FINRA Rule 11170

The second establishes the settlement price formula: the settlement price of contracts in part-redeemed bonds shall be determined by multiplying the contract price by the original principal amount thereof, and contracts shall be made on the same basis. 

FINRA Rule 11170 was amended by SR-FINRA-2010-030 effective December 15, 2010, as part of the Uniform Practice Code's transfer into the Consolidated FINRA Rulebook — no prior amendment dates are listed, distinguishing this rule from several of its neighbors within the 11100 subsection whose histories trace back to 1968 or earlier. One selected notice is associated — Regulatory Notice 10-49.

FINRA Rule 11170 sits within the 11100 Scope of Uniform Practice Code subsection of the 11000 Uniform Practice Code, immediately following FINRA Rule 11160's ex liquidating payments framework and immediately preceding FINRA Rule 11190's reconfirmation and pricing service participants framework.

What a Part-Redeemed Bond Is

A part-redeemed bond is a bond whose issuer has already redeemed — repaid — a portion of the bond's original principal amount, while the remainder of the issue continues outstanding and continues trading. 

This situation arises most commonly through sinking fund provisions, under which an issuer is contractually obligated to retire a specified portion of an outstanding bond issue at periodic intervals before final maturity, and through partial call provisions, under which an issuer exercises an option to redeem a portion of an outstanding issue early.

When either mechanism operates, the bonds that remain outstanding after a partial redemption are, individually, bonds whose face value has been reduced from their original principal amount to some lesser remaining principal amount — a $1,000 face-value bond that has had 30 percent of its principal redeemed through sinking fund operations now represents a claim to only $700 of remaining principal, even though the bond was originally issued, and may still be identified in the marketplace, by reference to its original $1,000 face value.

This creates a pricing problem that FINRA Rule 11170 exists to solve. Bond prices are conventionally quoted as a percentage of face value — a bond quoted at 95 is understood to be trading at 95 percent of its face value. For a bond that has not been partially redeemed, this convention works straightforwardly — a $1,000 face-value bond quoted at 95 trades for $950. But for a part-redeemed bond — where the remaining principal amount differs from the original face value referenced in the quotation — applying the quoted percentage directly to the original face value would produce a settlement price that does not correspond to the actual remaining principal amount the buyer is purchasing.

The Settlement Price Formula

FINRA Rule 11170's second sentence establishes the formula that resolves this problem — the settlement price of contracts in part-redeemed bonds shall be determined by multiplying the contract price by the original principal amount thereof, and contracts shall be made on the same basis.

This formula confirms that, notwithstanding the bond's partial redemption, the contract price — the quoted percentage at which the transaction is agreed — continues to be applied to the bond's original principal amount for purposes of calculating the dollar settlement price. In other words, FINRA Rule 11170 preserves the original face value as the base against which the quoted price percentage is applied, rather than requiring the market to re-quote part-redeemed bonds against their reduced remaining principal amounts.

The practical effect of this approach is that a part-redeemed bond continues to be quoted and traded using the same reference framework — the original principal amount — that the market has always used for that bond issue, preserving continuity in how the bond is identified and priced even as its underlying remaining principal amount changes over time through successive partial redemptions. The contracts shall be made on the same basis language extends this principle prospectively — not only does the formula apply to determining the settlement price of a given contract, but new contracts for the part-redeemed bond going forward shall continue to be made on this same original-principal-amount basis, ensuring consistency across the bond's continued trading life regardless of how many additional partial redemptions may occur.

Why This Approach Makes Sense: Continuity of Reference

FINRA Rule 11170's approach — anchoring the settlement price formula to the bond's original principal amount rather than its current remaining principal amount — reflects a sensible accommodation to how the bond market actually identifies and trades securities. A bond issue is identified by its CUSIP number, its issuer, its coupon rate, its maturity date, and its original principal amount or face value — these are the characteristics that define the security as a tradeable instrument, and they do not change merely because a portion of the issue's principal has been redeemed through ordinary sinking fund or partial call operations.

If FINRA Rule 11170 instead required part-redeemed bonds to be quoted and settled by reference to their current remaining principal amount — which would itself vary across different bonds within the same issue depending on which specific bonds (identified by serial number, in the case of registered or bearer bonds subject to lottery-based partial redemption) had been selected for redemption in prior sinking fund operations — the market would face significant additional complexity. Bonds within the same issue could have different remaining principal amounts depending on their redemption history, and market participants would need to track and quote each bond individually by its specific remaining principal rather than by reference to the issue's original terms.

By contrast, FINRA Rule 11170's original-principal-amount-based formula allows the entire issue to continue trading and being quoted as a single fungible instrument by reference to its original terms, with the part-redeemed designation and the formula's application handling the adjustment for whatever portion of principal has actually been redeemed as of the settlement date — without requiring the market to track and distinguish between individual bonds within the issue based on their specific redemption history.

The Brevity of FINRA Rule 11170's Amendment History

FINRA Rule 11170's amendment history — showing only a single amendment, SR-FINRA-2010-030 effective December 15, 2010, with no prior effective dates listed — stands in contrast to several of its neighboring rules within the 11100 subsection, many of which trace their origins to 1968, 1970, or other pre-1990 effective dates. This relative brevity may reflect that FINRA Rule 11170 addresses a narrow, well-defined operational question — the settlement price formula for part-redeemed bonds — that has not required the kind of periodic substantive refinement that broader provisions such as FINRA Rules 11140 and 11150 have undergone in response to evolving settlement cycle requirements, electronic communication methods, or other market structure developments.

The absence of any settlement-cycle-related amendment to FINRA Rule 11170 — in contrast to the T+2 and T+1 amendments that affected FINRA Rules 11140 and 11150 — is consistent with FINRA Rule 11170's subject matter. FINRA Rule 11170 addresses a price calculation formula, not a date-determination formula; the formula's mathematical operation — multiplying the contract price by the original principal amount — does not depend on the length of the standard settlement cycle in the way that FINRA Rule 11140 and FINRA Rule 11150's ex-date formulas do, and therefore has not required corresponding adjustment when the settlement cycle has changed.

Connection to FINRA Rules 11110, 11160, 11320, and 11620

FINRA Rule 11170 connects to FINRA Rule 11110 as the source of the UPC Committee's general interpretive authority over Uniform Practice Code provisions, including questions that might arise regarding the application of FINRA Rule 11170's formula to specific part-redeemed bond scenarios. It connects to FINRA Rule 11160 — the immediately preceding rule, whose ex liquidating payments and payments on account of principal framework directly produces the category of part-redeemed bonds that FINRA Rule 11170 then addresses from a pricing perspective; a bond that has received a payment on account of principal under the FINRA Rule 11160 framework is, by that very fact, a part-redeemed bond within FINRA Rule 11170's scope going forward. It connects to FINRA Rule 11320's dates of delivery framework, which governs the timing mechanics of settling the part-redeemed bond contracts whose price FINRA Rule 11170 determines. And it connects to FINRA Rule 11620's computation of interest framework, since a part-redeemed bond's interest payments — calculated on its actual remaining principal amount under standard bond mathematics — interact with FINRA Rule 11170's original-principal-amount-based settlement price formula as two distinct but related dimensions of how a part-redeemed bond's economics are determined.

Examination Relevance and Key Takeaways

FINRA Rule 11170 is tested on the Series 7 and Series 24 examinations as the settlement price formula for part-redeemed bonds — a brief but operationally important provision addressing the pricing mechanics of bonds that have undergone partial sinking fund or call redemptions.

The key points to retain are these: a part-redeemed bond is a bond that has been redeemed or paid in part, such that its current remaining principal amount is less than its original principal amount or face value, typically arising from sinking fund operations or partial call redemptions; FINRA Rule 11170's settlement price formula provides that the settlement price of contracts in part-redeemed bonds is determined by multiplying the contract price — the quoted percentage — by the bond's original principal amount, not its current remaining principal amount; this approach preserves continuity in how part-redeemed bonds are identified, quoted, and traded by reference to their original issue terms, avoiding the complexity that would arise from requiring the market to track and quote bonds individually based on their specific redemption history; the rule provides that contracts shall be made on the same basis going forward, ensuring this original-principal-amount-based approach continues to apply throughout the bond's remaining trading life regardless of further partial redemptions; and the rule was amended December 15, 2010 through SR-FINRA-2010-030, with no prior amendment dates listed and one selected notice — 10-49.