

The SEC approved SR-NASD-99-65, the TRACE Rules, after more than two years of industry and NASD discussion and review. The NASD received and considered many comments, and, in response to comments, made significant changes to the original proposal. With the implementation of the TRACE Rules, secondary market transactions in broad categories of registered and unregistered debt instruments will become subject to reporting for the first time. In addition, price and other transaction information for two types of debt instruments will be publicly disseminated. The scope of the regulatory changes and the schedule for implementation are described below.

In order for the industry to prepare for such changes, and in particular for technological changes to be made throughout the industry, the NASD has delayed the effective date and implementation of the TRACE Rules. The Association published the technical specifications on June 1, 2001. The Association will announce the specific date of effectiveness in an NASD Notice to Members. As of this writing, the expected effective date of the TRACE system and the TRACE Rules is Friday, February 1, 2002.

Firms need to contact the NASD by November 1, 2001, to arrange for system testing. The testing window will open officially on Monday, December 3, 2001; however, the NASD will attempt to facilitate earlier testing for those firms that are ready before that date. Details relating to TRACE testing, including contact names and numbers details, will be provided in a separate industry mailing.

The TRACE Rules have three main components that: (1) identify those fixed income securities transactions that are required to be reported; (2) detail the reporting requirements; and (3) identify those fixed income securities transactions that are subject to dissemination.

If a fixed income security is a TRACE-eligible security, generally transactions in such securities to which a member is a party must be reported to the NASD.

Most corporate debt securities fall within the definition of a TRACE-eligible security. Specifically, "TRACE-eligible security" means all United States dollar denominated debt securities that are depository-eligible securities under Rule 11310(d); Investment Grade and Non-Investment Grade (as defined in TRACE Rule 6210(h) and (i), respectively); issued by United States and/or foreign private corporations; and: (1) registered with the SEC; or (2) issued pursuant to Section 4(2) of the Securities Act and purchased or sold pursuant to Rule 144A under the Securities Act. Specifically excluded from the term TRACE-eligible security are sovereign debt; development bank debt; mortgage- or asset-backed securities; collateralized mortgage obligations, money market instruments, and debt securities that are not depository-eligible or are in physical form. The term TRACE-eligible security also does not include municipal securities. Rather, municipal securities are subject to reporting under the rules of the Municipal Securities Rulemaking Board. The TRACE Rules do apply to those Non-Investment Grade (as defined in the TRACE Rules) securities that are currently designated as FIPS securities or FIPS 50 securities. A security that is designated as a "PORTAL security" under the Rule 5300 Series that is a fixed income security, is sold in a private placement under Section 4(2) of the Securities Act, and is eligible for resale under Rule 144A, is a TRACE-eligible security.

Exempt from reporting are transactions that are part of a primary distribution; transactions in listed debt securities that are both executed on, and reported to, a national securities exchange; and transactions in which the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the debt security (e.g., to allow the seller to make a gift).

A transaction in a TRACE-eligible security must be reported to the NASD by an NASD member within one hour and 15 minutes of the time of execution. When two members are the parties to the transaction, both the member representing the sell side and the member representing the buy side must report the transaction. When a member is a party to a transaction involving a non-member, including a customer, the member must submit the transaction report. Each transaction report must include: (1) the security's CUSIP number or NASD symbol; (2) the number of bonds; (3) the price or the elements necessary to calculate the price, which are contract amount and accrued interest; (4) a symbol indicating whether the transaction is a buy or sell; (5) the date of trade execution ("as of" trades only); (6) the contra-party identifier; (7) the capacity - principal or agent; (8) the time of trade execution; (9) reporting side executing broker as "give-up" (if any); (10) contra side Introducing Broker in case of "give-up" (if any); (11) stated commission; (12) such trade modifiers as required by the TRACE Rules or the TRACE users guide; and (13) yield as required by Rule 10b-10 under the Securities Exchange Act of 1934.

Members will be able to choose from among several different mechanisms in order to meet their reporting obligations.

First, members may report directly through a computer-to-computer interface (CTCI). This method requires a dedicated line using the TCP/IP network protocol. It will be possible to send TRACE CTCI messages over an existing line that a member firm may use at this time to communicate with various Nasdaq reporting systems. Details will be outlined in the TRACE CTCI specification.

Second, members may report manually through a secure Web-based application that the NASD will provide. The Web application will be supported under Windows 95/98/NT/2000, and Sun Solaris 2.61. Web browsers that will be supported include Microsoft Internet Explorer 4.01SP1 for Windows and Sun, and Netscape Navigator Windows version 4.6 and above, or Sun version 4.0 or higher.

Third, vendors and service bureaus will be able to provide a reporting service for their clients by developing a CTCI interface and reporting on behalf of their clients.

Finally, the NASD and the National Securities Clearing Corp. ("NSCC") have agreed that members may forward transaction reports to the NSCC, which will forward them to the NASD. NSCC and NASD have developed a set of transaction layouts that build upon the layouts used by NSCC for Street-side transactions and upon the customer layouts used by the MSRB for municipal customer transaction reporting. The NSCC interface will allow members to transmit initial transaction reports for T-date and "as of" transactions; however, cancellations and corrections must be reported through the NASD Web browser. The NSCC interface will also support regulatory reporting for those transactions not clearing/settling through NSCC (e.g., cash trades).

The TRACE Rules provide that the Association will disseminate transaction information relating to transactions in two types of securities: (1) a TRACE-eligible security having an initial issuance size of $1 billion or greater that is Investment Grade at the time of receipt of the transaction report (except those securities that are issued pursuant to Section 4(2) of the Securities Act and purchased or sold pursuant to Rule 144A under the Securities Act); and (2) a TRACE-eligible security that is designated a FIPS Mandatory Bond immediately prior to the rescission of the FIPS rules.

Not all of the information that is reported will be disseminated. For each transaction, the NASD will disseminate, or supply to vendors to disseminate, the following information: (a) the NASD symbol for the fixed income security; (b) the CUSIP; (c) the date and time of trade execution; (d) price; (e) yield; and (f) quantity of bonds, subject to the following limitations. For a TRACE-eligible security having an initial issuance size of $1 billion or greater that is Investment Grade as referenced above, the actual quantity of the transaction (the total par value of the bonds purchased or sold) will be disseminated if the total par value of the reported transaction is $5 million or less; if the reported amount is greater than $5 million, a large volume trade dissemination cap identifier of "5MM+ will be disseminated instead of the actual quantity.

For a TRACE-eligible security that is designated as a FIPS Mandatory Bond as referenced above, the actual quantity of the transaction will be disseminated if the total par value of the reported transaction is $1 million or less; if the reported amount is greater than $1 million, a large volume trade dissemination cap identifier of "1MM+" will be disseminated instead of the actual quantity.

For each security, the highest price of the day, the lowest price of the day, and the "last sale" price of the day will be flagged with indicators for dissemination, when applicable. Certain modifiers may also be part of the information disseminated.

Immediately upon receipt of transaction reports between 8:00 a.m. and 6:30 p.m., Eastern Time, the Association will disseminate the transaction information.

(Reports received earlier or later than the times set forth above are also subject to dissemination as set forth in greater detail in TRACE Rule 6250(c) and (d)).

The Association expects that more fixed income securities transactions will become subject to dissemination in the future. In order to expand the classes and types of fixed income securities that would become subject to dissemination, the Association will work with the Bond Transaction Reporting Committee (BTRC), a special committee of the NASD that will be formed to analyze the effect that the dissemination of price and other information in certain TRACE-eligible securities transactions has upon the liquidity of those markets. Based in part on those results, the Association will determine a schedule for the dissemination of additional TRACE-eligible debt securities.

On this Web site, the NASD has published the technical specifications that members will need in order to make the technical changes required for members to comply with the TRACE Rules. In addition, the technical specifications may be made available through other media.

When the TRACE Rules take effect, the FIPS rules, which are currently set forth in the Rule 6200 Series, will be rescinded. There are 50 securities, called the FIPS Mandatory Bonds or FIPS 50 securities, for which aggregate price information is available currently. When the FIPS rules are rescinded, as noted above, transaction information in those 50 securities will be subject to dissemination under the new TRACE Rules. As a result, pricing information for the FIPS Mandatory Bonds will continue to be available following the implementation of TRACE. However, under TRACE the information disseminated will be transaction specific and will be updated continuously. In order to continue dissemination of transaction information in Non-Investment Grade debt securities, the Association expects to propose amendments to the TRACE Rules, which will allow the Association to continue designating up to 50 Non-Investment Grade debt securities for dissemination, using standards that parallel the standards now set forth in the FIPS Rules for the designation of the FIPS Mandatory Bonds (also known as the FIPS 50 securities).

Any rules- or system-related questions you may have concerning the TRACE corporate bond transparency initiative may be sent via e-mail to tracefeedback@nasd.com. Anyone wishing to telephone directly may call Justin Tubiolo, Vice President of Fixed Income at (212) 858-4419; Jim Schroder, Director, Fixed Income Department, NASD, for technology-related questions, at (212) 858-4321; or Sharon K. Zackula, Assistant General Counsel, Office of General Counsel, NASD Regulation, Inc., at (202) 728-8985.

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