Legal & Compliance
On March 18, 1993, the Securities and Exchange Commission (SEC) approved NASD rules regarding quotation- and transaction-reporting requirements for members trading high-yield, fixed-income securities. The following Notice answers some commonly asked questions about members' new obligations when they are participating in the high-yield market. The new rules can be found in the NASD Manual and the system is scheduled to begin rollout in November 1993, with full implementation in early 1994.
Questions About the Fixed Income Pricing SystemSM
The Fixed Income Pricing SystemSM (FIPS) requires dealers and brokers to display real-time quotes and to enter trade reports for certain high-yield corporate bonds. Participation in FIPS is mandatory for NASD® members holding themselves out as brokers or dealers in FIPS securities. FIPS has been designed to provide greater transparency and improved surveillance to the high-yield bond market. Under the rules of FIPS, NASD members that participate in the high-yield bond market must report all of their over-the-counter transactions in FIPS bonds within five minutes of execution. Trade reports in all other (non-FIPS) high-yield bonds are required by end-of-day. FIPS also gives buyers and sellers ready access to market information. The FIPS consolidated quotation and volume display reveals pricing and trading activity in the marketplace, helping prepare market participants for their own bond trading.
The following covers the most commonly asked questions regarding FIPS functions and the role of participants.
Question #1: What is FIPS?
Answer: The Fixed Income Pricing System, "FIPS," is a screen-based system operated by The Nasdaq Stock Market, Inc., that enables Nasdaq® to collect, process, and display quotes and summary transaction information in eligible high-yield corporate bonds to participants in the system and through information vendors. FIPS market hours for live quotations are 9:30 a.m. to 4 p.m., Eastern Time (ET). Trade reporting hours are from 9 a.m. to 5 p.m., ET.
Question #2: What securities are eligible for quoting in FIPS?
Answer: FIPS securities are fixed income corporate bonds rated BB+ or lower by Standard & Poor's Corporation. Nasdaq established an advisory committee to develop and monitor a list of the top-tier high-yield bonds based on volume, price, name recognition of the issue, research following, and representation from diverse industry groups. As a result, 35 bonds have been initially designated for mandatory quotation in FIPS and that number should rise to 50 within the first year of operation. FIPS participants may also voluntarily display quotes on any other high-yield bonds in which they wish to make markets.
High-yield securities quoted in FIPS that have matured, that have been called, that have been upgraded in rating to investment quality (higher than BB+), or that have been downgraded to an extent that the issue's trading characteristics do not warrant inclusion in the system, will be withdrawn from FIPS and replaced with another issue.
Question #3: What is a FIPS participant?
Answer: A FIPS participant is any NASD member that is registered as a FIPS dealer or broker. A FIPS dealer buys and sells FIPS securities for its own account on a regular basis. A FIPS broker or broker's broker regularly buys and sells FIPS bonds for the accounts of others.
Question #4: How does a member participate in FIPS?
Answer: To participate as a FIPS dealer or broker, a member must apply for authorization as such with Nasdaq. The application will become effective upon receipt of Nasdaq approval by the member. Once authorized, a participant may begin quoting FIPS securities by first registering in each FIPS security through its FIPS terminal. If a FIPS dealer or broker no longer holds itself out as a dealer or broker in a FIPS security, the participant may voluntarily terminate its registration in that security while maintaining its registration in other FIPS securities.
Question #5: What are the obligations of a FIPS participant?
Answer: FIPS participants must continuously quote the FIPS securities in which they are acting as a dealer or broker. Quotations may be one- or two-sided and must be reasonably related to the prevailing market in each bond. Quotes must reflect a size of 100 bonds ($100,000 par value) and be in increments of 1/8 percentage points. Odd-lot quotations (less than 100 bonds) may also be displayed. FIPS dealers may enter quotations into FIPS under their own name 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 FIPS for dissemination to FIPS participants and information vendors.
Question #6: What happens if a member's ability to enter or update its quotes is impaired?
Answer: The member must contact Nasdaq Market Operations at (800) 243-4284 to request withdrawal of its quotations; however, should the member remain in FIPS, it must execute any orders received from another member at its quotations as disseminated through FIPS.
Question #7: Is a FIPS security subject to quotation halts?
Nasdaq may halt quotations in a FIPS security by withdrawing all broker and dealer quotations in the issue under the following circumstances:
- Nasdaq or an exchange halts trading in any equity security of a FIPS issuer.
- A FIPS issuer makes a public announcement, or information about the issuer becomes known, that affects trading in the FIPS bond.
Question #8: What is the procedure for reporting trades in FIPS securities and all other high-yield bonds?
Answer: Between 9 a.m and 5 p.m., ET, members must report all transactions in FIPS securities regardless of size or price within five minutes of the execution. Trade reports not filed within five minutes will be considered late and must include the execution time on the report.
Trades in all other high-yield securities (i.e., those not quoted in FIPS) may be reported anytime between 9 a.m. and 5 p.m., ET on trade date but, if not reported by 5 p.m. on trade date, the trade must be reported as late in a manner designated by Nasdaq.
Question #9: How are trade reports submitted?
Answer: Members with a FIPS terminal can submit their trade reports directly to Nasdaq via these terminals, through the dial-up capability provided by the service, or through a computer-to-computer interface with FIPS.
Members without FIPS terminals that averaged five or fewer trades a day in either FIPS securities or other high-yield bonds during the previous calendar quarter may use the FIPS service desk to report trades.
Question #10: Who is responsible for reporting a high-yield bond transaction?
The obligation to report a transaction in FIPS securities or other high-yield bonds depends on the role of each party in the trade. In transactions between:
- A FIPS dealer and a FIPS broker—the broker reports the trade.
- Two FIPS dealers—the sell-side dealer reports the trade.
- A FIPS participant and non-par-ticipant—the FIPS participant reports the trade.
- Two non-participants—the sell-side participant reports the trade.
- A member and non-member—the member reports the trade.
- A clearing firm and a correspondent firm—whichever firm executed the trade.
- A dealer in a riskless principaltransaction—the dealer reports as a cross (riskless principal) transaction.
Question #11: When trade reporting, what details must be included in the report?
Answer: Each trade report must include the FIPS security symbol or CUSIP number (if the firm has a computer-to-computer interface with FIPS), number of bonds, unit price (net of commissions, commission equivalents, or accrued interest), time of execution (for late trades or for trades in securities not displayed in FIPS), capacity identifier (principal, agent, or riskless principal), and whether the trade is a buy, sell, or cross. In addition, the report must identify the contra-side broker or dealer or indicate that the contra-side was a customer. For multiple contra-sides, the member must break out the other parties separately in the report along with the number of bonds, unit price, and time of execution associated with each contra-side trade.
Question #12: How should members report odd-lot trades involving fractions of bonds, for example, 10 1/2 bonds @98.125?
Answer: When reporting such a trade, the member has to round up to the nearest whole dollar and bond, for example, report 11 bonds @ 99. Of course, the confirmation to the customer would have to reflect the actual transaction of 10 1/2 bonds @98.125.
Question #13: What transactions do not have to be reported?
The following transactions do not have to be reported:
- Transactions that are part of a primary distribution or a registered secondary distribution.
- Transactions made as part of a private offering under Section 4(2) of the Securities Act of 1933.
- Transactions where both sides agree to a price unrelated to the current market, for example, so the seller can make a gift of the securities.
- Transactions to acquire underlying securities at a previously established price unrelated to the current market.
- Transactions executed on an exchange.
Question #14: Must members report a trade involving an issue that they know has gone high-yield before Nasdaq becomes aware of it or will Nasdaq simply reject such trade reports?
Answer: A trade report in a high-yield bond is not due until after an issue becomes a part of the Nasdaq high-yield data base. A trade report for a bond not in the data base will be rejected.
Question #15: What will Nasdaq do with the quotation and volume information it collects through FIPS?
Answer: Nasdaq and information vendors will disseminate all quotations on a real-time basis during FIPS operating hours. The information disseminated will include bids and offers from brokers and dealers as well as a calculation of an inside market for each FIPS bond.
Each hour, Nasdaq and vendors will disseminate summary transaction information that will include the high execution price, low execution price, and volume for all transactions reported both in that hour and cumulatively in FIPS securities, aggregated from individual transaction reports made by members. In addition, an end-of-day summary will be disseminated with the day's overall high and low prices and cumulative volume. Transaction information in non-FIPS bonds will be monitored by Nasdaq for surveillance purposes only and not disseminated publicly.
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The rules are effective and full implementation of the system is scheduled for early 1994. For general information on FIPS, call S. William Broka, Vice President, Trading and Market Services at (202) 728-8050; questions on the FIPS rules may be directed to Beth E. Weimer, Associate General Counsel at (202) 728-6998; and questions regarding equipment needs may be directed to Market Data Services at (301) 948-6162.