MSRB NOTICE 2001-17 (MAY 29, 2001)

REAL-TIME REPORTING OF MUNICIPAL SECURITIES TRANSACTIONS

Comments Requested

The MSRB is publishing for comment its plans for dealer reporting of municipal securities transactions in real time.

Comments on this notice should be submitted no later than September 30, 2001, and may be directed to Larry M. Lawrence, Policy and Technology Advisor.  Written comments will be available for public inspection.

The Municipal Securities Rulemaking Board (the “MSRB”) has a long-standing policy to increase price transparency in the municipal securities market.  The MSRB consistently has affirmed its commitment to the ultimate goal of the transaction reporting program, which is to collect and make available transaction information in a comprehensive and contemporaneous manner.[1]  Toward this end, the MSRB has formulated the basic elements of its plan regarding operational aspects for mandatory dealer submission of trade data to MSRB in real time.  The MSRB’s goal in moving to real-time reporting is to have the operational details function as smoothly as possible for dealers and to achieve the collection of real-time trade data at the lowest possible cost to dealers.  The MSRB at this time is requesting comment on its operational plan for collection of data.

Although the MSRB has committed to bring about real-time price transparency for municipal securities, at this time the MSRB is not proposing a specific plan for disseminating transparency information in real time.  The MSRB has previously received comments regarding real-time price dissemination and understands that there are unique issues in the municipal securities market that must be considered when devising a plan for real-time price dissemination.[2]  The MSRB intends to issue a concept release on price and volume dissemination in 2002 which will provide ample opportunity for industry discussion prior to the planned 2003 operational date.  However, the MSRB believes that it is important to begin discussion of the operational plan for trade data collection now, because of the long lead time dealers will need in planning changes to their internal transaction processing systems.

BACKGROUND

In 1994, the MSRB announced a long-range plan for transaction reporting in the municipal securities market.[3]  The program was begun on a pilot basis in 1995, and has been enhanced several times over the intervening years to bring greater levels of market surveillance and transparency.  In 1998, a comprehensive market surveillance database – including both customer and inter-dealer transactions – was made available to the Securities and Exchange Commission (“SEC”), the National Association of Securities Dealers, Regulation (“NASDR”), and bank regulators.  The transparency component of the program also has been continually enhanced to provide more comprehensive transaction information to the market.  The program currently publishes transparency reports on a T+1 and monthly basis.[4]

A primary objective of the MSRB in implementing its transaction reporting program was to keep development and operational costs to dealers low.  This was done in part by using existing industry trade record formats, protocols and communication channels.  Dealers can use their own internal trade processing systems to produce the trade reports for submission to the MSRB.  Instead of requiring dealers to link their internal systems directly with the MSRB, the MSRB worked with National Securities Clearing Corporation (“NSCC”) and industry members so that dealers could use their existing data links with NSCC for municipal transaction reporting.  NSCC’s efforts in linking dealers to the MSRB’s system have been very effective, saving dealers significant operational and development costs.  In turn, the dealer community has supported the system and helped to make it successful.

OVERVIEW:  TRANSITION TO T+1 SETTLEMENT

The securities industry is planning to change its method of trade processing from the current standard of settling trades on the third day after trade date (T+3) to a next-day (T+1) standard by 2004.[5]  To achieve this goal dealers will need to adopt a “straight-through processing” approach in which trade data is input only once and the record of the trade is augmented by successive automated steps until the trade is settled and reported for regulatory purposes.  The MSRB believes that the securities industry’s movement to T+1 settlement provides an excellent opportunity to achieve real-time transaction reporting in the municipal securities market. 

The straight-through processing methodology necessary for T+1 settlement soon will replace most of the overnight batch processes now used for confirming, clearing and settling bond transactions.  Integrating trade reporting functions into the new processing systems should allow the municipal securities market to move to real-time transaction transparency without the extra expense of developing, building, maintaining and operating separate systems exclusively for real-time trade reporting.  Under this model for transaction processing, transactions will need to be entered into the processing stream as they are effected and will be reported to clearance and settlement systems continuously throughout the day.  The MSRB believes that the adoption of such new systems by dealers will provide the best means for dealers to report municipal trade data to the MSRB on a real-time basis.  The MSRB plans to implement real-time reporting by amending rule G-14 to require that dealers report trades no more than 15 minutes after they are effected.

Central Utility as a Conduit for Real-Time Trade Information

The Securities Industry Association’s Fixed Income Transparency Subcommittee has noted that the industry’s preferred model for handling fixed-income transaction processing involves the creation of a utility to serve as a central conduit for transaction data coming from dealers.[6]  The creation of such a utility is also a recommendation of the T+1 Streetside Fixed Income Matching Working Group.[7]  The planned central utility would allow dealers to route transaction data directly to regulators and clearing entities while having to maintain only one data communication link (with the utility).  This approach essentially describes the current structure for municipal securities transaction reporting in which NSCC serves as the utility. 

The MSRB believes that this model has worked well for overnight batch reporting of municipal securities trades and believes that it also will work well for more contemporaneous trade reporting.  The Depository Trust & Clearing Corporation (“DTCC”), through its subsidiaries NSCC and GSCC (Government Securities Clearing Corporation), is planning to provide a service to receive reports of trades in fixed-income securities and forward the trade reports to the MSRB and the NASD to support real-time trade reporting.  The MSRB supports DTCC’s planned system, as it will provide the crucial data communications hub necessary for dealers to efficiently transmit real-time trade information for both trade reporting and clearance purposes.

SYSTEM FEATURES FOR REAL-TIME REPORTING

The MSRB plans the following features for real-time reporting of municipal securities transactions.

Trade Messages

Data about trades will be formatted and transmitted as electronic messages.  Messages describing individual trades will replace the current files containing batches of trade records.  Transmission of messages between the dealer’s computer, the central utility and the MSRB’s system will use industry-standard “message queuing” technology.[8]  The central utility is expected to use message queuing as its communication standard. 

Instead of the proprietary file formats used currently for municipal securities trade reporting, standardized formats will be adopted for trade messages.  For its real-time comparison system for government securities, GSCC has adopted SWIFT/ISO 15022 standards.[9]  The GSCC system is being expanded so that it will support comparison of corporate and municipal securities in the future, so the MSRB expects to require messages consistent with the same standard. 

Linkage with Central Utility

Dealers will be able to report trades by submitting trade messages to the central utility for forwarding to the MSRB.  Cancellations and changes will be reported the same way.  MSRB immediately will send feedback to dealers through the utility.  In this way, dealers linked to the utility will not need to set up an additional telecommunications link with the MSRB.

Web-Based Input

As an alternative to the linkage with the central utility, the MSRB will provide a web browser for low-volume input, trade correction and dealer access to data.  The MSRB may operate this capability alone or the MSRB may be able to have MSRB reporting functions added to NASD or central utility web browser products.

Reporting Requirements

As noted, dealers – both buyers and sellers – will be required to report each trade so that the central utility receives the trade message within 15 minutes of trade execution.

MSRB’s feedback to dealers will consist of reply messages. One reply message will be sent corresponding to each trade message received by the MSRB.  The reply message will indicate either that the dealer’s trade message was accepted or that it had specific defects.  If the trade is rejected or requires correction due to defects, the dealer must respond within one hour by submitting a corrected trade message.

Required Data Elements

The data elements required for real-time reporting of municipal securities trades are similar to those now in use for end-of-day trade reporting.  The MSRB anticipates that a single message specification will apply to comparison of inter-dealer trades and to reporting of  both inter-dealer and dealer-customer trades.  The attachment to this notice identifies the data elements that will be in the trade reporting message. 

Relative to current end-of-day reporting requirements, the real-time trade message includes three new data elements.  Based on information it has received, the MSRB understands that it may be possible in some cases that the price at which a transaction is reported is not indicative of the market at the time of the transaction – for example, when the sale price to a customer by agreement is the average of purchases the dealer made during the day on the customer’s behalf.  In that case, a special price reason code  will be submitted by the dealer to identify the trade and provide a code for the reason the price is not at the market.  QSR indicator indicates that a trade is reported on a locked-in basis by a Qualified Special Representative.[10]  MSRB control number is a means for a dealer to refer to a previously reported trade when the dealer reports a cancellation or change.  It is an alternative to the currently used “dealer’s transaction control number.”  The MSRB control number will be provided to the dealer in the MSRB’s acknowledgement of the dealer’s report of the trade.

Clearing broker identities are currently required on inter-dealer transaction reports.  The real-time trade message will require the clearing broker’s identity on customer trades as well.  This will provide regulators with more complete data for market surveillance and audit trail purposes.

SURVEILLANCE DATABASE OF TRANSACTION INFORMATION

The MSRB will continue to populate its surveillance database with information reported about each trade, including dealer identities and other details that are not in transparency reports.

SCHEDULE

The MSRB plans the following schedule for real-time trade reporting:

September 30, 2001               Comments due on this notice

Fourth quarter 2001 to           Development of detailed message specifications

  first quarter 2002                 and operational procedures

Second quarter 2002              Publication of detailed message specifications and operational procedures

Mid-2002                                Concept release of dissemination plan

Early 2003                              Testing

Mid-2003                                Real-time trade reporting begins

REQUEST FOR COMMENTS

Specific comment is requested on the above operational system features.  The MSRB asks whether linkage with a central utility provides a suitable data communications channel for most dealers.  The MSRB also requests comments on the use of a uniform message specification for both inter-dealer and customer transactions.  Suggestions are welcome for cases, in addition to the example given, for which special price reason codes are appropriate to explain transactions not at the market.

  • May 29, 2001

ATTACHMENT TO NOTICE

DATA ELEMENTS FOR MUNICIPAL SECURITIES
REAL-TIME TRADE REPORTING MESSAGE  

The following data elements will be required for real-time reporting of municipal securities trades.  The MSRB anticipates that a single specification will apply to comparison of inter-dealer trades and to reporting of both inter-dealer and dealer-to-customer trades.  Data elements in addition to those shown here will be specified for purposes of inter-dealer trade comparison.

 

 

Appli-cable to*

 

Length

 

Type

 

Element Description                

 

D,C

 

9

 

A/N

 

CUSIP Number

Number assigned by the CUSIP Service Bureau.

 

D,C

 

9

 

N

 

Par Value Traded

Par value (quantity) traded, in dollars. 

 

   D,C

 

10

 

A/N

 

Dollar Price

The price of the security, in dollars per hundred dollars par value. 

Not required for a when-issued security when settlement date is not known.  

 

   D,C

 

9

 

A/N

 

Yield

Yield of transaction, in per cent. 

 

C

 

1

 

A

 

Dealer’s Capacity

Dealer’s capacity as agent for the customer or as principal.

 

C

 

8

 

A/N

 

Commission

Commission, in dollars per hundred dollars par value. 

 

D,C

 

1

 

A

 

Customer/Interdealer Indicator

Indicates whether trade is inter-dealer or dealer-customer. 

 

D,C

 

1

 

A

 

Buy/Sell Indicator

Indicates whether dealer reporting trade bought or sold the security.

 

D

 

1

 

A

 

Syndicate Takedown Indicator

Indicates that trade was syndicate manager’s trade with syndicate member.

 

D,C

 

8

 

N

 

Trade Date

The date the trade was effected.

 

D,C

 

4

 

A

 

Time of Trade

The time at which the trade was effected.


 

 

D,C

 

8

 

N

 

Settlement Date

Date the trade will settle.  (Omit for when-issued securities if settlement date is unknown.)

 

D,C

 

4

 

A

 

Dealer Effecting Trade

Dealer effecting trade directly with end customer or other dealer. NASD-assigned symbol.

 

D,C

 

4

 

N

 

Clearing Broker

Clearing broker for dealer effecting trade.

 

D

 

4

 

A

 

Contra Dealer Effecting Trade

Contra party in inter-dealer trade.
NASD-assigned symbol.

 

D

 

4

 

N

 

Contra Clearing Broker

Clearing broker for contra dealer.

 

D,C

 

4

 

A/N

 

Submitter of Data

Identifier of dealer, clearing dealer, or service bureau submitting trade report. 

 

D,C

 

2

 

A

 

Special Price Reason Code

Indicates the reason that the reported transaction price is not indicative of the market price. 

 

D

 

1

 

A

 

QSR Indicator

Indicates trade is reported by NSCC-authorized Qualified Special  Representative on locked-in basis.

 

D,C

 

10

 

A/N

 

MSRB Control Number

Control number provided by MSRB; reported by dealer when cancelling or changing trade report.  Omit from first report of trade.

 

C

 

1

 

A

 

Cancel/Amend Code

Indicates whether trade is being first reported, cancelled, changed or verified.

 

D,C

 

20

 

A/N

 

Dealer Transaction Control Number

Control number provided by dealer.

* C: Applicable to customer trades.  D:  Applicable to inter-dealer trades


[1]  See, e.g., letter from Robert H. Drysdale, Chairman, MSRB, to Arthur Levitt, Chairman, Securities and Exchange Commission, dated November 3, 1994, and “Public Reporting of Historical Information on Transactions in Municipal Securities:  Rule G-14,” MSRB Reports, Vol. 20, No. 2 (November 2000) at 36.

[2] Comments received by the MSRB in 1999, while supportive of improved price transparency, noted concern that dissemination of transaction prices in real time might impair liquidity, particularly for institutional investors.  It was stated that an investor seeking to sell a large position in a security might fail to maximize its proceeds if the first piece sold were publicly reported and if that report were to set a maximum market price for the balance of the position.  The MSRB will consider this matter carefully in formulating dissemination criteria.  

[3]  See “Board to Proceed with Pilot Program to Disseminate Inter-Dealer Transaction Information,” MSRB Reports, Vol. 14, No. 1 (January 1994) at 13-16.

[4] The MSRB publishes information on each trade in the municipal securities market, including par value, time of trade, dollar price and yield.  Trades in “frequently traded” issues are disclosed on T+1 by approximately 6:00 a.m. via an FTP subscription service.  (“Frequently traded” issues currently are defined as those trading four or more times on a given day.)  An additional service provides a monthly CD ROM with information on all transactions, including infrequently traded issues.  The daily service is free and a yearly subscription to the CD ROM service is $2,000.

[5]  See Arthur Levitt, “Office of the Chairman:  Letter to Industry, Regarding T+1” (February 16, 2001) at www.sec.gov/rules/other/levltrt1.htm.

[6]  See letter from Noland Cheng, Fixed Income Transparency Subcommittee of SIA’s Operations Committee, to Jonathan Katz, Secretary, SEC, dated December 21, 2000 (regarding File No. SR-NASD-99-65).

[7]  See “T+1 Streetside Fixed Income Matching Working Group White Paper,” Version V1.3 (September 20, 2000).  This Working Group is sponsored by the SIA and The Bond Market Association and includes representatives of dealers, clearing entities and regulators. 

[8] Message queuing is a data communications protocol first introduced by IBM and now available for IBM, Microsoft, Sun and many other computer environments.  GSCC has implemented message queuing with its members in its real-time comparison system for government securities and is now developing such a system for mortgage-based securities.  See Government Securities Clearing Corporation, “Interactive Messaging and Real-Time Comparison,” New Service Bulletin dated December 6, 1999, and “Real-time Trade Matching (RTTM) Service Enhancements,” New Service Bulletin dated August 9, 2000.

[9] SWIFT is the Society for Worldwide Interbank Financial Telecommunication.  ISO 15022 is the International Organization for Standardization scheme for securities messages.  The SWIFT/ISO standard defines messages composed of sequences of data tags and data fields.

[10] A Qualified Service Representative is a party, authorized by NSCC and by the NSCC members on both sides of a trade executed on an Alternative Trading System, that submits “locked-in” trades on behalf of the NSCC members.  The QSR matches “locked-in” trades before submitting them.  See MSRB Notice Concerning Locked-In Transactions (March 1, 2001) at www.msrb.org.