BMA: SEC Should Delay TRACE Permanent Fee Approval

The Securities and Exchange Commission (SEC) should delay approval of the National Association of Securities Dealers’ (NASD) proposal for a permanent fee structure for the Trade Reporting and Compliance Engine (TRACE), says a comment letter from the Bond Market Association (BMA).

"We believe some financial disclosure [regarding TRACE] is necessary before the SEC can make a decision," Michele David, vice-president and assistant general counsel of the BMA, tells Inside Market Data.

"NASD has never provided any financial information disclosing its developmental and operating costs for the TRACE system, nor the revenues generated by TRACE fees under the pilot program, to the Commission or to the industry," states the BMA letter, which was sent to the SEC on Nov. 25.

The letter goes on to say that "a reasonable and fair level of expenses allocable to market data should be established, and those expenses, together with the revenue streams from the sale of market data, should be publicly disclosed."

"Basically, without understanding what the expenses are, one cannot assess the [TRACE] system," says David. Meanwhile, members of the BMA, which is mainly composed of brokers/dealers, are upset because the fees for TRACE are "really high," she says. Given there might be a correlation between the fees and the increase in expenses, members want to know what is going on, says David. The fees include system, transaction reporting and market data charges.

"From the beginning the BMA has been working with NASD so that brokers/dealers have an economic interest in the sale of market data," says David. The brokers/dealers have an interest because they create the deals behind the data, she adds.

Although NASD has suggested that it would share net revenues from market data, it has never made any accounting of this interest, says David. Accordingly, she says, there is no rule governing how market data net revenues would be shared and how they would be passed on to brokers/dealers--for instance, through lower TRACE fees.

The BMA has no official position on what should be done with net revenues from the sale of market data, says David.

The figures that have been released by NASD raise concerns, say industry sources. For the first 12 months of operation, ending June 30, 2003, TRACE incurred expenses totaling about $12.4 million, which includes partial recovery of the original investment--approximately $7.2 million--for the development of TRACE, according to the NASD proposed rule change, which was filed with the SEC in October.

However, NASD estimated that total annual operating expenses for TRACE would be $6.0 million in its original fee proposal from May 2002, states the BMA letter.

NASD states that the incurred expenses include software enhancements, monitoring of transaction data and surveillance of the corporate debt market. NASD has also listed TRACE revenues for the first year of operation ending June 30, 2003 as totaling approximately $12.4 million, comprised of about $2.0 million in system fees, $8.9 million in transaction reporting fees and $1.5 million for market data fees. However, NASD does not provide further detail regarding revenues in the October SEC filing.

NASD is seeking permanent approval from the SEC for the TRACE fee structure prior to expiration of the pilot program for fees on Jan. 31, 2004.

A NASD spokesperson says it doesn’t comment on comment letters.