Three Types of Hybrid Securities Subject to Classification and Reporting Changes -

For some time now, there has been confusion regarding the appropriate trade reporting for certain hybrid securities. Hybrid securities, such as non-cumulative perpetual preferred securities and depositary shares, have certain features typically associated with equity securities and certain features typically associated with debt securities. Traditionally, trust preferred securities and non-cumulative perpetual securities were reported to FINRA’s Trade Reporting and Compliance Engine (“TRACE”) system (as debt securities).

Following the enactment of the Dodd-Frank Act and the implementation of the Basel III capital rules in the United States, trust preferred securities and other “innovative” hybrid securities that once qualified for favorable regulatory capital treatment have generally been phased out. Banks have instead come to rely upon the issuance of non-cumulative preferred stock to raise Tier 1-qualifying capital. Increased issuance activity may have led FINRA to revisit the manner in which hybrid securities transactions should be trade reported.