MSRB NOTICE 2006-35 (DECEMBER 6, 2006)

REAL-TIME TRANSACTION REPORTING UPDATE: UPCOMING CHANGES IN RULE G-14 AND RTRS AND REMINDERS ON EXISTING REQUIREMENTS UNDER RULE G-14

In January 2007, the MSRB will implement previously announced changes to Rule G-14 RTRS Procedures relating to the “List Offering Price/Takedown” indicator on certain transaction reports and to the “three-hour exception” to the reporting deadline.[1]  Also in January 2007, the National Securities Clearing Corporation (NSCC) will implement previously announced changes to the reporting of large accrued interest amounts and of par values less than $1,000.[2]  The new version of the Specifications for Real-Time Reporting of Municipal Securities Transactions (“Specifications”) reflecting these changes is being designated as Version 2.0.  Version 2.0 also contains revisions that reflect minor textual clarifications and describes several minor programming changes in the Real-Time Transaction Reporting System (RTRS), which are discussed in this notice.  (Click here to download or view Version 2.0 of the Specifications.)  This notice also reminds dealers of the requirement under Rule G-14 to correct trade submission errors, and not to report to RTRS any purchase from an issuer of a new issue of its securities.

PREVIOUSLY ANNOUNCED CHANGES

List Offering Price/Takedown Transactions

As the MSRB previously has announced, on January 8, 2007 amendments to Rule G-14 RTRS Procedures relating to “list offering price” and “takedown” transactions will become effective.[3]  The rule change expands use of the current optional “list offering price” Special Condition Indicator to include certain inter-dealer “Takedown” transactions and makes the use of the indicator mandatory.[4]  Beginning on January 8, 2007, Rule G-14 RTRS Procedures will require dealers to include the “List Offering Price/Takedown” (“LOP/TD”) indicator on trade reports of primary market sale transactions on the first day of trading by: (i) a sole underwriter, syndicate manager, syndicate member or selling group member at the published list offering price for the security (“List Offering Price” transaction); and (ii) 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 (“Takedown” transaction).  Transactions reported with the LOP/TD indicator will be allowed an end-of-day exception from fifteen minute transaction reporting. 

Currently, dealers use the Special Condition Indicator M020 if an end-of-day reporting deadline is needed for a List Offering Price transaction.  The same Special Condition Indicator, M020, will become mandatory beginning January 8, 2007 to indicate LOP/TD transactions.  Dealers will not have to change any fields used in reporting trades, i.e., indicator M020 will be used on “takedown” transactions as well as on “list offering price” transactions.

Expiration of Three-Hour Exception to Reporting Deadline for Certain Trades

Rule G-14 RTRS Procedures (a)(ii)(C) currently allows a dealer three hours to report a trade if the dealer: (i) does not have the CUSIP number and indicative data of the issue traded in the securities master file used by the dealer to process trades for confirmation, clearance and settlement; (ii) has not traded the security in the previous year; and (iii) did not act as a syndicate manager or syndicate member for the issue (the “three-hour exception”).  After December 29, 2006, the three-hour exception will be available only for transactions on a when, as and if issued basis (“when-issued” transactions).  Dealers attempting to claim the three-hour exception from fifteen minute transaction reporting on a transaction in a security after the when-issued period has ended will be in violation of Rule G-14.  The specifications for submitting the Special Condition Indicator for the three-hour exception on when-issued transactions remain unchanged during 2007 (see Section 4.3.2 of the Specifications).  On December 31, 2007, the three-hour exception will expire for when-issued transactions.[5]

Changes to the Comparison Eligibility of Certain Trades

As noted above, on January 26, 2007, enhancements to NSCC’s RTTM system will expand the definition of inter-dealer transactions eligible for comparison,[6] and thus will expand the definition of inter-dealer transactions that must be reported to the MSRB under Rule G-14.  These enhancements affect transactions only in rare instances, and should not greatly affect trade reporting.

Accrued Interest Expansion:  Transactions with accrued interest up to $9,999,999.99 will be eligible for comparison.  Currently, transactions with accrued interest up to $999,999.99 are eligible for comparison. 

Par Less Than 1,000:  Transactions in whole dollar amounts less than $1,000 will be accepted by the RTTM system.  Additionally, transactions over $1,000 that are not divisible by 1,000 will be compared by submitting two transactions.  For example, a transaction of 10,500 will be submitted as one transaction of 10,000 and one transaction of 500.  This is similar to the procedure for reporting these trades in corporate securities to RTTM.  A submission of 10,500 will continue to be rejected.

VERSION 2.0 OF RTRS SPECIFICATIONS

As noted, the new version of the Specifications reflecting the above changes is being designated as Version 2.0.  In this version, for changes involving the LOP/TD indicator, see Sections 1.2.2 and 4.3.2 and Appendix B; regarding the expiration date for the three-hour deadline for transactions other than on a when-issued basis, see Section 1.2.2; regarding changes to the accrued interest field of inter-dealer trades, see Sections 2.10 and 4.2.1, and regarding the submission of par amounts less than $1,000, see Section 4.3.2.

Version 2.0 of the Specifications clarifies the text regarding some topics[7] and describes several minor programming changes in RTRS, discussed below.

Late Submissions Cannot Be Corrected To Be Made Timely

RTRS scores a submission as “late” if it is submitted more than 15 minutes after the time of trade and it does not include a Special Condition Indicator that indicates an extended deadline applies.  “Late” submissions cannot be corrected to be made timely.[8]  RTRS programming has been changed so that if a dealer amends a submission by adding a Special Condition Indicator showing that a three-hour deadline applies (e.g., indicator M010), the correction does not make the submission timely.  This change (which is consistent with other RTRS programming)[9] is effective after December 29, 2006.

Unused Special Condition Indicators

The Special Condition Indicator for trade reports is of the form “Mnnn”, where each position (“n”) provides a different type of information about the special nature of a transaction.  Currently, it is possible to use the combinations “M120”, “M220” and “M920” as Special Condition Indicators.  However, these would indicate that a transaction was done at a price away from the market price and also at the list offering price on the first day of trading in the security, or that the transaction was “flat” and also at the list offering price.  Since these particular combinations (“M120”, etc.) are not being used by dealers to reflect actual market practices, they are being changed to “invalid” in RTRS.  If indicators “M120”, “M220” or “M920” are input, RTRS will respond with error message Q55D stating, “Invalid Special Condition Indicator,” and the end of day exception will not apply.   (See Appendix B to the Specifications.)  This change is effective after December 29, 2006.

Reporting Trades When Two Special Conditions Apply

The text of the Specifications has been clarified to describe more specifically which Special Condition Indicators to use when two special conditions apply.  The revised text states that if two exceptions to the 15-minute reporting deadline apply, the longer deadline should be used in the RTRS submission.  (See Section 4.3.2.)  The text clarifies that a List Offering Price/Takedown transaction in a short-term instrument must be reported with the LOP/TD transaction indicator rather than the Short-Term Instrument Special Condition Indicator – that is, with indicator M020 rather than M030.  (See Section 4.3.2.) 

REMINDER REGARDING THE CORRECTION OF ERRORS

The MSRB reminds dealers of the requirement to review trade status information from RTRS and to correct errors in RTRS submissions.[10]  Incorrect submissions to RTRS result in dissemination of unreliable transaction data to the market until correction is made.  Dealers must correct any inaccurate data submitted to RTRS as soon as possible.[11]

To provide information about incorrect or potentially incorrect input, RTRS returns error codes to the dealer[12] when it finds apparent errors or questionable conditions in submissions, based on information in the submission or securities information contained in the RTRS securities master file.  The MSRB specifically reminds dealers that any “questionable” error code (any code beginning with “Q”) requires prompt dealer attention and that if an error is found, prompt dealer action is required to correct the submission.  For example, error code Q111 indicates “QUESTIONABLE - Dollar price calculated from submitted yield differs from submitted price.”  A dealer that receives error code Q111 must examine the submission to verify the dollar price and yield.  If the dollar price and yield are not correct, the dealer must correct the reported data.

In the Specifications, the textual description of required dealer actions in response to error messages has been expanded to emphasize this dealer responsibility.  See Section 2.9.

REMINDER REGARDING PURCHASE OF NEW ISSUES FROM THE ISSUER

Pursuant to Rule G-14, the Specifications require dealers to report to RTRS all municipal securities transactions with other dealers and with customers.[13] The MSRB reminds dealers that a transaction with an issuer involving the sale by the issuer of a new issue of its securities is not a customer transaction.[14]  Thus, dealers must not report to RTRS a purchase from an issuer of a new issue of its securities.  Such reports will constitute violations of Rule G-14.

Questions about this notice may be directed to Larry M. Lawrence, Policy and Technology Advisor, Justin Pica, Uniform Practice Policy Advisor, or Sara Pranio, Uniform Practice Assistant.

December 6, 2006


[1] See “Amendments Approved to Rule G-14 RTRS Procedures Relating to ‘List Offering Price’ and ‘Takedown’ Transactions,” MSRB Notice 2006-28 (October 19, 2006) and “Reminder of Upcoming RTRS Changes:  LOP/TD Indicator and Three Hour Exception,” MSRB Notice 2006-30 (October 31, 2006).

[2] See “RTTM Corporate, Municipal, UIT (CMU) Specification Changes for Accrued Interest & Municipal Baby Bonds,” NSCC Important Notice A6329/ P&S5899 (November 2, 2006), and “Reminder Notice Concerning Changes to the Comparison Eligibility of Transactions with Accrued Interest or in Quantities Less than 1,000:  Rules G-12(f) and G-14,” MSRB Notice 2006-34 (December 5, 2006).

[3] See “Amendments Approved to Rule G-14 RTRS Procedures Relating to ‘List Offering Price’ and ‘Takedown’ Transactions,” MSRB Notice 2006-28 (October 19, 2006).

[4] 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).

[5] See “Industry Preparations for Expiration of Three Hour Exception from Real-Time Transaction Reporting,” MSRB Notice 2006-12 (April 24, 2006).

[7] The clarifications do not affect dealer inputs to RTRS or RTRS outputs.  They are: (1) The preface has been revised by deleting references to MSRB’s plans at the time Version 1 was published.  Throughout the Specifications, future tense verbs have been replaced by present tense – e.g., “RTRS will require…” has been changed to “RTRS requires….” (2) The statement, “Time of trade should be reported to the second” has been clarified to read, “Time of trade must be reported to the second.”  See Section 4.2.1, field TRAD.  (3) The discussion of message-based and web-based options for input has been clarified.  See Section 1.1.  (4) The specification of how to report dollar price, yield and commission in customer agency transactions now includes a discussion of the relation among these three parameters.  See Section 4.3.3.

[8] See, e.g.,  Specifications, Section 2.9 (the paragraph beginning, “The first character of the error code….”) and“Questions and Answers Regarding the Real-Time Transaction Reporting System (RTRS),” MSRB Notice 2005-08 (January 26, 2005), question 16.

[9] Currently, adding a Special Condition Indicator to indicate that a submission qualifies for an end-of-day deadline (e.g., M020 or M030) does not make the submission timely.  The programming change to RTRS applies the same rule to the addition of  Special Condition Indicator M010.

[10] See, e.g., Rule G-14 RTRS Procedures (a)(v):  “. . . 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.”  Also see“Reminder Regarding Modification and Cancellation of Transaction Reports: Rule G-14,” MSRB Notice 2005-13 (March 2, 2005) and“Questions and Answers Regarding the Real-Time Transaction Reporting System (RTRS),” MSRB Notice 2005-08 (January 26, 2005), question 15.  Of course, a dealer that becomes aware of an error in an RTRS submission without receiving an indication of error from RTRS must correct such a submission also.

[12] RTRS returns error codes and related text to dealers by electronic messages and e-mail, and displays this information on RTRS Web.  See, e.g., Rule G-14 RTRS Procedures (a)(v)

[13] See “Introduction to Real-Time Trade Reporting” in Specifications Section 1.  Dealers are also required to report “Inter-dealer regulatory-only” transactions to RTRS.  See “Trading Capacity,” Specifications Section 1.2.3.

[14] See “Customer Transaction Reporting Reminder on Transactions with Issuers and New Error Codes,” MSRB Notice dated April 15, 1999.  Note that Rule D-9 defines “customer” as “… any person other than a broker, dealer, or municipal securities dealer acting in its capacity as such or an issuer in transactions involving the sale by the issuer of a new issue of its securities” (emphasis added).