[Federal Register Volume 61, Number 211 (Wednesday, October 30, 1996)]
[Notices]
[Pages 56072-56078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27806]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37859; File No. SR-MSRB-96-10]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to Reports
of Sales and Purchases, Pursuant to Rule G-14
October 23, 1996.
On August 29, 1996, the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') a proposed rule change (File No.
SR-MSRB-96-10), pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act''), 15 U.S.C. Sec. 78s(b)(1). The proposed rule
change is described in Items I, II, and III below, which Items have
been prepared by the Board. The Commission is publishing this notice to
[[Page 56073]]
solicit comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Board is filing an amendment to Board rule G-14 concerning
reports of sales and purchases, and to the Rule G-14 Transaction
Reporting Procedures. The purpose of the proposed rule change is to
increase transparency in the municipal securities market by adding
retail and institutional customer transaction information to the inter-
dealer transactions currently included in the Board's Transaction
Reporting Program (``Program''). The proposed rule change would require
brokers, dealers and municipal securities dealers to (1) obtain an
executing broker symbol, if one has not already been assigned, from the
National Association of Securities Dealers (``NASD''); (2) provide the
Board with the name and telephone number of a person responsible for
testing the dealer's capabilities to report customer transaction
information; (3) test its capabilities to report such information; and
(4) report to the Board each day its municipal securities transactions
with customers. The Board is requesting that the proposed rule change
become effective according to the following proposed schedule:
Obtain executing broker symbol--Thirty days after
Commission approval of proposed rule change.
Provide contact information--July 1, 1997.
Test reporting capabilities--July through December 1997,
on a schedule to be announced by the Board.
Effective date for customer transaction reporting--January
1, 1998.
Although portions of the proposed rule change would not become
effective until 1998, the Board is requesting Commission approval of
the proposed rule change now to allow dealers adequate time to change
their internal systems to report customer transactions.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Board included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
texts of these statements may be examined at the places specified in
Item VI below. The Board has prepared summaries, set forth in Sections
A and B below, of the most significant aspects of such statements.
A. Purpose
The purpose of the proposed rule change is to increase transparency
in the municipal securities market by adding retail and institutional
customer transaction information to the inter-dealer transactions
currently included in the Program. Under the proposed rule change,
aggregate data about inter-dealer and customer market activity, and
certain volume and price information about all transactions in
frequently traded securities, would be disseminated to promote investor
confidence in the market and its pricing mechanisms. The information
would continue to be provided in the Program's daily report summarizing
prices and volumes of trading in the municipal securities market during
the previous day (the ``Daily Report'').\1\ In addition, the
transaction information on all transactions reported would be made
available to regulatory agencies responsible for enforcement of Board
rules, as a means to assist in market surveillance.
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\1\ The Board expects in the second quarter of 1997 to file and
obtain Commission approval of an additional proposed rule change
specifying revisions to the Daily Report format to accommodate
customer trade information. The proposed rule change will also
specify the fee for subscriptions to the Daily Report.
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The Transaction Reporting Program--Overview
The Board has developed the Program to accomplish two objectives.
The first is to increase the amount of information available about the
market value of individual municipal securities, which has been a
longstanding Board goal.\2\ This concept of disseminating information
to the public about transactions is now generally referred to by the
Board as bringing ``transparency'' to the market. The second, but
equally important, purpose of the Program is to provide a centralized
audit trail of municipal securities transactions by making available to
the NASD, the Commission, and other enforcement agencies a computer
database reflecting all municipal securities transactions reported to
the Board. This ``surveillance database'' helps meet the requirements
of those organizations for an audit trail of transaction data, in
connection with their surveillance of the market and inspection for
compliance with Board rules and securities laws.
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\2\ See ``Planned Pilot Program for Publishing Inter-Dealer
Transaction Information,'' MSRB Reports, Vol. 13, No. 3 (June 1993)
at 3-6.
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At this time, the Program is limited to inter-dealer transactions.
Under Board rule G-14, dealers currently report their inter-dealer
transactions to the MSRB each night through the automated comparison
system operated by National Securities Clearing Corporation (``NSCC'').
This reporting mechanism is convenient for dealers, since most of the
trade data that must be reported to the Board has to be reported to
NSCC in any event, for clearance and settlement purposes. The Board
accomplishes the transparency function by making summary price and
volume information available about these transactions on the Daily
Report. If the inter-dealer trade data received by the Board indicates
that there were four or more trades in an issue during that day, the
next morning's Daily Report includes the high, low and average prices,
and the total par traded, for that issue.\3\ Prices and volumes for
approximately 100 municipal securities issues are reported daily.
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\3\ Inter-dealer trades are reported publicly only if they were
successfully ``compared'' on trade date in the automated clearance
and settlement system, i.e., if the parties to the trade agreed on
trade details such as par value, price, and yield. Average prices
are reported only for those trades with par value between $100,000
and $1 million.
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The Board's Daily Report Service currently has nine subscribers who
receive electronic copies of the Daily Report each morning. Some
subscribers, such as news services, redistribute the information
broadly to their own clienteles. Paper copies of the Daily Report are
available for inspection in the Board's Public Access Facility in
Alexandria, Virginia. Information from the Daily Report is also
utilized in the Public Securities Association's transparency
initiatives: a generic AAA insured yield scale for publication in
newspapers, and an 800-number investor service.\4\
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\4\ The generic AAA insured yield scale provides composite
prices based on round lot trades ($250,000 or above) of municipal
bonds which have coupons that reflect current market conditions.
Certain yield scale data is published daily in a national newspaper,
USA Today (see, e.g., ``Key Indicators Thursday,'' USA Today,
Friday, August 23, 1996, at 3B). the 800 number investor service
enables investors to obtain benchmark price quotes relating to
particular issues of municipal bonds. Both PSA services incorporate
information from the Daily Report, and, in the case of the 800-
number service, the caller receives prices from the Daily Report if
they are available.
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The surveillance database contains information on all transactions
reported to the Board and is not limited to transactions in issues
traded four or more times. The database also contains information
reported to the Board but not included in Daily Reports, such as dealer
identities. The NASD currently uses the database to assist in its
surveillance of the market and provides direct access to the database
to
[[Page 56074]]
surveillance staff at its headquarters and two of its District Offices.
History of Program
In June 1994, the Board filed a proposed rule change to require
that dealers report inter-dealer transactions and to operate a facility
to report transaction information.\5\ This filing described the
computer system that would obtain inter-dealer trading data from
dealers and the Board's plan ultimately to include institutional and
retail customer transactions in the system, with the goal of making
available transaction information that is both comprehensive and
contemporaneous. In 1994 the Board stated its plan to implement the
Program in four phases.\6\
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\5\ See Securities Exchange Act Release No. 34458 (July 28,
1994) at 3.
\6\ See ``Reporting Inter-Dealer Transactions to the Board: Rule
G-14,'' MSRB Reports, Vol. 14, No. 5, (December 1994) at 3-6.
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Phase I--Inter-dealer transaction reporting, in which dealers would
use NSCC's comparison system as the reporting vehicle.
Phase II--Institutional customer transaction reporting, in which
dealers would use the clearance and settlement system as the
transaction reporting mechanism for those trades. Since dealers already
use this system to clear most of their transactions with institutional
customers, it was though that this technique would provide a relatively
quick and easy means to add institutional customer data to the Program.
Time-of-trade reporting for inter-dealer and institutional customer
trades also would be added in this phase.
Phase III--Retail customer transaction reporting. Because retail
customer transactions are not currently reported by dealers to any
central location, such reporting would have to be accomplished by
dealers modifying their own trade processing systems to generate files
of customer trades that could be transmitted to a new, customized
computer system at a central site.
Phase IV--More contemporaneous trade reporting. Phases I-III would
require dealer reporting of data by the end of trade date, with public
dissemination on the next day.
Phase IV of the Program would be a mechanism to accomplish more
contemporaneous reporting of data to the Board and to the public.
The Commission in November 1994 approved the proposed rule change
for reporting inter-dealer transactions. Phase I Daily Reports went
into production in January 1995. Two program modifications in Phase I
were implemented over the next 18 months. A requirement to report the
identify of the executing dealers in inter-dealer transactions (as
opposed to only identifying the clearing dealers) became effective July
9, 1995 \7\ and a requirement to report the time of execution of inter-
dealer transactions became effective July 1, 1996.\8\
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\7\ See Securities Exchange Act Release No. 35988 (July 18,
1995). The initial 1995 proposed rule change included a requirement
to report executing dealer identities but did not specify which
identification symbol was to be used. Some dealers have used NSCC
clearing numbers, others NASD executing broker symbols, and others
ad hoc symbols which they created themselves. Subsequent experience
has shown that one identifier--the NASD executing broker symbol--is
the most appropriate identifier for purposes of the Program. This is
discussed below, under ``Dealer Reporting Requirements.''
\8\ See Securities Exchange Act Release No. 37116 (April 16,
1996). The time-of-trade data is currently being stored in the
database and in the near future will be made available on the
surveillance screens.
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Revised Strategy for Obtaining Customer Transaction Data
In preparation for adding institutional customer transaction data
in Phase II, during the summer of 1995 the Board conducted a thorough
review of institutional customer trade data being submitted by dealers
to the centralized clearance and settlement system for institutional
customer trades.\9\ The review found that various aspects of this data
made it unsuitable for transparency and surveillance support purposes.
In general, the standards desired for timeliness, accuracy and
completeness of trade data for transparency and market surveillance
purposes were not met by the data flowing through the clearance and
settlement system. The procedures for submitting, resubmitting and
canceling trades are geared toward purposes of clearance and
settlement, e.g., if the customer's account number is unknown, dealers
must delay submitting the trade to the clearance and settlement system
until it is known. Dealers also must cancel and resubmit trade reports
to the clearance system to correct settlement-related information, such
as name or identification number of the customer's agent. A number of
procedures and practices employed by dealers for submitting information
to the clearance and settlement system appeared to be acceptable for
that purpose but would have hindered the purposes of transaction
reporting.\10\
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\9\ The centralized clearance system that dealers currently are
required to use to help clear and settle institutional customer
trades under rule G-15(d) is operated by the Depository Trust
Company (DTC), and is generally known as the Institutional Delivery
(ID) System. The ID System produces confirmations and
acknowledgements of institutional trades and is linked to the
automated system for book-entry settlement.
\10\ The Board's review found that dealers submit a substantial
portion of institutional trades to the clearance and settlement
system after trade date, because of unknown customer account
numbers, unknown settlement dates, and other reasons. The relatively
high cancellation rate of submissions also creates questions about
accuracy of the data available on trade date. Only a small fraction
of dealer-submitted trade information is acknowledged as correct by
the customer or its agent by the end of trade date. Of the remaining
data, some is later acknowledged but a substantial portion is not
acknowledged before settlement occurs. For those trades not
acknowledged by customers on trade date, it is not possible, on the
morning of the day after trade date (T+1), to distinguish between
those transactions that were submitted with correct price and
quantity and those which were not.
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The ability of the Board and the industry to overcome the problems
with the use of clearance and settlement data for transaction reporting
would have required changes in the clearance and settlement system and
substantial changes in internal dealer systems and procedures that feed
trade data to the clearance and settlement system. This would have been
a costly and time-consuming project and, at its conclusion, it would
immediately have been necessary to solve similar problems in collecting
retail transaction data. The Board decided instead to combine
institutional customer transactions with the planned retail trade
reporting component of the Program so that retail and institutional
customer transactions could be collected using a single mechanism
designed specifically to accommodate the purposes of transaction
reporting. This new plan, and the recognition of the full extent of
changes that would need to be made by dealers to their operations, also
necessitated a delay in the previously announced date for implementing
institutional and retail transaction reporting.\11\
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\11\ Initially the Board had anticipated that retail customer
transactions would be added to the Program by the end of 1996. Under
the revised plan, this function would be delayed to January 1, 1998.
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The Customer Transaction Reporting Program
Overview. Under the Board's revised approach, included in the
proposed rule change, each dealer that effects transactions with
customers would generate a file of certain required information about
its customer transactions, in a specified format, and would transmit
the file electronically to the MSRB by midnight of each trading day.
The Board expects that most dealers will modify existing internal
processing systems to produce the file required by the proposed rule
change. This approach will be less costly to
[[Page 56075]]
dealers than if the Board were to mandate the use of an independent
transaction reporting system with stand-alone terminals that would have
to be acquired by dealers and operated by dealer staff.
The dealer could use any available method to transmit the specified
file to the Board's system. Most dealers are expected to use existing
telecommunications links with NSCC for this purpose, but,
alternatively, dealers with low volumes of customer trades may dial-in
to the Board's system and upload the file by modem.
The Board plans to build a subsystem of the Transaction Reporting
System for accepting customer transaction information. The resulting
Customer Transaction Reporting Subsystem (``CTRS'') would encompass the
system originally planned for retail transactions, but will process
institutional customer transaction data as well. Therefore, dealers
will have consistent operational requirements for reporting both retail
and institutional customer transactions.
Trade Information to be Reported. Dealers would report
approximately a dozen data items about each customer trade. These
items, and their purpose in the customer transaction reporting
subsystem, are as follows:
CUSIP Number. The number assigned by the CUSIP Service Bureau to
identify the security. Other identification numbers will be considered
errors. This item is needed for transparency and surveillance
purposes.\12\ Format: 9 alphanumeric characters.
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\12\ Items needed for transparency purposes will appear on the
public Daily Report. Items needed for surveillance purposes will be
stored the Board's surveillance database and used by the enforcement
agencies for audit trail construction and other enforcement
purposes.
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Trade Date. The date the trade was executed. This item is needed
for transparency and surveillance purposes and to determine compliance
with the Board's rule G-14 requirement that the trade be reported on
trade date. Format: 8 digits, CCYYMMDD.
Time of Trade Execution. The time of day, stated as Eastern time to
the nearest minute, at which the trade was executed. This item is
needed for surveillance purposes. Format: 4 digits, HHMM, Military
format.
Dealer Identifier. The executing broker symbol, assigned by the
NASD, that identifies the executing dealer. The dealer identity is
needed for surveillance purposes. Format: 4 letters, e.g., ABCD.
Buy/Sell Indicator. An indicator of the dealer's capacity as buyer
or seller in the transaction. This item is needed for surveillance
purposes. Format: ``B'' or ``S''.
Par Value Traded. The par value, in dollars, of the securities in
the transaction. The maturity value of zero coupon securities will be
given if it differs from the par value. Par value is needed for
transparency and surveillance purposes. Format: 9 digit integer.
Dollar Price. The price of the security, in dollars per hundred
dollars par value. Dollar price will be reported to the CTRS excluding
any commission; the CTRS will include the commission (a separate item,
described below) in dollar prices as shown in the Daily Reports. If the
dollar price cannot be computed precisely because the settlement date
of a ``when-issued'' transaction is unknown, the CTRS will estimate the
dollar price based upon the reported yield and an estimated settlement
date (see below). Dollar price is needed for transparency and
surveillance purposes. Format: 9 digits plus explicit decimal point,
e.g., 100.123456 or 098.765432. The decimal point may ``float,'' e.g.,
both 00099.5000 and 99.5000000 are valid.
Yield. The yield of the transaction, in percent, as reported on the
confirmation. Yield will not be required on transactions in municipal
variable-rate or collateralized mortgage obligations. Yield will be
used to validate dollar price. Format: 8 digits plus explicit decimal
point. Units are per cent, e.g., 03.500000 denotes 3.5%.
Dealer's Capacity and, if Agent, Commission Charged. The dealer's
capacity indicates whether the dealer acted as agent or principal
toward the customer. It is needed for surveillance purposes.
Commission, if any, will be stated as dollars per hundred dollars par
value, and is needed for computing the net price including commission.
Format ``A'' or ``P''. Commission: 7 digits plus explicit decimal,
e.g., 00.05000.
Settlement Date. The date the transaction is due to settle. The
dealer must provide the settlement date if it is known. If the
settlement date for an issue in ``when-issued'' status is not known at
the time the trade information is reported, the CTRS will estimate it
as 20 business days after the first trade in the issue, until the
actual settlement date for the issue is determined. This item will be
used to validate the consistency of dollar price and yield as reported.
Format: 8 digits, CCYYMMDD.
Dealer's Control Number for Transaction. An identifier, assigned by
the executing dealer, sufficient to identify the transaction from among
the dealer's other transactions. Dealers may use any coding method,
provided that no two transactions done by a dealer within a three-year
period have the same control number. This item is needed for
surveillance purposes (so that submissions can be associated with
entries in the dealer's record-keeping system) and for data management
(so that a dealer may identify a transaction to be revised after it is
first reported to the CTRS). Format: 20 alphanumeric characters.
Cancel/Amend Code and Previous Record Reference. An indicator of
whether the dealer is reporting an update to data previously reported
about a transaction, and, if necessary, the dealer's control number for
the transaction whose data is to be updated. Cancel/Amend code format:
``F'': First report of this transaction to the MSRB. ``C'': Cancel the
record of the trade identified by the dealer's control number. ``A'':
Amend the record of the trade identified by the dealer's control
number. ``V'': Verification that a record of a transaction containing
possible errors is correct.
Use of Intermediaries. An important feature of the Program is a
provision for dealers to submit customer transaction data to the Board
through an intermediary that could handle the technical details of
preparing files in the specified format and/or the function of
transmitting correctly formatted files to the CTRS. For example,
clearing dealers (dealers that submit transactions for clearance and
settlement on behalf of other dealers) could report transactions on
behalf of the dealers for whom they clear. Clearing dealers themselves
may use service bureaus (firms offering confirmation or other
processing services) to collect, format and transmit data to the Board.
By using the same telecommunication links for CTRS data as for clearing
data, the expense to dealers of customer transaction reporting would be
minimized.
The Submission Process. Dealers or intermediaries will perform two
steps in submitting customer trade data to the Board. First, they will
prepare a file containing the necessary information in the physical
format specified by the Board. Second, they will transmit the file to
the CTRS.
The dealer may extract the necessary information from its record-
keeping or automated confirmation systems, or may key in the data to a
program designed specifically to create a file in the correct format.
For dealers who wish to key in data on a personal computer, data entry
and editing software will be made available by the Board. It is
expected that only dealers with low volumes of trades will use this
method, since higher-volume dealers already store
[[Page 56076]]
most of the required trade data in existing computer systems and are
expected to adapt those systems for reporting purposes rather than
manually re-enter the data into another system.
For file transmission, the Board expects most dealers to use
intermediaries, as discussed above. Existing links between dealers and
NSCC are expected to be used to transmit most files.\13\ If a dealer
does not wish to use a intermediary to transmit files to the Board, the
dealer will be able to upload files directly to the CTRS from a
personal computer. The Board will make telecommunications software
available for uploading files, which will run on the dealer's computer
under Microsoft Windows. To upload files by dialing in, a dealer will
need a modem and any version of Windows supported by Microsoft
Corporation. The Board expects this option to be utilized only by
lower-volume dealers because most high-volume dealers are already
linked with NSCC. The CTRS is being designed initially with sufficient
capacity for up to 100 dial-in submissions per day, although fewer are
expected.
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\13\ The Board currently is in discussion with NSCC and it
appears that NSCC will offer telecommunications services to dealers
for customer transaction reporting.
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Errors and corrections. The system will send messages to dealers,
by facsimile, acknowledging receipt of a day's file and identifying
records that appear to be in error or questionable. (The system also
will make available an electronic copy of the receipt and error message
file, which the dealer may optionally download to its computer if it
prefers.) Dealers will submit corrections using a method similar to
that for reporting trades. A dealer may also ``cancel'' a trade, that
is, inform the system that a trade previously reported did not occur or
was cancelled by the parties. Dealers will report only changes relevant
to the Board's transaction reporting purposes, for example, a change in
the price or par value of a trade.
Dealer Reporting Requirements
The proposed rule change would require dealers to report their
customer transactions to the Board by midnight of trade date. Dealers
also would be required to report corrections and cancellations as soon
as the need for such change is known. Dealers would be able to make
changes to data previously reported for two months after the trade
date.
The proposed rule change would also require each dealer to use a
NASD four-letter executing broker symbol (e.g., ``ABCD'') to identify
itself as the party that effected a transaction. Dealers reporting
inter-dealer trades to the Board through NSCC currently are required by
rule G-14 to identify the executing brokers (as well as the clearing
brokers), but the specific symbol to be used is not specified in rule
G-14 procedures. Specifying the use of the NASD executing broker symbol
will enable users of the surveillance database to determine the
executing dealer unambiguously in all cases. The NASD assigns such
symbols, on request, to all dealer firms including bank dealers. A
dealer not already assigned such a symbol will be required to obtain
one from the NASD. Executing broker symbols are already in wide use by
many dealers. Since identification symbols are already needed for the
audit trail of inter-dealer transactions and it would improve the
functions of the surveillance database for this uniform identifier to
be used, the Board requests that this provision become effective 30
days after Commission approval of the proposed rule change.
The requirement to report customer trades would become fully
effective January 1, 1998, with a testing requirement, discussed below,
effective beginning July 1997.
Proposed Mandatory Testing
Dealers will need to test their own trade processing systems to
ensure they can produce files containing the required information in
the proper format. Such testing would clarify system input
specifications with dealers and ensure that dealers' systems are able
to correct erroneous input. Mandatory testing by dealers is the only
way to ensure that dealers' systems are ready to submit customer trade
data before the reporting requirement becomes effective.
To begin system operations by January 1, 1998, the proposed rule
change would require testing with dealers between July and December
1997. Procedures would involve testing first by the dealers with the
greatest volume of customer trades, followed by the lower-volume
dealers. Each dealer would be required to report all its customer
trades, on a test basis, to the Board for a specified time. None of the
test submissions would be publicly reported or provided to the
enforcement agencies. The Board would inform the dealers of any
problems found, and the dealer would re-test its system and reporting
procedures within two months of the initial run. The proposed rule
change would require dealers to provide the Board with the name of a
dealer staff person responsible for testing, and to participate in a
testing program, which would begin in July 1997. The Board plans to
test first with larger submitters, giving consideration to the test
readiness of individuals firms.
The Daily Report
All transactions in municipal securities will be recorded in the
surveillance database. The Daily Report, however, will not include
price data on every transaction, since it reports on those issues that
were traded most frequently during the previous day. As noted above,
currently the Daily Report includes summary information on those
securities which were traded four or more times the previous business
day. Including customer trades will substantially increase the number
of issues trading above this ``reporting threshold.'' It is impossible
at this time, however, to predict quantitatively the effect on the
Daily Report of including retail customer trades, since there is no
existing source of comprehensive retail transaction information in the
industry. The Board is requesting and has begun receiving samples of
customer trade data from certain dealers, on a voluntary basis, and has
begun to measure the frequency with which issues are traded, trade
sizes, and other factors needed to structure the Daily Report to
include customer transaction data. The Board plans to determine the
reporting threshold and other formatting aspects of the Daily Report by
mid-1997 and will describe it in an additional proposed rule change, to
be filed before system operations begin.\14\
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\14\ The planned proposed rule change will also specify the fee
for subscriptions to the Daily Report, along with any Program
modifications found to be necessary.
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Customer Transaction Data as a Measure of Dealers' Market Participation
The Board currently levies four types of fees that are generally
applicable to dealers. Rule A-12 provides for a $100 initial fee paid
once by a dealer when it enters the municipal securities business. Rule
A-14 provides for an annual fee of $200 from each dealer that conducts
municipal securities business during the year. Rule A-13 provides for
an underwriting fee based on the par value of a dealer's participation
in primary offerings of municipal securities, and for a transaction fee
based on the par value of a dealer's transactions reported to the
Board. The transaction fee is currently .0005 per cent (one-half cent
per $1,000) of the total par value of inter-dealer sales of municipal
securities, since the current
[[Page 56077]]
reporting requirement applies only to inter-dealer trades.
The Board's goal in allocating fees among dealers is to reflect as
accurately as possible each dealer's involvement in the municipal
securities market. The Board believes underwriting activity and inter-
dealer transaction volume currently are the best available and
auditable means upon which to base fees, but the Board has noted that
these measures of dealer activity do not track every important activity
in the market.\15\ When customer transaction data becomes available,
the Board will consider revising the basis of the transaction fee to
include all trades in municipal securities, not just the inter-dealer
transactions as under the current transaction fee structure.
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\15\ See Securities Exchange Act Release No. 36492 (November 20,
1995) at 4-5 and ``Revisions to Board Fee Assessments: Rules A-13,
A-14 and G-14,'' MSRB Reports, Vol. 16, No. 1 (January 1966) at 29.
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B. Statutory Basis
The Board has proposed the rule change pursuant to Section
15B(b)(2)(C) of the Act, which requires, in pertinent part, that the
Board's rules:
* * * be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in
regulating * * * transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market
in municipal securities, and, in general, to protect investors and
the public interest. * * *
III. Self-Regulatory Organization's Statement on Burden on
Competition
The Board does not believe that the proposed rule change will
impose any burden on competition in that it applies equally to all
dealers in municipal securities.
IV. Self-Regulatory Organization's Statement of Comments on the
Proposed Rule Change Received From Members, Participants, or Others
The 1995 Request for Comments
The Board published a notice in February 1995,\16\ requesting
comment on the institutional customer transaction phase of the Program
and proposing that, to produce the Daily Report in this phase,
institutional customer and inter-dealer transactions would be reviewed
together to identify those issues in which four or more transactions
occurred on a given day. Once these frequently traded issues were
identified, the prices for all transactions in the issue would be
reviewed to determine the high and low prices, which would be reported
on the next day. An ``average price'' would be computed based upon all
transactions in that issue involving par values between $100,000 and $1
million, if any. In response, six comment letters were received from
the following:
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\16\ ``Transaction Reporting Program for Municipal Securities:
Phase II,'' MSRB Reports, Vol. 15, No. 1 (April 1995) at 11-15.
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A.G. Edwards & Sons, Inc. (``Edwards'') \17\
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\17\ Letter from Douglas L. Kelly, Vice President, A.G. Edwards
& Sons, Inc. to Larry M. Lawrence, Policy and Technology Advisor,
MSRB (May 30, (1995).
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Goldman, Sachs & Co. (``Goldman'')\18\
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\18\ Letter from Edward C. Briscotti, Vice President, Goldman,
Sachs & Co., to Judith A. Somerville, Uniform Practice Specialist,
MSRB (May 31, 1995).
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Kemper Securities, Inc. (``Kemper'')\19\
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\19\ Letter from Kathleen M. Burns, Municipal Bond Dept., Kemper
Securities, Inc., to Hal Johnson, Deputy General Counsel, MSRB
(August 22, 1995).
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The Public Securities Association (``PSA 1995'') \20\
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\20\ Letter from Joseph W. Sack, Senior Vice President, Public
Securities Association (``PSA 1995'') to Larry M. Lawrence (June 2,
1995).
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The Regional Municipal Operations Association (``RMOA'')\21\
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\21\ Letter from Bruce L. Vernon, Regional Municipal Operations
Association (``RMOA 1995'' to Judith Somerville (June 13, 1995).
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Applied Financial Management, Inc. (``Applied Financial'')\22\
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\22\ Letter from Ron Moore, Senior Market Analyst, applied
Financial Management, Inc. (``Applied Financial'') to Larry M.
Lawrence (undated).
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The Board described its revised plan to implement reporting of both
institutional and retail customer transactions in a January 1996 notice
in which preliminary technical specifications were also proposed for
comment.\23\ In response, three comment letters were received from the
following:
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\23\ ``Reporting Customer Transactions in Municipal Securities:
Rule G-14,'' MSRB Reports, Vol. 16, No. 1 (January 1996) at 15-18,
and ``Customer Transaction Reporting: Proposed Technical
Specifications and Request for Comment,'' Ibid. at 19-22.
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The Public Securities Association (``PSA 1996'')\24\
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\24\ Letter from George Brakatselos, Vice President, Public
Securities Association, to Larry M. Lawrence (May 2, 1996).
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The Regional Municipal Operations Association (``RMOA 1996'')\25\
and Zia Corporation (``Zia'')\26\
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\25\ Letter from Executive Committee of the Regional Municipal
Operations Association to Harold Johnson (March 22, 1996).
\26\ Letter from Glenn Burnett, President, Zia Corporation to
Larry M. Lawrence (July 2, 1996).
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Discussion of Comments
Use of Institutional Transaction Data from the Clearance and
Settlement System. One commentator \27\ stated its preference that the
Board use institutional trade data reported by dealers to the clearance
and settlement system (referred to in its letter as the Depository
Trust Company's (``DTC'') Institutional Delivery [ID] System). Another
commentator \28\ recommended that the DTC develop a program for
reporting retail customer transaction data. A commentator\29\ suggested
that the Board focus on reporting institutional customer transactions
because they are ``much more illustrative of the activities of the
municipal market'' than are retail transactions.
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\27\ RMOA 1996
\28\ Goldman
\29\ RMOA 1995
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Although the Board had hoped to use clearance and settlement data
for institutional customer transaction reporting, after a careful
review the Board found that various aspects of the clearance and
settlement system data make it unsuitable for transparency
purposes.\30\ Regarding the suggestion that the Program should focus on
institutional, rather than retail, customer transactions, the Board
notes the retail transactions are a necessary and integral part of the
Program, both for disclosing prices in the Daily Report and for
constructing the comprehensive audit trail.
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\30\ See above and see also ``Reporting Customer Transactions in
Municipal Securities: Rule G-14,'' MSRB Reports, Vol. 16, No. 1
(January 1996), at 16 and footnote 6.)
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The Daily Report. The Board received a variety of suggestions for
changing the Daily Report. Some commentators \31\ suggested reporting
individual transactions, while others \32\ suggested combining data
from all trades falling within a given par value range.
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\31\ Kemper, Zia and Applied Financial
\32\ PSA 1995, PSA 1996
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The Board does not intend to raise the threshold of four or more
trades a day for Daily Report purposes. At this time, however, it is
impossible to predict how the inclusion of retail customer data will
affect the Daily Report, since retail transactions are not available to
conduct a simulation. The system is being designed to have the
capability to produce the Daily Report in various formats, based upon
alternative criteria, so that this decision can be made when more
information is available. As noticed above, the Board has deferred a
decision on the Daily Report criteria until next year, by which time
sample customer trade data, provided voluntarily to the Board by
several dealers for study, can be analyzed. The Board, at that time,
will reconsider all of the comments received on the structure of the
Daily Report.
[[Page 56078]]
Transactions to be Reported. The Board's 1996 request for comment
asked whether transactions in certain types of municipal securities
should be excluded from reporting. The securities that might be
excluded are those that may require special processing by dealer
systems, e.g., variable-rate securities, collateralized mortgage
obligations, securities prepaying principal and securities trading
``flat.'' One commentator \33\ stated that all municipal transactions
should be included in the scope of transactions reported, except those
in securities that are ineligible for CUSIP number assignment. The
proposed rule change would require dealers to report customer
transactions in all securities eligible for CUSIP number assignment.
The Board notes, however, that it may be impossible, at least
initially, to calculate meaningful and reliable dollar prices from
yield for some of these instruments with non-standard payment
structures. Thus, although the separate trade information will go into
the surveillance database for audit trail purposes, some transactions
in municipal securities with non-standard payment or call features may
not be included as part of the Daily Report.
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\33\ PSA 1996
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Data Items to be Reported by Dealers. One commentator \34\ stated
its belief that there is no need for data items in addition to those in
the request for comment. The Board has determined that, with one
exception, the data items proposed in the January 1996 notice are
sufficient for processing customer transaction data and has included
those items in the proposed rule change.\35\
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\34\ PSA 1996.
\35\ The exception is the ``cancel/amend code,'' an indicator
whether the dealer is reporting a change to data previously reported
about a transaction. This indicator was not specified in the 1996
notice, but is logically necessary to enable the dealer to correct
erroneous reports made to the Board.
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Estimating the Settlement Date. Transactions involving the
distribution of new issue securities sometimes are effected before the
first settlement date is determined. Often the parties to such ``when-
issued'' transactions agree on the yield of the transaction when
effecting the trade, and calculate the corresponding dollar price after
the settlement date is determined. The proposed rule change would
require the reporting of such transactions on trade date. The system is
designed to estimate the dollar price for next-day reporting based upon
the reported yield and an estimated settlement date. The 1996 request
for comment asked whether the dealer or the Board should estimate the
settlement date, and a commentator \36\ proposed the date should be
estimated by the Board. Accordingly, the Board will estimate the
settlement date as the date of first trade plus 20 business days.
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\36\ PSA 1996.
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Information about Calls or Pre-refunded Securities. One commentator
\37\ suggested that the Board require the dealer to report whether the
security was priced to call or was known to be pre-refunded, in order
to be sure the dealer took such information into account. The planned
system is designed to verify the reported dollar price and yield by
recalculating the dollar price from the reported yield, using data
about the security obtained from one or more securities information
vendors. The calculations should be the same if issue information used
by the Board and the dealer is the same. If the system's recalculated
price indicates there may be erroneous input caused by typographical
errors, the dealer will be informed and the transaction will not be
included in the Daily Report. Therefore, it is unnecessary to request
call or pre-refunding information from the dealer as part of trade
input.
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\37\ Zia.
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Program Costs and ``Open Systems'' Approach. One commentator \38\
expressed concern that the Board remain sensitive to the cost to
dealers of reporting customer transactions. This commentator also
commended the Board for taking the ``open system'' approach to provide
flexibility to dealers and intermediaries in configuring their
reporting systems.
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\38\ PSA 1996.
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The Board notes that the system design and approach to the
Transaction Reporting Program are intended to minimize long-term
resource commitments from dealers. Instead of requiring dealers to
lease a terminal from the Board and hire personnel to input
transactions, the program is designed so that dealers can generate
nightly files of trade data from their existing trade processing
systems. In addition, NSCC has stated its willingness to allow dealers
to utilize existing telecommunications links as the means for
transmitting these files to the Board. The Board, as well as dealers,
will benefit from dealers using existing links with NSCC, since the
Board's system then will need less hardware and staff to support dial-
in submissions.
Standardized Format for Vendor Reports. A commentator \39\ posited
that the Board may desire to have uniformity among transaction reports
distributed by information vendors, and recommended that the Board
impose standards for vendor-produced ``Official MSRB Daily Reports.''
The Board desires to provide maximum flexibility for value-added
vendors to reformat the public transaction information to meet the
needs of the marketplace, and does not intend to define an ``official''
report format for redistribution of data obtained via its Daily Report
Service.
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\39\ Applied Financial.
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V. Date of Effectiveness of the Proposed Rule Change and Timing
For Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
VI. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submissions, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of the filing will also be
available for inspection and copying at the Board's principal offices.
All submissions should refer to File No. SR-MSRB-96-10 and should be
submitted by November 20, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-27806 Filed 10-29-96; 8:45 am]
BILLING CODE 8010-01-M
