MSRB NOTICE 2002-11 (MARCH 27, 2002)

PROPOSED RULE CHANGE CONCERNING PUBLIC REPORTING OF TRANSACTION IN FREQUENTLY-TRADED MUNCIPAL SECURITIES: RULE G-14

On March 27, 2002, the MSRB filed with the Securities and Exchange Commission a proposed rule change regarding its Transaction Reporting Program.[1] In its filing, the MSRB proposes to change its Daily Transaction Report (the “Report”) in order to provide a greater amount of information to the public and thereby increase transparency in the market. The transaction information on the Report would come from reports made to the MSRB by brokers, dealers and municipal securities dealers (“dealers”) under its Rule G-14, which governs reports of sales or purchases. This rule currently requires dealers to report essentially all inter-dealer and customer transactions in municipal securities to the MSRB by midnight of trade date.

Currently the MSRB provides a daily public report with details of each transaction in any municipal security that was traded four or more times on the previous day. Under the proposed rule change, the threshold for reporting a municipal security would change from four to three trades per day and, as a result, the number of trades reported each day would increase substantially.

Background

The MSRB has a long-standing policy to increase price transparency in the municipal securities market, with the ultimate goal of disseminating comprehensive and contemporaneous pricing data. One product of the MSRB’s Transaction Reporting Program is its Daily Transaction Report (the “Report”), which has been provided to subscribers each day since January 2000. The report is made available each morning by 7:00 am and includes details of transactions in municipal securities that were “frequently traded” the previous business day. Since the beginning of the Transaction Reporting Program in 1995, “frequently traded” securities have been defined as those that were traded four or more times on a given business day.

In designing the transparency reports that appear on the day after trade date (T+1), the MSRB has adopted the threshold of four trades a day because of the concern that an isolated transaction may not necessarily provide a reliable indicator of “market price” and might be misleading to an observer not familiar with the market. At the same time, the MSRB has made a commitment to review the use of these reports as experience is obtained and eventually to move to transparency reporting on a more contemporaneous and comprehensive basis.[2]

Since 1995, the MSRB has made ongoing efforts to increase price transparency in the municipal securities market in measured steps, culminating in comprehensive, real-time price transparency. The first price transparency report, begun in 1995, was a T+1 report that summarized inter-dealer trades in frequently traded municipal securities. In 1998, the MSRB added customer trades to the T+1 summary reports, and in January 2000 began publishing individual transaction data on frequently traded securities in addition to summarizing their high, low and average prices. The MSRB has also introduced “comprehensive” transaction reports for this market, which list all municipal securities transactions (regardless of frequency of trading), but which are available no less than two weeks after trade date.[3]

The MSRB believes at this time that the next appropriate step in this process is to change the threshold for determining that a municipal security is “frequently traded” for purposes of the T+1 transparency report. Accordingly, the MSRB has filed the proposed rule change, which would lower the threshold from four to three trades per day.

Impact of Proposed Report on Transparency

The proposed threshold change would increase substantially the proportion of municipal securities market activity that is reported on the day after trading. On a typical day, there are approximately 26,000 transactions in about 10,000 issues, with a total par value traded of about $9.5 billion. The present T+1 report, with a threshold of four or more trades per day, includes an average of 11,600 trades in 1,100 different issues, with a total par value of about $3.9 billion. Under the proposed threshold, the report is expected to include an average of 14,400 trades in 2,600 issues, with a total par value of about $5.2 billion. This represents a 24 percent increase in the number of trades reported, a more-than-twofold increase in the number of issues reported, and a 33 percent increase in par value reported.[4]

Description of Service

The enhanced Daily Transaction Report with the three-trade threshold will replace the current report and will be available each day to subscribers via the Internet. Subscribers to the current report obtain it free of charge, and their subscriptions will continue should the proposed report be implemented. New subscriptions will be available free to parties who sign a subscription agreement. In addition, recent reports will continue to be available for examination, also free of charge, at the MSRB’s Public Access Facility in Alexandria, VA.

Implementation Schedule

The enhanced report will be available to subscribers as soon as practical after SEC approval of the proposed rule change. It is estimated that the period between approval and implementation will not exceed two weeks.

March 27, 2002



[1] File No. SR-MSRB-2002-04. Comments on the proposed rule change may be made to the Commission and should refer to this file number.

[2] See, e.g., “Board to Proceed with Pilot Program to Disseminate Inter-Dealer Transaction Information,” MSRB Reports, Vol. 14, No. 1 (January 1994). In its approval order for the Inter-Dealer Daily Report, the Securities and Exchange Commission noted that the Board, in proceeding to subsequent levels of transparency, “should continue to work toward publicly disseminating the maximum level of useful information to the public while ensuring that the information and manner in which it is presented is not misleading.” See Securities Exchange Act Release No. 34955 (November 9, 1994), 59 FR 59810 (November 18, 1994).

[3] The first comprehensive report was introduced in October 2000 and listed all trades after a one-month delay. The latest comprehensive report began operation in November 2001 and has a two-week delay. See Release No. 34-44894 (October 2, 2001), 66 FR 51485 (October 9, 2001).

[4] These data based upon market activity from April 1, 2001 through July 31, 2001.