[Federal Register Volume 61, Number 78 (Monday, April 22, 1996)]
[Notices]
[Pages 17745-17747]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9802]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37116; File No. SR-MSRB-95-17]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to Reports
of Sales and Purchases
April 16, 1996.
I. Introduction
On December 13, 1995 the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') a proposed rule change to
require brokers, dealers and municipal securities dealers (``dealers'')
to include time of trade execution when submitting information on
inter-dealer transactions to the Board under rule G-14, in order to
enhance the Board's transaction reporting pilot program (``the
program'').
The proposed rule change was published for comment in Securities
Exchange Act Release No. 36827 (February 9, 1996), 61 FR 6276
(``Proposing Release''). The Commission received two comments on the
proposal.\1\ For the reasons discussed below, this order approves the
proposal to amend Board rule G-14, effective July 1, 1996, as requested
by the Board in the Proposing Release.
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\1\ See letter from Joseph W. Sack, Senior Vice President,
Public Securities Association, to Secretary, Securities and Exchange
Commission, dated March 8, 1996 (``PSA letter''), and from The
Executive Committee of the Regional Municipal Operations Association
to the MSRB, dated March 22, 1996 (``RMOA letter''). The Commission
notes that the RMOA letter was not submitted to the Commission as a
comment letter specifically on this filing, but because the letter
provides RMOA's comments on the proposed rule to require time of
trade reporting, the Commission is considering the pertinent
comments in the present order.
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II. Description of the Proposal
a. Purpose
As discussed in the Proposing Release, the proposed rule change is
intended to improve the audit trail that is currently available for
inter-dealer municipal securities transactions by requiring municipal
dealers to include the time of trade execution when submitting
information on their trades under Board rule G-14. This would make it
possible to reconstruct the time sequence of interdealer transactions.
The information would be made available, through the Board's automated
transaction reporting system, to the Commission and to organizations
charged with inspection for compliance with, and enforcement of, Board
rules (``enforcement agencies'').
b. Background
This initiative is one element of an ongoing, multi-phase pilot
program to increase price transparency for public use and to create
audit trails for market surveillance purposes in the municipal
securities markets. In 1994,\2\ the Board described its plan to
disseminate a daily public report that summarizes market activity for
securities traded ``frequently'' \3\ on the previous day (``T+1''), and
to construct a comprehensive ``surveillance database,'' that would
include details of each trade (the identity of the parties, the price,
par value, etc.). The 1994 plan proposed four phases: inclusion of
inter-dealer transactions in Phase I, institutional customer
transactions in Phase II,\4\ retail customer transactions in Phase III,
and intra-day reporting in Phase IV.
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\2\ See letter from Robert Drysdale, MSRB, to Arthur Levitt,
SEC, dated November 3, 1994.
\3\ Currently, the threshold for ``frequent'' trading is four or
more trades in one day.
\4\ ``Institutional'' transactions were defined for the purpose
of Phase II as customer transactions settled on a delivery versus
payment/receipt versus payment (DVP/RVP) basis. These are
transactions in which the customer requires that settlement occur
with an exchange of money and securities at the time of settlement.
Generally, institutional customers require DVP/RVP settlement and
retail customers do not.
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The Commission originally approved the pilot program in concept on
November 9, 1995.\5\ That order initiated the Board's transaction
reporting program and operation of the supporting computer system, and
was an important first step to increase transparency and market
surveillance of the municipal securities market.
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\5\ See Securities Exchange Act Release No. 34955 (November 9,
1994), 59 FR 59810 (order approving Phase I of the MSRB's
transaction reporting pilot program). The input stream for inter-
dealer transaction reporting under Phase I is transaction
information reported by dealers, pursuant to Board rule G-14, to the
Board through the automated comparison system. The Board has
designated National Securities Clearing Corporation (``NSCC''), the
central facilities provider of the automated comparison system, as
its agent for receiving inter-dealer transaction information.
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Accordingly, Phase I of the transaction reporting system has been
operational since January 23, 1995. Each day, the system has produced a
report of price and volume of inter-dealer transactions in ``frequently
traded'' municipal securities executed on the previous business day.
The system also generates a surveillance data base which includes,
among other things, the price and volume of each compared trade, the
trade date, identification of the security traded, and identification
of all parties to each compared interdealer transaction.\6\
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\6\ The Commission has recently approved the requirement to
identify all dealers that are parties to a trade when submitting
transaction information to the Board. See Securities Exchange Act
Release No. 35988 (July 18, 1995), 60 FR 38069.
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The information provided in the surveillance database is intended
to enable the enforcement agencies to construct audit trails of inter-
dealer transactions. The Board has provided on-line access to the
surveillance database to the National Association of Securities
Dealers, Inc. (``NASD'') and is making information from the
surveillance database available to all the agencies responsible for
enforcing Board rules. The proposed amendment to rule G-14 is intended
to enhance the surveillance information currently available, and to
make it more useful to those responsible agencies.
c. Timing
The Proposing Release notes that changes in the automated
comparison system are underway to enable that system to collect time-
of-trade
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information, and dealers and service providers must make corresponding
changes in order to furnish to the MSRB the information that would be
required under the proposal. To provide market participants with
sufficient time to make the necessary internal system changes, the
Board has requested that the Commission make the proposed rule change
effective on July 1, 1996.
The Proposing Release also describes the MSRB's revised plan to
delay implementation for Phase II by merging that phase with Phase III
of the program.\7\ According to the MSRB, notice was to be made
available to the Commission and the industry by the end of 1995,
outlining the new plan and requesting comment from industry
participants. Corresponding proposed amendments to rule G-14 will be
filed with the Commission in mid-1996. The Commission notes that the
Proposing Release included a discussion of this new schedule, but did
not formally propose a revised schedule or rule amendment for
Commission review at this time.
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\7\ In 1994, the MSRB had planned to obtain institutional trade
data from the Institutional Delivery (``ID'') System, operated by
Depository Trust Corporation (``DTC''). After further research into
this matter, however, the MSRB has determined that it is appropriate
to merge Phases II and III of the program. Under this modified
approach, dealers would be required to report selected information
about institutional and retail customer trades to the Board by
uploading the data from their own systems to the central system
operated by the Board. The Commission has not approved this modified
schedule.
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d. Comments Received by the MSRB Prior to Filing With the Commission
In its filing with the Commission, the Board stated that it
received two comments on the proposal in response to a notice published
by the MSRB which, among other things, had described the proposed rule
change and requested comment from market participants.\8\
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\8\ See ``Transaction Reporting Program for Municipal
Securities: Phase II,'' MSRB Reports, Vol. 15, No. 1 (April 1995),
at 11-15.
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According to the Board, one commentor \9\ that responded to the
MSRB publication stated that time-of-trade reporting would involve
``major and possibly costly'' system changes to dealer systems. This
commentor, according to the Board, believed that time-of-trade
reporting should be delayed until retail customer transactions are
added to the transaction reporting program, so that dealers and
clearing agencies could make the needed changes in conjunction with
more extensive changes foreseen for the later phases. The MSRB further
explained that the second commentor that responded to the MSRB
publication \10\ stated that many firms would incur development costs
to modify their trading systems to accommodate time-of-trade
information.
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\9\ The Public Securities Association provided this comment.
\10\ Goldman, Sachs & Co provided this comment.
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The Board responded to the above concerns in the Proposing Release.
The Board believes that the proposed rule change is essential to
facilitating effective surveillance and enforcement activities
regarding inter-dealer transactions and should not be delayed until
later phases of the transaction reporting program. The Board does not
believe that incorporating time-of-trade data into current trade
reporting systems represents a major system change. The Board further
believes that the proposed rule change would merely add one item of
information to an existing reporting requirement. That information item
already is required, for record-keeping purposes, to be recorded by the
dealer. Finally, the Board has proposed more than six months' lead time
from its publication date to the effective date to allow dealers
sufficient time to schedule the necessary system changes. In many
cases, it would be expected that this change could be made in
connection with other minor system adjustments that must be implemented
in the ordinary course of business.
III. Comments
As noted above, the Commission received two comments on the
proposal.\11\ Both commenters opposed approval of the proposed rule
change.
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\11\ See note 1, supra.
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The commenters made essentially the same arguments that were made
to the MSRB prior to filing discussed above. Specifically, one
commenter, noting that it had already commented to the MSRB on the
proposed rule change, continues to oppose the proposed rule change
because of the costs that it would impose on dealers.\12\ The commenter
asserts that, in light of other costs currently imposed on municipal
dealers, along with the MSRB's plans to require new systems by January
1998 for institutional and customer transaction reporting,
implementation of the present proposal should be delayed until the
requisite systems changes can be merged with those that will be
required for the January 1998 transparency initiatives.
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\12\ See PSA letter, supra note 1.
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With respect to the present proposed rule change, the second
commenter believes that time of trade information will be useful when
the Board begins to take trade data beyond the dealer-to-dealer
business.\13\ The commenter does not see the usefulness of the
information now, however. This commenter recommends postponing the
proposed rule change ``in favor of a more logical progression toward
the desired goals.'' \14\
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\13\ See RMOA letter, supra note 1.
\14\ Id.
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IV. Discussion and Order Approving Proposed Rule Change
The Commission believes the proposed rule change, effective as
requested on July 1, 1996, is consistent with Section 15B(b)(2)(C) of
the Securities Exchange Act of 1934, 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 * * *.
While the Commission is sympathetic to the commenters' concerns
regarding implementation costs, the Commission agrees with the MSRB
that time of trade will be useful to enforcement agencies in
determining the sequence of trades. This, in turn, should improve
market surveillance capabilities in identifying dealer trading patterns
that warrant further investigation to determine whether potentially
violative practices have occurred. These improvements in the audit
trail for market surveillance of the municipal securities markets
should assist in preventing fraudulent and manipulative acts and
practices and, in general, protect investors and the public interest,
in furtherance of the above stated statutory objectives.
In this regard, the Commission previously has noted the need to
make an ``integrated audit trail'' of transaction information available
to the enforcement agencies. The Commission has expressed its belief
that an audit trail will ``provide valuable information for market
surveillance and inspection purposes to the MSRB, the Commission, the
NASD, and the relevant banking agencies.'' \15\ Time of trade should
prove useful as the MSRB moves toward coordinating its increasingly
``integrated'' audit trail.
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\15\ Securities Exchange Act Release No. 34955, supra note 4, at
19.
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The Commission also notes that, since its inception, the pilot
program for trade reporting has been a multi-phase
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program that, as proposed and approved in concept, would require market
participants to make numerous systems changes. Thus, the requisite
systems changes to report time of trade is one element of the on-going
initiative, about which participants have been on notice for more than
a year. Time of trade will not only be useful in market surveillance
efforts for the present phase of the pilot program, but time of trade
will continue to be needed when retail trade reports are required.
Moreover, the MSRB has proposed, and the Commission is approving, a
delayed effective date so that dealers may attempt to merge these
systems enhancements with any others that may be required internally by
dealers.
Finally, while the Commission has not yet formally reviewed or
approved the MSRB's proposal to delay institutional trade reporting
until that phase can be merged with customer trade reporting, the
Commission believes that market surveillance efforts and transparency
are both essential elements of the overall pilot program and,
therefore, one aspect of the program should not be delayed because
technical difficulties have slowed progress in another aspect of the
program. In this regard, the Commission looks forward to working with
the MSRB and market participants toward continued swift improvements in
both market surveillance and price transparency in the municipal
securities markets.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-MSRB-95-17), effective July
1, 1996, is approved.
\16\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9802 Filed 4-19-96; 8:45 am]
BILLING CODE 8010-01-M
