FINRA's TRACE Program to Increase Transparency of Mortgage-Backed Securities Market

Attorney Advising Disclaimer

FINRA Monday announced an accelerated effort to "significantly" increase transparency in Fannie Mae-, Freddie Mac- and Ginnie-Mae issued mortgage-backed securities through the Trade Reporting and Compliance Engine ("TRACE").

Specifically, FINRA announced that new TRACE procedures and practices will increase transparency by fully disseminating transaction information related to trades—namely time, price and volume. Brokers and firms will be required to report to TRACE within two hours of effecting a transaction. FINRA hopes to cut that two-hour requirement to just one-hour by 2014.

Starting Monday, July 29, FINRA will make this mortgage-backed securities information publicly and freely available to retail investors via the Authority's Market Data Center.

FINRA stated its intention to file propose rule changes with the SEC to similarly create transaction transparency amongst asset-backed securities, including securities backed by credit card receivables and auto/student loans.

FINRA also announced the opening of a Smart Bond Investing guide, which covers bond maturity and pricing, yield and return, different types of risk and tolerances, types of bonds, investment strategies and the process of buying and selling bonds. The guide also contains a 10-step list of valuable tips to reference before investing in bonds or bond funds.

These tips are:

1: Objectives; Customers should clearly define investment objectives before investing.

2: Risk Profile; By establishing a risk profile and taking into account risk, investors will be better prepared for both the highs and the lows of investing. Ask about the duration of the bonds held by the fund, as "duration" is a measure of risk. If the duration of the bonds held by the fund is showing an increase, it means the risk of the bond fund is increasing, too.

3: Homework; FINRA recommends investors educate themselves, from reading books and news articles on bond investing to consulting each bond's offering statement.

4: Prospectus; By reading a bond fund's prospectus, investors will gain valuable insight into the fund's operation—for instance, included bonds and fees. Ask a broker for a copy. Be prepared to read hundreds of pages. More importantly, ask your broker whether he or she read the hundreds of pages. Remember, your broker is a fiduciary in California and other states. Even when your broker is not a fiduciary, he or she is obligated to provide you with a fair and complete disclosure of the material facts and risks of the investment.

5: Specialized Firm or Broker; Firms and brokers specializing in bonds may be a better fit than a broker who generalizes in all investments. This is also the step where FINRA's BrokerCheck comes into play.

6: What price and when traded; Bond liquidity may become clearer by consulting a bond's trading history—if a bond has not traded in days or weeks, it may be illiquid.

7: Understand costs and fees; Out of any gross price, fees, commissions, mark-ups or mark-downs combine to create a net profit. Discover the costs associated with buying or selling a bond before taking that next step. Be aware the class of bond fund shares may have front-end, back-end, or contingent deferred sales charges. Push your broker to disclose the material facts about the fees.

8: Reinvest Coupons; By establishing a "coupon account," an investor can put money away without being tempted to spend it, allowing compounding to work for the bond. This tip does not apply to bond funds, which automatically do this. Be careful to consider whether to reinvest the dividend payments in a bond fund, or take the payments in cash. Either way, FINRA registered broker-dealers will try to use the NOP myth to lessen any claim for damages making the phony argument dividend payments should offset principal losses.

9: Don't try to time the market; FINRA advises against speculating on interests and trying to "time" the bond market, instead suggesting to stick to the investment strategy established above.

10: Don't reach for yield; FINRA cites reaching for yield after interest rates have declined as "the single biggest mistake bond investors make," reminding investors that with higher yield comes higher risk.

News: FINRA Significantly Increases Transparency in the Mortgage-Backed Securities Market (FINRA)

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