MSRB NOTICE 2006-27 (AUGUST 15, 2006)

NOTICE OF FILING OF PROPOSED RULE CHANGE RELATING TO RTRS PROCEDURES, UNDER RULE G-14 REPORTS OF SALES OR PURCHASES

Today the Municipal Securities Rulemaking Board (“MSRB”) filed with the Securities and Exchange Commission (the “Commission”) a proposed rule change to Rule G-14, Reports of Sales or Purchases (the “proposed rule change”).[1]  The proposed rule change would: (1) expand the definition of “list offering price” transactions to include certain inter-dealer “takedown” transactions; and (2) require the reporting of these transactions as “list offering price/takedown” transactions on the first day of trading of a new issue under MSRB Rule G-14 RTRS Procedures, paragraph (a)(ii)(A).  The MSRB proposed a January 8, 2007 effective date for this proposed rule change.

Background

The “List Offering Price” is defined as the publicly announced initial offering price at which a new issue of municipal securities is to be offered to the public.[2] For purposes of RTRS transaction reporting, a “Takedown” transaction is a primary market sale transaction executed on the first day of trading of a new issue by a sole underwriter or syndicate manager to a syndicate or selling group member at a discount from the List Offering Price. In a 2004 notice, the MSRB stated that these inter-dealer transactions must be reported within fifteen minutes of the time of execution and that they do not fall within the List Offering Price end-of-day exception.[3]

As experience with real-time transaction reporting has increased, however, industry members have pointed out that Takedown transactions share many of the same characteristics as List Offering Price transactions.  A high volume of Takedown transactions on the first day of trading in a new issue, for example, often presents operational difficulties for underwriters attempting to report all of their Takedown transactions within a fifteen-minute window.  It also has been noted that prices for both Takedown transactions and List Offering Price transactions are set under an offering price agreement for the new issue and therefore do not necessarily reflect market prices at the time the transaction is effected.  Thus, the proposed rule change would expand the definition of List Offering Price to include Takedown transactions, require use of an indicator on reports of all customer List Offering Price and inter-dealer Takedown transactions, and retain the end of the day exception from the normal fifteen minute reporting deadline for the expanded category of “List Offering Price/Takedown” transactions.[4]

Description of Proposed Rule Change

The proposed List Offering Price/Takedown indicator would be required to be used by dealers when reporting any primary market sale transaction executed on the first day of trading of a new issue:

●           by a sole underwriter, syndicate manager, syndicate member or selling group member at the published list offering price for the security (“List Offering Price Transaction”); or

●           by a sole underwriter or syndicate manager to a syndicate or selling group member at a discount from the published list offering price for the security (“RTRS Takedown Transaction”).

The indicator would be included on MSRB price transparency reports to designate to transparency report users that the trade report does not represent a normal secondary market transaction. Since the secondary market transactions in a new issue are likely to provide the best gauge of the current market value for a new issue and may be reported to RTRS simultaneously with List Offering Price and Takedown transactions, the MSRB believes that transparency reports on the first day of trading for a new issue would be more useful if List Offering Price and Takedown transactions were identified with a special condition indicator.

On April 21, 2006, the MSRB published a notice seeking comment on an exposure draft of the proposed rule change that also described a new indicator for certain transactions that are based on pricing commitments made prior to the formal award of a new issue (the “Conditional Trading Commitment” indicator).[5]  Following a review of the six comment letters it received, the Board decided to postpone the creation of the Conditional Trading Commitment indicator.

Questions concerning this notice may be directed to Karen A. Caplan, Associate General Counsel.

August 15, 2006

TEXT OF AMENDMENTS [6]

Rule G-14 Reports of Sales or Purchases

(a) – (b)  No change.

Rule G-14 RTRS Procedures

(a)  General Procedures.

(i) No change.

(ii)  Transactions effected with a Time of Trade during the hours of the RTRS Business Day shall be reported within fifteen minutes of Time of Trade to an RTRS Portal except in the following situations:

(A) A “List Offering Price/Takedown Transaction,” as defined in paragraph (d)(vii) of Rule G-14 RTRS Procedures, shall be reported by the end of the day on which the trade is executed.  [Syndicate managers, syndicate members and selling group members that effect trades in new issues on the first day of trading at the list offering price shall report such trades by the end of the day on which the trades were executed.]

(B) – (C)  No change.

(iii) – (vi)  No change.

(b)  Reporting Requirements for Specific Types of Transactions.

(i) – (iii)  No change.

(iv)  Transactions with Special Conditions.  Reports of transactions affected by the special conditions described in the RTRS Users Manual in Section 4.3.2 of the Specifications for Real-Time Reporting of Municipal Securities Transactions shall be reported with the “special condition indicators” shown and in the manner specified.  Special condition indicators designated as “optional” in these Specifications are required for the Submitter to obtain an extended reporting deadline under paragraphs (a)(ii)(B)-(C) of Rule G-14 RTRS Procedures, but may be omitted if a deadline extension is not claimed.  All other special condition indicators are mandatory, including the List Offering Price/Takedown Transaction indicator for transactions identified in paragraph (a)(ii)(A) of Rule G-14 RTRS Procedures.

(c)  No Change.

(d) Definitions.

(i)  - (vi)  No change.

(vii)  “List Offering Price/Takedown Transaction” means a primary market sale transaction executed on the first day of trading of a new issue:

(A)  by a sole underwriter, syndicate manager, syndicate member or selling group member at the published list offering price for the security (“List Offering Price Transaction”); or

(B)  by a sole underwriter or syndicate manager to a syndicate or selling group member at a discount from the published list offering price for the security (“RTRS Takedown Transaction”).


[1] SR-MSRB-2006-07.  Comments on the proposed rule change should be submitted to the Commission and should reference this file number.

[2] If the price is not publicly disseminated (e.g., if the security is a “not reoffered” maturity within a serial issue), the price is not a List Offering Price.  See “Reminder Notice on List Offering Price and Three-hour Exception for Real-Time Transaction Reporting: Rule G-14,” MSRB Notice 2004-40 (December 10, 2004).

[3] See id.

[4] These List Offering Price/Takedown transactions would be designated with the same special condition indicator currently in use for List Offering Price transactions.  The technical requirements for the current List Offering Price indicator are summarized in the Specifications for Real-Time Reporting of Municipal Securities Transactions which is available on-line at http://www.msrb.org.  The draft revisions to the Specifications for the indicator identifying the List Offering Price/Takedown Transactions may be found in “Request for Comment on Draft Procedures for Reporting Special Condition Indicators on Certain New Issue Transactions,” MSRB Notice 2006-10 (April 21, 2006).

[5] See “Request for Comment on Draft Procedures for Reporting Special Condition Indicators on Certain New Issue Transactions,” MSRB Notice 2006-10 (April 21, 2006).

[6] Underlining indicates additions; brackets denote deletions.