FINRA Rule 11170 consists of two sentences. What does its opening sentence do?

It requires the issuer to notify the market of each partial redemption it makes

It designates bonds redeemed or paid in part as part-redeemed bonds

It excludes cash transactions from the settlement price framework that follows

It obliges a seller to disclose the proportion of principal already redeemed

What is a part-redeemed bond?

One whose issuer has repaid part of its original principal, the remainder staying outstanding and trading on

One that has been called in full but whose certificates have not yet been surrendered for payment

One whose issuer has defaulted on part of a scheduled principal payment but not on the whole of it

One issued in instalments, only some of which have so far been paid up by the subscribers to it

Thirty percent of the principal of a bond originally issued with a face value of one thousand dollars has been redeemed. What does that bond now represent?

A claim to one thousand dollars, the redemption having reduced only the coupon payable

A claim to seven hundred dollars of remaining principal

A claim to seven hundred dollars plus a premium on the portion already redeemed

A claim to one thousand dollars at maturity, of which three hundred is treated as prepaid

How does FINRA Rule 11170 direct that the settlement price of a contract in a part-redeemed bond be calculated?

By taking the contract price against the original principal and adding accrued interest to it

By multiplying the contract price by the principal amount still outstanding

By multiplying the contract price by the bond's original principal amount

By multiplying the contract price by the original principal and deducting the redeemed portion

FINRA Rule 11170 adds that contracts shall be made on the same basis. What does that clause extend?

It obliges each party to a contract to compute the settlement price from the same published quotation source

It requires every member dealing in the issue to use one clearing agency for those contracts

It applies the same formula to the bond's accrued interest as it does to its principal amount

It carries the original-principal basis forward to new contracts in the bond, not only to settling existing ones

Suppose part-redeemed bonds were instead quoted and settled against the principal each individual bond has remaining. What would that require of the market?

Tracking and quoting each bond in the issue separately, by its own redemption history

Settling such contracts through a clearing agency rather than between the two members directly

Obtaining the Committee's designation of a revised principal amount for the issue as a whole

Restating the issue's coupon rate each time a further portion of its principal was redeemed

Which characteristics identify a bond issue as a tradeable instrument, and do they survive a partial redemption of its principal?

Its issuer, coupon and maturity alone, the CUSIP being reassigned on each partial redemption made

Its CUSIP, issuer, coupon, maturity and original principal, all of which survive the redemption

Its CUSIP, issuer, coupon and current outstanding principal, the last of which is restated each time

Its CUSIP and its remaining principal, the other terms being taken from the indenture as needed

Bond prices are quoted as a percentage of face value, a convention that works straightforwardly for a bond none of whose principal has been redeemed. Why does it leave the settlement price of a part-redeemed bond open unless a rule settles it?

Bonds of the issue stop being quoted once part of the principal is redeemed, leaving no percentage to apply at all

The redeemed portion was repaid at a premium, which a percentage quoted against face value has no means of capturing

A quoted percentage could be applied to the original face value or to the smaller remaining principal, giving different prices

The bond's coupon rate falls with its principal, so a quoted percentage no longer matches the yield the bond pays

Ten bonds of one issue carry $10,000 of original principal. An earlier partial redemption left $6,000 outstanding, and contracts in the bonds were made at that time. A further redemption has since left $5,000 outstanding. What is the settlement price of a new contract for the ten bonds at a contract price of 49?

$2,940, the contract price applied to the $6,000 outstanding when earlier contracts were made

$2,450, the contract price applied to the $5,000 of principal now outstanding

$4,410, the price on the original principal cut by 10 percent for the latest redemption

$4,900, the contract price applied to the $10,000 of original principal

A bond is dealt in flat. Its trustee sets a Tuesday, which is a business day, as the record date for a payment of 20 percent of each bond's principal, and trades other than for cash go ex that payment on that Tuesday. The trustee makes the payment the following week. From when are transactions in the bonds transactions in part-redeemed bonds?

From the payment, once each bond's principal has actually been reduced by it

From the next interest payment date after the principal payment is made

From the Tuesday, trading ex the payment making the bonds part-redeemed at once

From the date the trustee announced the payment, the redemption being fixed then

The issuer of one bond has paid 5 percent of its principal, and the issuer of another has paid 70 percent of its principal; neither bond has been repaid in full. Which of them is designated a part-redeemed bond?

The 70 percent bond but not the other, a payment under a tenth of principal not counting

Both, the designation following from the fact of a payment, whatever portion of principal it covers

The 70 percent bond but not the other, the designation reaching bonds that are mostly repaid

The 5 percent bond but not the other, a bond mostly repaid being treated as repaid in full

A seller owes ten bonds of an issue on which no principal has been redeemed or paid. It delivers six of them, the other four to follow. Are the six bonds delivered part-redeemed bonds?

No, unless the other four are never delivered, which leaves the contract itself paid in part

Yes, once the purchaser accepts them, acceptance turning the delivery into a redemption in part

No; the shortfall is a part delivery, which leaves the principal of the six bonds untouched

Yes; bonds delivered in part are designated part-redeemed until the other four arrive

Two members compare a trade in bonds from which part of the principal has been redeemed. The comparison gives an adequate description of the security and the price but omits the phrase "part-redeemed", and the members later find that they computed the settlement price differently. Which requirement of FINRA Rule 11220 would that phrase have served?

Describing the security adequately, which the bond's issuer, coupon and maturity cannot do by themselves

Stating the price at which the transaction was made, which the phrase would have expressed in dollars

Recording the amount of principal redeemed, which the comparison has to state for each bond traded

Including other information needed to ensure that buyer and seller agree on the transaction's details

A part-redeemed bond that pays interest is sold regular way between members. How does interest on the bond enter the settlement of the contract?

FINRA Rule 11620(a) adds interest to the dollar price as an item separate from the settlement price multiplication

It does not, the multiplication of the contract price by a principal amount already allowing for the interest the bond has accrued

FINRA Rule 11620(a) adds interest to the dollar price only where a part-redeemed bond is traded for cash rather than regular way

It is deducted from the settlement price in proportion to the part of the bond's principal that the issuer has already redeemed

On the same day, two members make one regular-way contract in a part-redeemed bond and another in a bond none of whose principal has been redeemed. How do the delivery dates of the two contracts compare?

The part-redeemed contract falls due a business day later, so the parties can reconcile the principal redeemed

They fall on the same day, part-redeemed status making no change to the date of delivery

The part-redeemed contract falls due on the bond's next principal payment date instead of the regular-way date

The part-redeemed contract has no fixed date, the parties settling it whenever they have agreed the price

The standard settlement cycle has been shortened more than once, and the ex-date formulas of FINRA Rules 11140 and 11150 were amended in response. Why did the shortening call for no corresponding change to FINRA Rule 11170?

Its formula was already written for one-day settlement when the Code moved into the Consolidated Rulebook

The Uniform Practice Code Committee adjusts how it is applied by interpretation each time the cycle changes

Its formula fixes a price by multiplication, which gives the same figure however long settlement takes

Its formula takes its date from FINRA Rule 11320's delivery dates, so a shorter cycle reaches it without amendment

Two members strike a contract for cash in bonds of an issue whose issuer has already paid a quarter of each bond's principal. Does FINRA Rule 11170's settlement price formula govern that contract?

No; a cash contract settles on the day it is made, before any part-redeemed designation can attach to the bonds

No; cash transactions are excepted from it, just as they are excepted from going ex a payment on account of principal

Only if the comparison carries the phrase part-redeemed, cash trades otherwise settling as bonds never redeemed would

Yes; the rule speaks of contracts in part-redeemed bonds and does not except contracts for cash

A seller owes twelve bonds on a contract that is due and delivers seven of them. The purchaser wants to refuse the seven until all twelve can be delivered together. Does FINRA Rule 11350 allow it to do that?

Yes; a contract is performed only by delivering every bond it calls for, so a purchaser may wait for the whole

Yes, if the purchaser tells the seller before the close of business on the day the part delivery is made

No, but the purchaser may cancel the contract as to the five bonds that were not delivered

FINRA Rule 11170 shows a single amendment, while broader Uniform Practice Code provisions such as FINRA Rules 11140 and 11150 have been refined repeatedly. What about FINRA Rule 11170's subject may account for the difference?

It applies only to bonds dealt in flat, a class of bond too small to have prompted any amendment

It governs only cash contracts, which the successive settlement-cycle changes never reached at all

Its formula is taken from each bond's indenture, so any change is made there rather than in the rule

Broader Uniform Practice Code provisions such as FINRA Rules 11140 and 11150 have undergone periodic substantive refinement. In response to what?

Evolving settlement cycles, electronic communication methods and other market structure developments

Repeated disputes between members over how bonds redeemed in part should be priced at settlement

Changes in the tax treatment of bond interest and of principal repaid ahead of a bond's maturity

Downgrades of bond issuers that left more issues trading flat after defaults on their interest

A trustee makes a payment on account of part of each bond's principal. How do FINRA Rule 11160 and FINRA Rule 11170, taking them in that order, divide what follows between them?

The first prices contracts in the bonds struck before the payment, and the second prices the contracts in them struck after it is made

The first fixes when trades other than for cash go ex the payment, and the second governs how contracts in the bonds are priced

The first fixes when trades other than for cash go ex the payment, and the second fixes when cash trades go ex it

The first designates the bonds part-redeemed once the payment is made, and the second fixes the date on which trades go ex it

Under FINRA Rule 11120(f), what does a record date fixed for a payment on account of part of a bond's principal determine?

The day on which the trustee actually pays the principal to the bond's holders

Which holders must present their bonds so the payment can be noted on them

Which holders of the bond are entitled to receive that payment of principal

The day from which interest stops accruing on the principal being repaid

A comparison for a trade in bonds of which no principal has been redeemed or paid omits the phrase part-redeemed. Is the comparison deficient under FINRA Rule 11220 for that reason?

Yes; every bond comparison has to state whether or not the bonds traded are part-redeemed bonds at all

Yes, unless the bonds are dealt in flat, when the flat designation takes the place of the phrase on it

No; the phrase is optional on every comparison, being detail the members may add or leave out as they wish

No; the phrase is called for where it applies, and on these bonds it does not apply

Does FINRA Rule 11170 alter the general scope that FINRA Rule 11100(a) gives the Uniform Practice Code, so far as trades in part-redeemed bonds are concerned?

No; it carries no provision of the kind a rule needs to widen or narrow that scope

Yes; it widens the Code so that it reaches trades in part-redeemed bonds made on a national securities exchange

Yes; it limits the Code's reach over part-redeemed bonds to contracts made regular way, leaving the other kinds of contract outside it

No; only FINRA Rule 11100(a)'s own exceptions can alter that scope, never the text of an individual rule

Two members settle a trade in part-redeemed bonds through a registered clearing agency whose rules provide that the rules of other organizations shall apply. Does FINRA Rule 11100(a)(1)'s clearing agency exception take the trade outside the Code, and so outside FINRA Rule 11170?

Yes; a trade settled through any registered clearing agency is outside the Code, whatever that agency's own rules may say

No; to the extent the agency's rules call in other organizations' rules, the trade stays within the Code

Yes, unless the comparison for the trade carries the phrase part-redeemed, which by itself keeps the trade within the Code

No; the exception is limited to trades in stocks, so every trade in bonds stays within the Code

Two members dispute whether the issuer's payment of 40 percent of each bond's principal had been made at all before their trade, and so how their contract should be priced. Does FINRA Rule 11110's grant of interpretive power reach that dispute?

Yes; any question about how a settlement price is calculated falls within the Committee's power

Yes, provided both members refer the dispute to the Committee before the contract is settled

No; whether the payment was made is a substantial disagreement as to the facts involved

No; a question of settlement price belongs to the clearing agency rather than to the Committee

Two members agree a contract for cash on a Wednesday in bonds of an issue part of whose principal has been paid. Every weekday that week is a business day. Under FINRA Rule 11320(a), when are the bonds due for delivery?

On the Thursday, the first business day after the contract

On the Friday, the second business day after the contract

On the Wednesday if the comparison is marked part-redeemed, otherwise on the Thursday

On the Wednesday itself, the day the contract is made

FINRA Rule 11170 | Financial Regulation Courses

Transactions in "Part-Redeemed" Bonds

SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES

FINRA Rule 11170 establishes the settlement price calculation framework for transactions in bonds that have been partially called or paid down — a category of bond that requires special pricing treatment because its outstanding principal amount no longer matches its original face value.

The rule consists of two sentences. The first establishes the designation: in transactions in bonds which have been redeemed or paid in part, such bonds shall be designated as part-redeemed bonds.

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 — a quoted percentage could be applied either to the original face value or to the remaining principal amount, and the two would produce different settlement prices unless the market settles which amount the percentage is applied to.

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 signalling that the contract price is applied to the original principal amount, 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 fixes when transactions go ex the principal payments that produce 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 part of its principal, a payment the FINRA Rule 11160 framework makes transactions go ex, 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 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.

Working the Settlement Price Formula

FINRA Rule 11170 fixes the base of the calculation: the settlement price of a contract in a part-redeemed bond is the contract price multiplied by the original principal amount. Consider a contract for ten bonds of one issue, each originally issued with $1,000 of principal, on which 40 percent of each bond's principal has been paid. The ten bonds carry $10,000 of original principal, of which $6,000 remains outstanding. At a contract price of 58, the settlement price is 58 percent of $10,000, or $5,800. Applying the contract price to the $6,000 still outstanding, which would give $3,480, is not the calculation the rule prescribes.

Because the multiplication uses the original principal amount, the amount of principal still outstanding does not enter the calculation. Two contracts, each at a contract price of 80 for bonds carrying $5,000 of original principal, both settle at $4,000, whether the bonds concerned have had 20 percent or 50 percent of their principal redeemed.

The base does not move when the issuer redeems more. FINRA Rule 11170 provides that contracts "shall be made on the same basis". Suppose the issue in the first example later has a further 10 percent of each bond's original principal redeemed, so that $5,000 of the $10,000 original principal remains. A new contract for the same ten bonds at a contract price of 49 settles at 49 percent of $10,000, or $4,900. The original principal amount is still the figure the contract price is multiplied by, however many partial redemptions have taken place.

Which Bonds Carry the Part-Redeemed Designation

The designation in FINRA Rule 11170's first sentence reaches bonds "which have been redeemed or paid in part". Either route is enough. A bond on which the issuer has paid part of the principal is a bond paid in part, and it is designated part-redeemed even though no bond of the issue was called. A bond from which a portion of principal was redeemed qualifies in the same way.

The text sets no minimum portion. A bond with 5 percent of its principal paid and a bond with 70 percent paid have both been paid in part, and both are designated part-redeemed. The designation follows from the fact of a partial redemption or payment, not from its size.

The word "part" in FINRA Rule 11170 refers to the bond's principal, not to the quantity delivered under a contract. Suppose a seller owes ten bonds and delivers six. That is a part delivery, which FINRA Rule 11350 addresses by requiring the purchaser to accept a part delivery on any contract due, subject to that rule's proviso. The six bonds delivered have had none of their principal redeemed or paid, so the shortfall does not make them part-redeemed bonds.

Principal Payments, Ex-Dates and the Part-Redeemed Bond

A bond can become part-redeemed through a payment on account of principal, and the Code fixes when trading goes "ex" such a payment. FINRA Rule 11160 provides that all transactions except "cash" transactions in stocks, bonds or similar evidences of indebtedness shall be "ex" liquidating payments or payments on account of principal in accordance with the formula set forth in FINRA Rules 11140 and 11150. A record date can be fixed for such a payment: FINRA Rule 11120(f) defines the record date as the date fixed to determine the holders entitled to receive, among other things, principal payments.

Suppose the trustee of a bond dealt in flat fixes a Tuesday, a business day, as the record date for a payment on account of 20 percent of each bond's principal. Applying the formula in FINRA Rule 11150(a)(1), transactions in the bond other than cash transactions are "ex" that principal payment on the Tuesday, the record date itself. Once the payment has been made, each bond has been paid in part, and later transactions in it are transactions in part-redeemed bonds, settled at the contract price multiplied by the original principal amount.

The Part-Redeemed Designation on Comparisons and Confirmations

FINRA Rule 11220 requires confirmations or comparisons to include an adequate description of the security and the price at which the transaction was made. They must also include any other information deemed necessary to ensure that the buyer and seller agree as to the details of the transaction. Among the phrases that this other information should include, if applicable, the rule lists "part-redeemed". A comparison for a trade in a bond from which part of the principal has been redeemed should therefore carry the phrase "part-redeemed". Both sides then record that the transaction is in part-redeemed bonds, whose settlement price FINRA Rule 11170 calculates on the original principal amount.

Settlement Price, Interest and Delivery Date

FINRA Rule 11170 fixes how the settlement price of a contract is calculated. It says nothing about interest. Interest is the subject of FINRA Rule 11620. Under FINRA Rule 11620(a), in the settlement of contracts in interest-paying securities other than for "cash", interest at the rate specified in the security is added to the dollar price. Nothing in FINRA Rule 11170 removes that addition for a part-redeemed bond. So for a part-redeemed bond that pays interest, traded other than for cash, the interest under FINRA Rule 11620(a) is a separate item from the multiplication FINRA Rule 11170 prescribes.

Part-redeemed status also leaves the delivery date untouched. FINRA Rule 11170 contains no date. FINRA Rule 11320 sets the dates of delivery by type of transaction (cash, regular way, seller's option, buyer's option and delayed delivery), and none of its provisions makes an exception for part-redeemed bonds. A regular-way contract in a part-redeemed bond is therefore due for delivery on the same day as a regular-way contract in any other bond made on the same date.

When the Code Governs a Part-Redeemed Bond Trade

FINRA Rule 11170 is part of the Uniform Practice Code. FINRA Rule 11100(a) sets the Code's general scope: over-the-counter secondary market transactions in securities between members. FINRA Rule 11100(b) allows a rule of the Code to expand or limit that scope only if the rule specifically provides for it, and FINRA Rule 11170 contains no such provision. Suppose a member sells a part-redeemed bond to a retail customer who is not a member. That sale is not a transaction between members, so it falls outside the Code's general scope, and FINRA Rule 11170 does not govern it as a rule of the Code.

Paragraph (a)(1) of FINRA Rule 11100 also excepts transactions between members that are compared, cleared or settled through the facilities of a registered clearing agency. The exception does not apply to the extent that the rules of the clearing agency provide that rules of other organizations shall apply. Suppose two members' trade in a part-redeemed bond is settled through a registered clearing agency whose rules do not bring in other organizations' rules. That trade is outside the Code's scope, and FINRA Rule 11170 does not govern it.

Questions About Applying the Formula

FINRA Rule 11110 gives the Uniform Practice Code Committee power to issue interpretations or rulings on how the Code applies to situations in which there is no substantial disagreement as to the facts involved. Suppose two members agree on the facts: 40 percent of each bond's principal had been paid before their trade, and they agree on the contract price. They differ only over whether the settlement price is computed on the original or on the remaining principal. That question is one on which the Committee may issue an interpretation or ruling. If instead the members disagree over whether the principal payment had been made at all, there is a substantial disagreement as to the facts. That situation falls outside the condition FINRA Rule 11110 attaches to the Committee's power.

Common Errors with Part-Redeemed Bonds

The most direct error is multiplying the contract price by the principal still outstanding. FINRA Rule 11170 names the original principal amount as the figure the contract price is multiplied by.

A second error is deducting the redeemed portion after multiplying by the original principal amount. The rule's formula is a single multiplication, and it contains no deduction.

A third error is treating a further partial redemption as a reason to change the base for new contracts. Contracts "shall be made on the same basis", so the original principal amount remains the base after every further redemption.

A fourth error is confusing a part delivery with a part-redeemed bond. A seller who delivers fewer bonds than the contract calls for has made a part delivery. That shortfall does nothing to the principal of the bonds delivered.

Bonds, Not Stocks: The Reach of the Part-Redeemed Designation

The designation in FINRA Rule 11170's first sentence is written in terms of bonds: in transactions in bonds which have been redeemed or paid in part, such bonds are designated part-redeemed bonds. FINRA Rule 11160 is written more widely. It provides that all transactions except cash transactions in stocks, bonds or similar evidences of indebtedness shall be "ex" liquidating payments or payments on account of principal.

Suppose a company winding up its business makes a liquidating payment on its common shares, and the shares go on trading. FINRA Rule 11160 covers stocks, so it governs when transactions in the shares, other than cash transactions, go "ex" that payment. The shares are not bonds, so FINRA Rule 11170 does not designate them part-redeemed, and its settlement price formula, which applies to contracts in part-redeemed bonds, does not apply to contracts in them.

Cash Contracts in Part-Redeemed Bonds

Several neighbouring rules of the Code treat cash transactions separately. FINRA Rule 11160 excepts cash transactions from going ex payments on account of principal. FINRA Rule 11150(a) excepts them from the ex-interest dates it prescribes for bonds traded flat. FINRA Rule 11620(a) computes interest on a cash transaction up to but not including the date of the transaction, and on other transactions up to but not including the first business day following that date. FINRA Rule 11170 draws no such line. Its second sentence speaks of the settlement price of contracts in part-redeemed bonds, and it does not except cash contracts.

Suppose two members agree a contract for cash in a bond on which 25 percent of each bond's principal has been paid. The contract is a contract in part-redeemed bonds, and its settlement price is determined in the same way as that of a regular-way contract in the same bonds: by multiplying the contract price by the original principal amount. Being for cash changes when the bonds are delivered, which under FINRA Rule 11320(a) is the day of the transaction, but not how FINRA Rule 11170 calculates the settlement price.

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.