17.5.1.1 Transaction Reporting and Compliance Engine
Unlike stocks, bonds are not generally traded on exchanges. Instead, bond trading takes place directly between broker-dealers, banks, mutual funds, and other market makers in a decentralized, over-the-counter market. Bonds have not been well suited to exchange trading because they are less uniform and more varied than stocks. A large corporation might have dozens of different bond issues. In addition, there are government and agency bonds, municipal bonds, mortgage and collateralized debt obligation bonds, and foreign bonds.
The Trade Reporting and Compliance Engine (TRACE) is FINRA’s automated system for reporting trades in OTC debt securities. TRACE does not accept quotes or execute trades; it only reports completed trades. Both the buy and the sell side report TRACE trades. The trades must be reported within 15 minutes during business hours. If the report is made within the 15-minute limit, it will be displayed immediately.
Debt securities that are eligible for TRACE include (1) convertible and non-convertible corporate bonds, (2) investment grade and high-yield bonds, (3) U.S. dollar denominated debt that requires registration with the SEC, and (4) U.S. Treasury securities. New issues and debt sold under SEC Rule 144A also need to be reported to TRACE, but they are not displayed.
Debt securities that are not eligible for TRACE include municipal bonds, securities issued by a foreign government, asset-backed debt securities, and money market debt securities. Exchange-listed debt securities traded on and reported to an exchange also do not have to be reported to TRACE. Nor do transactions resulting from the exercise or settlement of an option.
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