MSRB NOTICE 2003-23 (JUNE 13, 2003)

REQUEST FOR COMMENT: PLAN FOR REAL-TIME PRICE REPORTING

OVERVIEW

As previously announced, the MSRB is implementing a real-time transaction reporting system and is planning to make it operational in mid-2004.[1]  Once this system – the “Real-time Transaction Reporting System” or “RTRS” – is operational, Rule G-14 will require dealers to submit transaction data to the system within 15 minutes of the time of trade.  Transaction prices will be electronically disseminated immediately after transactions are received by the MSRB and automated error checking is completed.[2]  This will provide the municipal securities market, for the first time, with real-time transaction price transparency.

This notice reviews the reasons for moving to real-time transaction reporting, the preparations already made, and the current plan for completing the transition to RTRS and disseminating real-time transaction prices.  Specific comment is requested on the policies that will govern the dissemination of real-time prices.  The MSRB encourages all interested parties to provide their views on this important issue. 

Concurrently with this notice, the MSRB also is publishing the RTRS Message Specifications.[3]  This technical document, along with the RTRS Operational Overview published in April,[4] form the operational plan for RTRS.  A major element of the RTRS operational plan is the coordination of RTRS system planning with the “Real-Time Trade Matching” or “RTTM” system.  The RTTM system is being implemented by National Securities Clearing Corporation (NSCC) to provide for real-time comparison of inter-dealer transactions in corporate bonds and municipal securities. [5]   To minimize dealer costs, the RTRS operational plan calls for the use of RTTM telecommunication facilities as data collection points for RTRS data, the use of a standard reporting format by both systems, and the use of one trade report both for price reporting and inter-dealer comparison.  This notice includes a draft of proposed rule changes to Rule G-12(f) on automated comparison and Rule G-14 on transaction reporting designed to implement RTRS using this approach.  Comment is requested on the proposed rule changes.  The exact start-up date for RTRS, further details of the transition plan, and the MSRB’s decisions on the proposed rule changes and price dissemination plan will be announced after the MSRB reviews comments on this notice.

PRICE TRANSPARENCY IN THE MUNICPAL SECURITIES MARKET

In 1994 the MSRB initiated a transaction reporting program for municipal securities serving the dual role of providing price transparency and supporting market surveillance.[6]  As part of this program, the MSRB announced its plans to introduce transparency into the market in measured steps, culminating in contemporaneous, or “real-time,” price transparency.[7]  The continuing commitment of the MSRB to reaching this goal reflects its desire to be responsive to clear direction from the Securities and Exchange Commission (“SEC”) and Congress on the need for price transparency in the over-the-counter fixed income markets.[8]  As the Self-Regulatory Organization for the municipal securities market, chartered in the Securities Exchange Act to provide for the protection of investors and the public interest, the MSRB has worked toward real-time price transparency as part of its responsibility to further national goals for investor protection articulated by Congress and the SEC.

The MSRB has sought to implement a transaction reporting program that takes into consideration the special characteristics of the municipal securities market.  These include:

  • the large number of outstanding municipal securities issues that may be traded (approximately 1.5 million) and the introduction yearly of as many as 150,000 new issues;

  • the predominance of “buy and hold” investors in the market and the lack of frequent trading in most issues; and

  • the over-the-counter nature of the market, including the lack of a quoted market for most issues and the lack of a formal market-maker or exchange structure.

Measured Increases in Price Transparency

The MSRB’s first price transparency report, initiated in 1995, was made available on the day after trade date (“T+1”) and summarized high, low and average inter-dealer prices for issues that met a trading threshold of four or more trades in the inter-dealer market (the “T+1 Daily Report”).  In 1998, the MSRB implemented the customer transaction reporting component of the existing system and added customer trade data to the T+1 Daily Report. The trading threshold of four trades was retained, but since it applied both to inter-dealer and customer trades, many more issues met the trading threshold and were subject to price dissemination.  In January 2000, the MSRB further enhanced the T+1 Daily Report by publishing individual transaction data (rather than high, low and average prices) for each issue that met the trading threshold. 

In October 2000 the MSRB began offering the “Comprehensive Report,” which lists all municipal securities transactions regardless of frequency of trading.  This report includes late-reported trades, inter-dealer trades compared after trade date, and transaction data corrected by dealers after trade date as well as infrequently traded issues.  The one-month delay in comprehensive price data has been shortened in several steps, with comprehensive data now being disseminated, on a daily basis, one week after trade date.

As the market became familiar with the T+1 Daily Report and the Comprehensive Report, the MSRB began the process of lowering the trading threshold in the T+1 Daily Report to make more trade data available on a T+1 basis.  In May 2002, the MSRB changed the trading threshold to three trades.  In November 2002, the trading threshold was lowered to two trades.  The MSRB recently received approval from the SEC to drop the trading threshold on the T+1 Daily Report altogether and, on June 23, 2003, will begin reporting all T-submitted trades on T+1.

These measured increases on price transparency have allowed the municipal securities market time to adjust to each new situation.  As an example, when price reports were first introduced in 1995, the MSRB was concerned that an observer might be misled if he or she considered an isolated transaction or pair of transactions as providing the same indicator of “market price” as a stock exchange quotation.  The MSRB is not aware of any problems occurring similar to the concerns expressed in 1995, and believes that the introduction of price transparency has thus far gone very well.  The market’s reaction to the Comprehensive Report and to the previous lowering of trading thresholds on the T+1 Daily Report generally has been positive.  The use of the data in those reports by market professionals and pricing services indicates its value and suggests the additional value that would be derived from real-time price data.

Move to Real-Time Transaction Reporting

The MSRB recognizes that, because of the unique features of the municipal securities market, real-time price transparency for municipal securities will not necessarily function in the same manner as in the major equity markets.  For the majority of municipal securities that are not traded daily, an investor will not be able simply to view “last sale” information to obtain an exact market price, as generally can be done for exchange-traded or NASDAQ listed stocks.  Nevertheless, real-time prices will provide extremely important information on the market conditions for individual securities that are trading on a given day, and this information often can be extrapolated to assist in the accurate valuation of similar municipal issues that are not actively traded on a given day.

The transaction prices available from the existing Transaction Reporting System show that, while much of the market trades within a narrow range, there are instances in which intra-day prices for specific issues vary substantially, even when no apparent news or transaction size differences account for the different valuations.  This fact is not intended to suggest that instances of substantial intra-day price volatility would be eliminated by real-time price transparency, particularly when the market is assimilating new information about interest rates or the credit quality of specific issues.  However, the existing transaction data does suggest that the efficiency of pricing in some cases might be improved substantially if prices are made accessible on a real-time basis, as is done in many other securities markets.  In general, real-time price transparency should benefit the market by helping to ensure that information relevant to the value of municipal securities issues is incorporated more quickly and reliably into transaction prices.

The MSRB also believes that real-time price transparency will enhance investor confidence by providing, for the first time, a comprehensive and contemporaneous view of the market, accessible to any interested party.  There is a significant demand by sophisticated investors to see where municipal bonds are trading as part of their research and investment strategies for fixed-income products.  Real-time price transparency will increase their confidence that they have obtained the best market price for specific securities.  For both institutional and retail investors, the open availability of market prices should instill greater confidence that pricing mechanisms in the market are fair and efficient.[9]

After some delay in the MSRB’s original plans, the time for moving to real-time price reporting has arrived. The current Transaction Reporting System has successfully increased price transparency in measured increments over the past eight years, but has now reached a limit on the transparency it can provide due to the method used to report trade data.  Moreover, the current industry drive to adopt “straight through processing” techniques and the implementation of a new, real-time comparison system for inter-dealer transactions provides an opportune time for dealers to make the system changes necessary for real-time transaction reporting.

Coordination of Real-Time Transaction Reporting with Real-Time Comparison

The implementation date of real-time transaction reporting, originally scheduled for 1997, has been delayed by the MSRB several times to give dealers additional time to make changes in bond processing systems necessary to capture trade data and process it on a real-time basis.[10]  The current focus on “straight through processing” of securities transactions provides the best possible environment to make the conversion to real-time transaction reporting.[11]  In particular, the contemporaneous development of RTTM, the real-time comparison system to be implemented by NSCC in the fourth quarter of 2003, will allow dealers to leverage their systems development work to satisfy two goals at once – that of real-time transaction reporting and real-time comparison of inter-dealer transactions.  The development plans for both RTRS and RTTM have been coordinated so that one trade report can satisfy both trade reporting and comparison objectives.  In addition, retail and institutional customer transactions and certain inter-dealer agency transactions described herein also will be reported through NSCC portals and using the same record format.  For trades that are not eligible for comparison, NSCC will not process the transaction data submitted, but will immediately forward the data to the MSRB.  This will allow dealers to avoid setting up separate telecommunications links and facilities specifically for reporting these trades to the MSRB.[12]

It should be noted that the move to real-time comparison would be necessary independently of the need for real-time price transparency.  The existing method for comparison of municipal securities was initiated 20 years ago and is in need of updating.  Approximately 17% of inter-dealer transactions done each day are not compared by the morning after trade date, creating issues of dealer risk for uncompared transactions and the accuracy of intra-day position records, as well as general issues of accurate and efficient processing of inter-dealer transactions.  Compared with over-the-counter equity markets where most inter-dealer trades are compared within 90 seconds, over-the-counter debt markets are substantially behind in the efficiency of trade processing.  Although the MSRB does not believe that the standards for processing efficiency in “quoted markets” should be applied to bond markets, which function without a market-maker structure, the MSRB notes that the need to “lock-in” transactions by comparison quickly after a trade nevertheless is crucial for regulatory reasons as well as for efficient clearance and settlement.

Proposed rule changes to Rule G-12(f)(i) on inter-dealer comparison follow the text of this notice.  The proposed changes contain the new requirement that trade data, when required for comparison, be submitted to the registered clearing agency within 15 minutes of the time of trade.  This reflects the goal that a single trade report will satisfy both trade reporting and comparison purposes.  New language also is included reflecting existing policy as to the “inter-dealer transactions” that are subject to the comparison requirement.  Finally, the proposed change in Rule G-12(f)(i) notes a dealer’s obligation to monitor submissions made against it in the real-time comparison system and to use the procedures provided by the clearing agency to address any erroneous information concerning its side of a transaction that may be submitted by a contra-party.

DEVELOPMENT OF RTRS

The operational requirements for RTRS have been developed and coordinated between MSRB and NSCC with the objective of providing the most efficient means possible to achieve both the real-time transparency and trade matching objectives.  The process of developing this coordinated plan has been greatly aided by numerous discussions held with industry members at committee meetings and conferences over the past five years.[13]  The MSRB has obtained valuable input at its outreach meetings held in different parts of the country, and at focus groups held by the MSRB to explore specific topics on bond transaction processing and real-time transaction reporting.  Recently, MSRB and NSCC held joint education and awareness seminars across the country where input also was received.[14]

Enhanced Functionality Offered by RTRS

The primary objective of RTRS is to make price information publicly available as soon as possible after trades are effected.  Real-time reporting will also bring operational advantages to dealers and enforcement agencies, compared with the current batch-oriented reporting system.  These advantages of RTRS include: the ability for a dealer to ensure the accuracy of regulatory information about its trades (time of trade, etc.) even when that information is reported on its behalf by a clearing broker; the capability for dealers to report their capacity as agent in inter-dealer trades; and improvements in the “audit trail” of trade information.

Submission of Transaction Reports by Intermediaries

As in the current transaction reporting system, a dealer will be able to use an intermediary, e.g., its clearing broker, to submit transaction reports to RTRS.  The MSRB expects those dealers that are not self-clearing to submit inter-dealer trades through their clearing broker as they do today.  However, these dealers should now ensure that their clearing brokers will be able to submit the inter-dealer trade reports satisfying both comparison and transaction reporting requirements within 15 minutes of the time of trade and will be able to monitor and react promptly to real-time submissions made to the comparison system against their correspondents.[15] 

Regardless whether the trade is an inter-dealer or customer trade, when a dealer intermediary is used to submit information required under Rule G-14, both dealers have the responsibility to work together to ensure that such trade submissions are timely and accurate.  Although the dealer that effected the transaction bears the primary responsibility for ensuring transaction reporting is done correctly, a clearing broker acting on behalf of such dealer to report transactions, or to compare transactions, shares responsibility for that part of the process that is under its exclusive control.  This principle is reflected in section (b)(ii) of the proposed language for Rule G-14.

Message-Based versus Web Submission of Trade Data

The MSRB is aware that many dealers may need to undertake substantial systems work over the next year to integrate real-time transaction reporting and comparison into existing trade processing procedures.  The extent of work that will be required depends in part upon the real-time reporting method chosen by the individual dealer.  Two options will be available: 1) message-based trade input, and 2) Web-based trade input.  In using the message-based method of trade reporting, the dealer sends electronic messages containing trade data to the NSCC “Access Network” and receives interactive feedback, also as messages.  As noted, NSCC acts as a portal, relaying the messages to and from the MSRB’s RTRS.  In using the Web-based method, the dealer enters trade data through an Internet browser.  Both procedures are described in the Operational Overview, with additional detail provided in the Specifications for Real-Time Trade Reporting of Municipal Securities Transactions and the RTTM Message Specifications for real-time comparison.[16] 

In essence, the message-based method is designed to allow a submitter to interface with RTRS and RTTM using its own automated transaction processing systems.  This allows dealers to avoid manual and duplicative data entry and to ensure that transaction reports are consistent with internal trade records.  The Web-based trade submission method requires no system development work beyond an Internet connection and the need to obtain access to the system.  However, Web input is manual and it will not be possible to interface the Web-based method with the dealer’s processing system.  Therefore, exclusive use of the Web-based method for submitting transactions generally will be appropriate only for relatively low-volume submitters.

For high-volume submitters of transaction data, such as large dealers, clearing brokers and service bureaus, the only efficient and practical means for trade submission is likely to be message-based.  The extent of systems work necessary for interfacing with RTRS (and with RTTM) in this case will be dependent in large part on whether the submitter currently captures trade data in real-time for processing.  Submitters that have prepared for real-time transaction reporting and comparison by converting from overnight batch processing systems to ones with a more real-time or “straight-through” processing approach should find the necessary systems changes comparatively minor.  The decision by MSRB and NSCC to use standard, non-proprietary, message formats and to implement systems in a coordinated manner is intended to further reduce the development work that will be necessary for submitters.

RTRS Transition Information for Dealers

In addition to publication of the RTRS Operational Overview and Message Specifications, the MSRB is devoting a section of its Web site, www.msrb.org, to RTRS transition information.  This RTRS Transition Web site will be updated with frequently asked questions and with any system information updates or changes of which submitters should be aware, including the exact operational date for RTRS operations once this date is set.  MSRB representatives also will continue to be available to meet with industry groups, committees, conferences, etc., to answer questions and to assist in the transition.

Testing and Contact Requirements

As noted in the proposed rule changes following the text of this notice, successful testing will be required of RTRS submitters to ensure a working interface with RTRS prior to the date for system operations.  RTRS testing will be coordinated as much as possible with RTTM testing.  For example, it may be possible for a dealer to conduct a single test series with both RTTM and RTRS to assure that it can achieve both real-time comparison and regulatory reporting of inter-dealer transactions.  A test schedule will be provided on the RTRS Transition Web site along with testing procedures, test scripts and other information necessary for setting up a testing account. 

Testing facilities for dealers using the message-based submission method will be made available at least six months prior to the announced start-up date for RTRS operations.  Message-based submitters must be ready to test by three months prior to the announced RTRS start-up date and will be required to schedule test dates at that time if successful tests have not already been completed.

Because of the simplicity of Web-based submission, testing will not be as extensive for this as for message-based submission.  Submitters planning to use the Web-based function for transaction reporting, and who currently submit an average of more than five transactions per week to the existing transaction reporting system will be required to complete Web-based testing no later that three months prior to the announced start-up date for RTRS operations.  Dealers with transaction volume lower than five trades per week must complete tests at least one month prior to the RTRS start-up date.  Testing procedures for the Web-based trade reporting function will be made available on the RTRS Transition Web site.

Regardless of which means of submission is chosen, submitters to the RTRS will be required to provide the MSRB with the name of a contact person for the RTRS transition and other information necessary to ensure an efficient transition to RTRS on a new “Form RTRS.”  The requirement for testing and submission of Form RTRS are reflected in the new proposed language for Rule G-14.  The MSRB will send forms to dealers so that the necessary information can be provided.

Post-Implementation Compliance with 15-Minute Reporting Requirement

After RTRS becomes operational, the goal of the system will be to have each transaction reported accurately, within 15 minutes of the time that the trade was effected.  Frequent instances of inaccurate trade reports, trade modifications or late trades are of particular concern in a real-time system since it is expected that market professionals will rely increasingly on real-time trade data once it becomes available.  The MSRB nevertheless is aware that major efforts will be needed by dealers to accomplish the goal of real-time transaction reporting and that some degree of inaccuracy or lateness may be unavoidable when the system first becomes operational.  For dealers using the message-based submission technique, some time may be needed to iron out the problems that frequently occur in a major system revision.  For both message-based and Web submitters, it also may take time to reinforce behavioral changes needed to ensure that, at the time of a purchase or sale, appropriate action is immediately taken by the sales personnel, trader or support staff resulting in the trade being entered into a designated RTRS portal within 15 minutes. 

As the mid-2004 operational date approaches, the MSRB will confer with industry members and with regulators having responsibility to enforce Rule G-14 to discuss acceptable levels of compliance for the 15-minute requirement for transaction reporting and comparison.  The MSRB may find it appropriate at that time to provide additional guidance, in the form of rulemaking, on acceptable (and non-acceptable) levels of error.  This guidance could include specific compliance parameters (e.g., percentage of late trades, modified trades, etc.) that dealers can use to judge whether they have met expected standards.  It also could set forth standards that rise over time, allowing dealers a period for adjustment, but ensuring the overall industry compliance with the 15-minute reporting requirement reaches acceptable levels within a reasonable time-frame.  As with the current transaction reporting system, MSRB will make reports available to each dealer showing the dealer’s performance on the various compliance parameters, along with industry averages for each parameter.

PRICE DISSEMINATION PLAN

The MSRB currently is considering the policies that would govern the dissemination of real-time transaction data received by the MSRB (the “Price Dissemination Plan”).  The major components of the plan as currently being considered are described below for comment.  The MSRB will review comments received on price dissemination before making any final decisions.  Comment is requested on the general policies that should govern real-time price dissemination as well as on any specific issues of methodology.  Questions on specific issues are posed below to facilitate the comment process.  Once conclusion is reached on the more substantive issues of price dissemination, the technical issues can be addressed (e.g., record formats and telecommunications protocols for real-time data dissemination, batch download policies, etc), along with policies on any fees that may be charged for the data.

Transactions Done During RTRS “Business Day”  

Under the proposed rule language, dealers would, with limited exceptions, report within 15 minutes of time of trade all transactions done between 7:30 a.m. and 6:30 p.m. EST (the “RTRS Business Day”). [17]  Exemptions include certain inter-dealer trades not eligible for comparison, transactions in securities without CUSIP numbers assigned, and transactions in municipal fund securities. Trade submissions made during the RTRS Business Day would be disseminated in real-time.

For purposes of measuring the 15-minute reporting requirement, “time of trade” is considered to be the time that a dealer has a contract for a sale or purchase of securities at a set price and quantity sufficient to compute final money on the transaction.  The 15-minute reporting requirement would be measured by comparing the time of trade with the time of receipt of the trade report at the designated RTRS portal.  Since NSCC is a designated portal, time of receipt would be measured by the trade’s arrival at NSCC.  NSCC will immediately route the trade reports to the MSRB, where automated error checking will be done.  Unless the trade report contains errors or is subject to an exception, transactions reported by dealers during the RTRS Business Day would be disseminated within a few minutes after receipt at the designated RTRS Portal. 

The current plan for dissemination of prices calls for inter-dealer price information to be published only after comparison is achieved on the trade, as done in the current system.  However, RTRS is being designed with the flexibility to disseminate uncompared inter-dealer transaction data if it is found that a substantial proportion of trades take longer than 15 minutes to be compared.[18]

Transactions Done Outside RTRS “Business Day

Under the proposed rule changes, dealers would be required to report transactions done outside of the RTRS Business Day, but would not be required to do so on a real-time basis.  Transactions effected outside of the RTRS Business Day would have to be reported by dealers no later than 15 minutes after the start of the next RTRS Business Day.  These trade reports would be disseminated by RTRS during the first 15 minutes of the Business Day; however, dealers can submit the data prior to this time during any of the hours that RTRS is open for acceptance of trade data and RTRS will store the data for dissemination at the start of the next RTRS Business Day.  The daily “window period” during which RTRS is open for acceptance of trade data, including after-hours trade data, is discussed below.

Late Trade Reports and Trade Data Modifications

Trades that are not reported within the timeframe set by the proposed rule changes would be considered late.  The trade data in this case must be reported as soon as possible even though late.  Similarly, any corrections or cancellations of a trade report also must be reported as soon as possible.  Late trade reports and trade modifications will be disseminated by RTRS as soon as received if they are submitted during the RTRS Business Day and at the start of the next Business Day otherwise.  Trade reports would be accompanied by a control number assigned by RTRS so that users of the data can quickly identify the trade data that was reported in error and know which previously reported data is being modified.

Window Period During Which RTRS Will Accept Trade Data

RTRS operations would be open to accept trade data not only during the RTRS Business Day, but also during the 30 minutes prior to start of the Business Day, and during the 90 minutes after the end of the RTRS Business Day.  The additional time for submissions before and after the RTRS Business Day is intended to allow dealers to submit after-hours trades at the time most convenient to the submitter.  A dealer also would be able to use the additional time for submitting trade corrections or late trades that may be uncovered by end-of-day or start-of-day processing.  Transactions reported outside the RTRS Business Day would be stored and then disseminated by RTRS when it next begins real-time price dissemination at the beginning of the next RTRS Business Day.  Trade date and time of trade will be noted on each disseminated price to avoid any confusion about when the transaction was effected.

Request for comment on transactions subject to immediate price dissemination

Comment is requested on the transactions to be subject to immediate price dissemination.  The following questions may be helpful in providing comment:

  • Should there be a  “phase-in” of real-time transaction reporting by beginning with a subset of all municipal issues and following a schedule for expanding this subset to gradually become more comprehensive?  If so, what parameters should be used to select issues for inclusion or exclusion in the initial phases (e.g. rating or size of issue)?  How would a phase-in period fit into the overall purpose of the program to promote pricing efficiency and investor protection?

  • Are the hours set for real-time transaction reporting and dissemination (the RTRS Business Day) appropriate for the market?

  • Is the additional time before and after the RTRS Business Day to report trade data useful?  Would it be preferable for RTRS to accept trade data only during the time that real-time dissemination is in effect?

  • Are there transactions for which it is impossible for technical or operational reasons to report within 15 minutes and therefore should be exempted from the 15-minute requirement? 

  • How should syndicate transactions be handled in terms of the 15-minute requirement?

  • Given that variable rate instruments generally are sold only at a price of par, is there a need for these trades to be submitted in real-time?

  • As noted, RTRS will provide a control number to reference transactions and this control number will be used to note that the transaction later was cancelled or modified.  Is this the best means to handle trade data corrections submitted by dealers?

Specific Transaction Information To Be Disseminated

As noted in the RTRS Operational Overview, the basic transaction information that will be reported by a dealer in RTRS will be similar to that reported in the existing transaction reporting system.  This information supports both the price transparency and surveillance functions of the system.  The major changes from current information requirements are discussed below.  The RTRS Operational Overview and Message Specifications provide additional detail.

“Special Price” Trades

One difference in RTRS and existing trade reporting is the Special Price Indicator.  As discussed in the Operational Overview, it will be possible for a dealer to code a trade report as having a “special price” reason if the dealer knows it is reporting a trade at a price that was not a true market price.  This feature is found in the TRACE System for transaction reporting of corporate bonds and is being added to RTRS to provide consistency between the two systems.  Coding a transaction as a “special price” trade would allow RTRS to disseminate the trade data, but would assure that the off-market price will not be considered a market-priced transaction. 

“Weighted Average Price” Indicator

Another new feature of RTRS is the reporting of a code that indicates that a price being reported was derived as part of a “weighted average price” transaction.  This feature also is found in the TRACE system for corporate bond transactions.  An average price transaction is one in which a dealer agrees to purchase up to a certain quantity of securities for a customer at various market prices during the day, culminating with one sale transaction to the customer of the aggregate par value, with a price representing a weighted average of the dealer’s purchases.  Dealers would be required to code the sale to the customer in this case as a weighted average just as is required in the corporate bond market.  The Price Dissemination Plan currently calls for displaying the “weighted average price” code along with other data about the transaction.

Alternative Trading System Identifier

The operational plan for RTRS currently requires that a dealer that is registered with the Securities and Exchange Commission as an Alterative Trading System (ATS) obtain an ATS identifier from the MSRB.  If a trade is effected on an ATS, the trade report must include the ATS identifier.  This information is collected for surveillance purposes.  The Price Dissemination Plan does not propose to indicate the ATS identifier as part of the disseminated price information.

Dealer’s Capacity

In the current transaction reporting system, information on a dealer’s capacity (i.e., whether it acted as agent for a customer in effecting a transaction, or whether it was acting as principal) is not shown on trade reports.  The Price Dissemination Plan for RTRS does not propose to change this policy.  However, as noted in the RTRS Operational Overview and Message Specifications, RTRS will change the manner in which dealers report certain agency trades.  This is being done to provide a more complete audit trail and to provide consistency with the way corporate bond reporting is done in TRACE.  The implications of the new methodology on price dissemination are explained below to provide an opportunity for comment on how this information should be handled for price transparency purposes.

The current transaction reporting procedures require a dealer effecting a trade “as agent” for a customer to designate its capacity on the customer trade report.  This requirement will remain in RTRS.  Inter-dealer transaction reports currently do not require a capacity field to show whether the inter-dealer trade was done as agent for a customer, but RTRS will have such a requirement.[19]   In addition, RTRS procedures will require that an agency trade effected for a customer by an introducing broker against a principal position of its clearing broker (i.e., a trade in which no principal position passes between the clearing broker and the introducing broker) include a report showing the identity and role of the clearing broker.[20]  This represents a change from the existing transaction reporting system for municipal securities, in which no report is made of the offsetting side of an agency transaction done by an introducing broker against its clearing broker’s position. The change is being made at the request of NASD to provide a more complete audit trail for surveillance purposes.  It also provides consistency with the manner in which similar transactions are handled in the TRACE transaction reporting system for corporate bonds. This should simplify programming for dealers that will be using the same system for reporting corporate bond and municipal securities transactions.[21]

The Price Dissemination Plan being considered would continue the practice of showing each side of an agency trade, but not disclosing the agency indicator.  This results in two trades being reported for executions of an agency order just as two trades are reported for riskless principal transactions.  The dissemination of two transaction reports in these instances may be considered to be “double counting” and users of transaction data concerned with total market activity and trade counts should be aware of how data is reported.  The “double counting” phenomenon will increase once the offsetting sides of agency transactions by introducing brokers are reported.  While RTRS could suppress dissemination of inter-dealer transactions identified as the contra-side of an agency transaction done for a customer, there is no current requirement in RTRS for designation of riskless principal transactions.  Accordingly, the Price Dissemination Plan proposes to continue reporting both sides of an agency trade to maintain consistency with the manner in which riskless principal trades are reported.

List of Information Items to be Disseminated

The specific items proposed to be disseminated by RTRS for price transparency purposes are:

  • CUSIP Number and brief security description
  • Par Value of Transaction if one million dollars or under; otherwise reported as “1MM+”;

  • Dollar price;

  • Yield (for all customer transactions in non-defaulted securities where transaction is done on yield basis or if yield can be computed from dollar price);

  • Date and time of trade;

  • Whether the transaction was a (i) purchase from a customer; (ii) sale to a customer; or (iii) inter-dealer transaction;

  • When-Issued indicator, if any;

  • Indicator that dollar price was computed by MSRB using estimated settlement date for an issue on which settlement date has not been set;

  • Modification/Cancellation indicator, if any

  • Special price indicator, if any;

  • Weighted Average Price indicator, if any; and 

  • RTRS Control Number.

Request for comment on transaction information to be disseminated

Comment is requested on the transaction information that is disseminated for price transparency purposes.  The following questions may be helpful in providing comment:

  • As noted by the MSRB in connection with the existing transaction reporting system, the purpose of screening the size of transactions over one million dollars in par is to alleviate concern that revealing the actual transaction size for these transactions too easily allows identification of the trading parties and may affect liquidity.[22]  The Board balanced this concern against the value that actual transaction size provides in these instances to data users.  Should this decision be revisited?

  • Is the special price indicator the best means for handling off-market prices?  What specific reasons might a transaction be off market?  Should reason codes be disseminated?  Should special price trades be disseminated at all?

  • Should the ATS indicator be included in trade data that is disseminated?

  • Are there alternative means of handling agency and riskless principal transactions to avoid “double counting?”  Would display of the agency indicator from the trade report help clarify market volume?

  • Issues of “double counting” transactions also have been raised concerning broker’s brokers transactions.  Should transactions by broker’s brokers be identified as brokered inter-dealer transactions?

*                      *                      *

Comments on this notice should be directed to Harold L. Johnson, Deputy General Counsel, or Justin R. Pica, Uniform Practice Specialist, by Monday, September 15, 2003.

June 13, 2003

PROPOSED RULE CHANGES*

DRAFT

G-12 (f) Use of Automated Comparison, Clearance, and Settlement Systems

(i)        Notwithstanding the provisions of sections (c) and (d) of this rule, a an inter-dealer transaction eligible for automated trade comparison through the facilities of a clearing agency registered with the Securities and Exchange Commission (registered clearing agency) shall be compared through a registered clearing agency.  Each party to such a transaction shall submit or cause to be submitted to a registered clearing agency all information and instructions required from the party by the registered clearing agency for automated comparison of the transaction to occur.  Transactions effected during the RTRS Business Day shall be submitted for comparison within 15 minutes of the time of trade.  Transactions effected outside the hours of an RTRS Business Day shall be submitted no later than 15 minutes after the beginning of the next RTRS Business Day.  In the event that a transaction submitted to a registered clearing agency for comparison in accordance with the requirements of this paragraph (i) shall fail to compare, the party submitting such transaction shall, as soon as possible, use the post-original-comparison procedures provided by the registered clearing agency in connection with such transaction until such time as the transaction is compared or final notification of a failure to compare the transaction is received from the contra-party.  A broker, dealer or municipal securities dealer that effects inter-dealer transactions eligible for comparison by a clearing agency registered with the Commission shall ensure that submissions made against it in the comparison system are monitored for the purpose of ensuring that correct trade information alleged against it is acknowledged promptly and that erroneous information alleged concerning its side of a trade (or its side of a purported trade) is corrected promptly through the procedures of the registered securities clearing agency

(ii)   No change.

(iii)  No change.

(iv)            Definitions.

a.      “Inter-Dealer Transaction Eligible for Comparison by a Clearing Agency Registered with the Commission” means a contract for purchase and sale between one broker, dealer or municipal securities dealer and another broker, dealer or municipal securities dealer, resulting in a contractual obligation for one such broker, dealer or municipal securities dealer to transfer municipal securities to the other broker dealer or municipal securities dealer involved in the transaction, and which contract is eligible for comparison under the procedures of an automated comparison system operated by a registered securities clearing agency.

b.      “Time of trade” is defined in section V of Rule G-14 Transaction Reporting Procedures.

DRAFT

Rule G-14  Reports of  Sales or Purchases

(a) No change.

(b) Transaction Reporting Requirements.

(i)  Each broker, dealer or municipal securities dealer shall report to the Board or its designee information about its transactions in municipal securities to the extent required by, and using the formats and within the timeframes specified in, Rule G-14 Transaction Reporting Procedures. Transaction information collected by the Board under this rule will be used to make public reports of market activity and prices and to assess transaction fees. The transaction information will be made available by the Board to the Commission, securities associations registered under Section 15A of the Act and other appropriate regulatory agencies defined in Section 3(a)(34)(A) of the Act to assist in the inspection for compliance with and the enforcement of Board rules.

(ii) The information specified in the Transaction Reporting Procedures is critical to public reporting of prices for transparency purposes and to the compilation of an audit trail for regulatory purposes. All brokers, dealers and municipal securities dealers have an ongoing obligation to report this information promptly, accurately and completely. The broker dealer or municipal securities dealer may employ an agent for the purpose of submitting customer transaction information; however the primary responsibility for the timely and accurate submission remains with the broker, dealer or municipal securities dealer that effected the transaction. Although the primary responsibility for submitting timely and accurate transaction information lies with the dealer that effected the transaction, a clearing broker that clears inter-dealer municipal securities transactions on behalf of another broker, dealer or municipal securities dealer shares responsibility to ensure that such transactions are submitted in a timely and accurate manner with respect to those aspects of transaction reporting that are under its exclusive control.  If a clearing broker undertakes to submit customer transactions in municipal securities on behalf of another broker, dealer or municipal securities dealer, it shares responsibility to ensure timely and accurate submissions with respect to those aspects of customer transaction reporting that are under its exclusive control.

(iii) To identify its transactions for reporting purposes, each broker, dealer and municipal securities dealer shall obtain a unique executing broker symbol from the National Association of Securities Dealers, Inc. 

(iv) To facilitate identification of transactions that are effected by an Alternative Trading System (ATS), a broker, dealer or municipal that is registered with the Commission as an ATS shall obtain an ATS identifier from the Board.

(v) Form RTRS.  Each broker, dealer or municipal securities dealer shall provide to the Board on Form RTRS information necessary to ensure that its trade reports can be processed correctly.  Such information includes the manner in which transactions will be reported (e.g., through the message-based trade input method, the Web-based trade input method, or both), the broker symbol obtained from the NASD, any ATS designations, the identity of and information on any intermediary to be used as a Submitter, information on personnel that should be contacted if there are problems in RTRS submissions, and information necessary for systems testing with RTRS.  Information provided on Form RTRS shall be kept current by notifying the MSRB when contact information or other information provided on the form changes.

Rule G-14 Transaction Reporting Procedures

(a) Inter-Dealer Transactions.

(i) Except as described in paragraph (ii) of this section (a), each broker, dealer and municipal securities dealer shall report all transactions with other brokers, dealers or municipal securities dealers to the Board’s designee for receiving such transaction information. The Board has designated National Securities Clearing Corporation (NSCC) for this purpose. A broker, dealer or municipal securities dealer shall report a transaction by submitting or causing to be submitted to NSCC information in such format and within such timeframe as required by NSCC to produce a compared trade for the transaction in the initial comparison cycle on the night of trade date in the automated comparison system operated by NSCC. Such transaction information may be submitted to NSCC directly or to another registered clearing agency linked for the purpose of automated comparison with NSCC.

The information submitted in accordance with this procedure shall include the time of trade execution and the identity of the brokers, dealers, or municipal securities dealers that execute the transaction in addition to the identity of the entities that clear the transaction. If clearing/introducing broker arrangements are used for transactions, the introducing brokers shall be identified as the "executing brokers." If the settlement date of a transaction is known by the broker, dealer or municipal securities dealer, the report made to NSCC also shall include a value for accrued interest in the format prescribed by NSCC.

(ii) A transaction that is not eligible to be compared in the automated comparison system operated by NSCC (because of the lack of a CUSIP number for the security or other reasons) shall not be required to be reported under this section (a). A transaction that is subject to a "one-sided" submission procedure in the automated comparison system operated by NSCC shall be reported only by the broker, dealer or municipal securities dealer that is required to submit the transaction information under the one-sided submission procedure.

(b) Customer Transactions

(i) Each broker, dealer and municipal securities dealer shall report to the Board all transactions with customers effected after March 1, 1998, except as described in paragraph (iii) of this section (b). A broker, dealer or municipal securities dealer shall report a transaction by submitting or causing to be submitted to the Board, by midnight of trade date, the customer transaction information specified in paragraph (ii) of this section (b) in such format and manner specified in the current User's Manual for Customer Transaction Reporting. The broker, dealer or municipal securities dealer shall promptly report cancellation of the trade or corrections to any required data items.

(ii) The information submitted in accordance with this procedure shall include: the CUSIP number of the security; the trade date; the time of trade execution; the executing broker symbol identifying the broker, dealer or municipal securities dealer that effected the transaction; a symbol indicating the capacity of the broker, dealer or municipal securities dealer as buyer or seller in the transaction; the par value traded; the dollar price of the transaction, exclusive of any commission; the yield of the transaction; a symbol indicating the capacity of the broker, dealer or municipal securities dealer as agent for the customer or principal in the transaction; the commission, if any; the settlement date, if known to the broker, dealer or municipal securities dealer; a control number, determined by the broker, dealer or municipal securities dealer, identifying the transaction; and a symbol indicating whether the trade has previously been reported to the Board, and, if so, the control number used by the broker, dealer or municipal securities dealer for the previous report.

(iii)  The following transactions shall not be required to be reported under this section (b):

(A) a transaction in a municipal security that is ineligible for assignment of a CUSIP number by the Board or its designee; and

(B)  a transaction in a municipal fund security.

(iv) Each broker, dealer and municipal securities dealer effecting customer transactions in municipal securities, including introducing and clearing brokers, shall provide to the Board the name and telephone number of a person responsible for testing that firm’s capabilities to report customer transaction information. Each broker, dealer or municipal securities dealer shall test such capabilities in a manner and according to the requirements specified in the current User’s Manual for Customer Transaction Reporting. This paragraph (iv) shall take effect July 1, 1997.

I.   General Procedures

a.      The Board has designated the message-based trade input method offered by National Securities Clearing Corporation (NSCC) and the Web-based trade input method as RTRS Portals for reporting municipal securities transactions under Rule G-14. Transaction data submissions must conform to the formats specified for the RTRS Portal used for the trade submission.

b.      Transactions effected with a Time of Trade during the hours of the RTRS Business Day shall be reported within 15 minutes of Time of Trade to an RTRS Portal.

c.       Transactions effected with a Time of Trade outside the hours of the RTRS Business Day shall be reported no later than 15 minutes after the beginning of the next RTRS Business Day.

d.      Transaction data that is not submitted in a timely and accurate manner in accordance with these Procedures shall be submitted or corrected as soon as possible.

e.       Information on the status of trade reports in RTRS is available by message-based transmission from NSCC, through a web browser function using the Internet, or via electronic mail.  Trade status information from RTRS indicating a problem or potential problem with reported trade data must be reviewed and addressed promptly to ensure that the information being disseminated by RTRS is as accurate and timely as possible.

f.        RTRS Portals will be open for transmission of transaction data and status of trade reports beginning 30 minutes prior to the beginning of the RTRS Business Day and ending 90 minutes after the end of the RTRS Business Day.

II.   Reporting Requirements and Exemptions for Specific Types of Transactions

a.      Inter-Dealer Transactions Eligible for Automated Comparison by a Clearing Agency Registered with the Commission

i.      Bilateral Submissions: Inter-Dealer transactions eligible for automated trade comparison at a clearing agency registered with the Commission (registered clearing agency) shall be reported by each dealer submitting, or causing to be submitted, such transaction records required by the registered clearing agency to achieve comparison of the transaction.  The transaction records also shall include the additional trade information for such trades listed in the Specifications for Real-Time Transaction Reporting of Municipal Securities.

ii.      Unilateral Submissions: For transactions that, under the rules of the registered clearing agency, are deemed compared upon submission by one side of the transaction (unilateral submissions), a submission is not required by the contra-side of the transaction.  The contra-side, however, must monitor such submissions to ensure that data representing its side of the trade is correct and use procedures of the registered clearing agency to correct the trade data if it is not.

b.      Customer Transactions.  Reports of transactions with customers shall include the specific items of information listed for such transactions in the Specifications for Real-Time Transaction Reporting of Municipal Securities.

c.       Agency Transactions With Customers Effected By An Introducing Broker Against Principal Positions of its Clearing Broker.  Reports of agency transactions effected by an introducing broker for a customer against the principal positions of its clearing broker shall include the specific items of information listed in the Specifications for Real-Time Transaction Reporting of Municipal Securities for “Inter-Dealer Regulatory-Only” trades.

d.      Transactions Not Reported
The following transactions shall not be reported under Rule G-14:

  i.      Transactions in securities without assigned CUSIP numbers;

  ii.      Transactions in municipal fund securities; and

  iii.      Inter-dealer transactions for principal movement of securities between dealers that are not inter-dealer transactions eligible for comparison in a clearing agency registered with the Commission.

III. RTRS Users Manual.  The RTRS Users Manual is comprised of the Operational Overview, Specifications for Real-Time Transaction Reporting of Municipal Securities, the Users Guide for Web-Based Submissions, Testing Procedures, guidance on how to report specific types of transactions and other information relevant to transaction reporting under Rule G-14.  The RTRS Users Manual is located at www.msrb.org and may be updated from time to time with additional guidance or revisions to existing documents.

IV.  Testing

a.  Prior to submitting transaction data to RTRS, a successful test of system use will be required.  Testing procedures are included in the RTRS Users Manual.

b.  Testing During RTRS Start-Up

              i. Testing facilities will be made available at least six months prior to the announced effective date of these transaction reporting procedures (“Announced RTRS Start-Up Date”). Except as provided in the subparagraph below, each broker, dealer or municipal securities dealer shall be prepared for testing no later than three months prior to the Announced RTRS Start-Up Date and shall either have successfully tested its RTRS capabilities or have scheduled a testing date with the MSRB by that time.

             ii. A broker, dealer or municipal securities dealer electing to use only the Web-based trade input method of transaction reporting and that has averaged submissions of five or fewer trades during a one-year period beginning in July 2002, shall be required to test its RTRS capabilities no later than one month prior to the Announced RTRS Start-Up Date.

V.    Definitions

a.  “RTRS” means the Real-Time Transaction Reporting System operated by the Board.

b.  The “RTRS Business Day” is 7:30 a.m. to 6:30 pm, Eastern Time, Monday through Friday, on each business day as defined in Rule G-12(b)(i)(B).

c.  “Time of Trade” is the time at which a dealer first has a contract for a sale or purchase of securities at a set price and quantity sufficient to compute final money on the transaction.

d. “Submitter” means a broker, dealer or municipal securities dealer, or service bureau acting on behalf of a broker, dealer or municipal securities dealer, that has been authorized to interface with RTRS for the purposes of entering transaction data into the system.

e.   “Inter-Dealer Transaction Eligible for Automated Comparison by a Clearing Agency Registered with the Commission” is defined in MSRB Rule G-12(f)(i).

f.    “Municipal fund securities” is defined in Rule D-12.


[1] See “Plans for MSRB’s Real-Time Transaction Reporting System,” MSRB Notice 2003-3 dated February 3, 2003, on www.msrb.org.

[2] The error checking process and dissemination should take no more than a few minutes after a transaction record is received by the MSRB.

[3] See “Specifications for Real-time Reporting of Municipal Securities Transactions, Version 1.0,” dated June 12, 2003, on www.msrb.org.

[4] See “Operational Overview of MSRB’s Real-Time Transaction Reporting System, Version 1.0,” MSRB Notice 2003-13 dated April 7, 2003, on www.msrb.org.

[5] NSCC is a clearing agency registered under the Securities Exchange Act.  The RTTM service will be provided on behalf of NSCC by the Fixed Income Clearing Corporation (FICC), an affiliate of NSCC, via a service agreement.  FICC already has implemented RTTM for Government Securities and Mortgage-Backed securities trade processing. 

[6] Surveillance data is made available to regulators with authority to enforce MSRB rules, including the NASD and the SEC.

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

[8] See, e.g., Subcommittee on Telecommunications and Finance in 1993, Hearing on Regulation of the Municipal Securities Market, 103rd Cong., 1st sess., September 9, 1993; Subcommittee on Finance and Hazardous Materials, Hearing on the Bond Price Competition Improvement Act of 1999, 106th Cong., 1st sess., May 18, 1999. 

[9] InvestingInBonds.com, a retail-oriented web site carrying data from the existing Transaction Reporting Program, has been very successful in attracting users.  InvestingInBonds.com is operated by The Bond Market Association. 

[10] See, e.g., “Real Time Reporting of Municipal Securities Transactions,” MSRB Reports Vol. 21, No. 2 (July 2001); “Plans for MSRB’s Real-Time Transaction Reporting System,” MSRB Notice 2003-3 dated February 3, 2003, on www.msrb.org.

[11] See, e.g., “SIA Board Endorses Program to Modernize Clearing, Settlement Process for Securities,” SIA Press Release dated July 18, 2002, on www.sia.com.

[12] By agreement with the MSRB, NSCC will not charge dealers for serving as the portal for customer transaction data, but MSRB will reimburse NSCC for system costs that are attributable exclusively to this function.

[13] RTRS plans have been presented by MSRB representatives and discussed at numerous meetings of The Bond Market Association’s Municipal Operations Committee, the Regional Municipal Operations Association, and various committees of the Securities Industry Association.  Presentations also have been made on RTRS at many industry conferences.

[14] See “Real-Time Transaction Reporting: Joint Seminar Announcement,” MSRB Notice 2003-5 dated February 26, 2003, on www.msrb.org.

[15] Clearing brokers and their correspondents also should discuss how customer trade reporting will be handled for the correspondents.  It will be possible either for the correspondent to submit directly to the MSRB or for the clearing broker to submit on the correspondent’s behalf.  Similarly, dealers using service bureaus should talk with the service bureaus at this time to ensure that the service bureau will be ready to submit trades within 15 minutes if the dealer intends to use the service bureau for this purpose.

[16] See “Operational Overview of MSRB’s Real-Time Transaction Reporting System, Version 1.0,” MSRB Notice 2003-13 dated April 7, 2003, on www.msrb.org.;  “Specifications for Real-time Reporting of Municipal Securities Transactions, Version 1.0,” dated June 12, 2003 on www.msrb.org.  For RTTM Message Specifications, see “Interactive Messaging: NSCC Participant Specifications for Matching Input and Output Version 1.0,” dated March 31, 2003 on www.ficc.com.

[17] All times given are Eastern.

[18] Unlike inter-dealer transactions, which have two submissions (both a buy side and a sell side) that must be compared, customer trades, which comprise approximately 80% of all reported trades, do not require comparison and will be disseminated as soon as automated error checks are completed.

[19] The dealer is not required to report the link between the inter-dealer and customer transaction reports associated with agency transactions.  

[20] Following current policy, the transaction between the clearing broker and the introducing broker is not required to be submitted for comparison because it does not result in the movement of a principal position between dealers; instead it will be described as an “Inter-Dealer Regulatory-Only” transaction.  The RTRS Operational Overview and Message Specifications contain additional details. 

[21] In the TRACE System such transactions are reported with the method known as an “Automated Give-Up.”

[22] See “Proposed Rule Change Concerning T+1 Public Reporting Of Transactions in Municipal Securities,” MSRB Notice 2003-12 dated April 7, 2003, on www.msrb.org.

* Italics indicate new language; strikethrough denotes deletions.