MSRB NOTICE 2006-20 (JULY 31, 2006)

REQUEST FOR COMMENT ON DRAFT PROCEDURES FOR REPORTING SPECIAL CONDITION INDICATORS FOR CERTAIN SPECIAL TRADING SITUATIONS

The MSRB is requesting comment on proposed revisions to the transaction reporting procedures used by brokers, dealers and municipal securities dealers (“dealers”) for certain special trading situations.  The proposed revisions would: (i) clarify transaction reporting requirements and require use of the existing “away from market” special condition indicator on trade reports of four types of transactions typically executed at special prices; (ii) create two new special condition indicators for purposes of reporting certain inter-dealer transactions “late;” and (iii) provide an end-of-day exception from real-time transaction reporting for trade reports identified as “away from market.”

The proposed revisions to transaction reporting procedures are described below and include draft amendments to Rule G-14 RTRS Procedures and draft technical specifications (click here to access the draft technical specifications).  Comments should be submitted no later than September 15, 2006 and may be directed to Justin R. Pica, Uniform Practice Specialist.  Written comments will be available for public inspection.

BACKGROUND

The MSRB Real-Time Transaction Reporting System (RTRS) serves the dual purposes of price transparency and market surveillance.  Because a comprehensive database of transactions is needed for the surveillance function of RTRS, MSRB Rule G-14, with limited exceptions, requires dealers to report all of their purchase-sale transactions to RTRS.  All reported transactions are entered into the RTRS surveillance database used by market regulators and enforcement agencies.  However, not all of these reported transactions are equally useful for price transparency.  To address this problem, RTRS was designed so that a dealer can code a specific transaction report with a “special condition indicator” to designate the transaction as being subject to a special pricing condition.  Depending on the special condition that is indicated, RTRS either can suppress dissemination of the transparency report to prevent publication of a misleading price or take other action.

TRANSACTIONS EXECUTED WITH SPECIAL PRICING CONDITIONS

            The MSRB has identified four trading scenarios that have generated questions from dealers and users of the MSRB price transparency products.  Each of the four trading scenarios described below represents situations where the transaction executed is not a typical arms-length transaction negotiated in the secondary market (which is typically a better indicator of the market value of a security).  The draft procedures would require dealers to report the transactions identified in the trading scenarios with the existing M9cc “away from market” special condition indicator.[1]  Transactions reported with this special condition indicator would be entered into the surveillance database but suppressed from price dissemination to ensure that transparency products do not include prices that might be confusing or misleading.

Auction Agent Instruction to Program Dealer

After an auction is conducted for municipal auction rate securities (“ARS”) with multiple program dealers, the auction agent instructs transactions to be made between program dealers pursuant to the auction results.  A program dealer whose clients, which may include both customers and non-program dealers, have sold securities will need to transfer the securities to another program dealer whose clients have bought securities.  This allows program dealers to balance their client accounts with the auction results.  The draft procedures clarify that program dealers would be required to report any transaction between program dealers pursuant to the instruction of an auction agent with the M9cc special condition indicator.[2]                   

Repo Transactions

Some dealers have programs allowing customers to finance municipal securities positions with repurchase agreements (“repos”).  Typically, a bona fide repo consists of two transactions whereby a dealer will sell securities to a customer and agree to repurchase the securities on a future date at a pre-determined price that will produce an agreed-upon rate of return.  The draft procedures clarify that both the sale and purchase transactions resulting from a repo would be required to be reported with the M9cc special condition indicator.[3]

UIT-Related Transactions

Dealers sponsoring Unit Investment Trust (“UIT”) or similar programs sometimes purchase securities through several transactions and deposit such securities into an “accumulation” account.  After the accumulation account contains the necessary securities for the UIT, the dealer transfers the securities from the accumulation account into the UIT.  Purchases of securities for an accumulation account are presumably done at market value and are required to be reported normally.  The transfer of securities out of the accumulation account and into the UIT, however, may not necessarily be at market price.  The draft procedures would clarify that dealers are required to report the subsequent transfer of securities from the accumulation account to the UIT with the M9cc special condition indicator.

TOB Program-Related Transactions  

Dealers sponsoring tender option bond programs (“TOB Programs”) for customers sometimes transfer securities previously sold to a customer into a derivative trust from which derivative products are created.  If the customer sells the securities held in the derivative trust, the trust is liquidated and the securities are reconstituted from the derivative products and transferred back to the customer.  The draft procedures would clarify that dealers are required to report the transfers of securities into the derivative trust and the transfer of securities back to the customer upon liquidation of the trust using the M9cc special condition indicator.

INTER-DEALER TRANSACTIONS REPORTED LATE

Inter-dealer transaction reporting is accomplished by both the purchasing and selling dealers submitting the trade to the National Securities Clearing Corporation (NSCC) automated comparison system (RTTM) following NSCC’s procedures.  RTTM forwards information about the transaction to RTRS.  The two inter-dealer trade processing situations described below are the subject of dealer questions and currently result in dealers being charged with “late” reporting.  The draft procedures would create a new special condition indicator for each scenario, allowing dealers to report these types of transactions without receiving a late error.

VRDO Ineligible on Trade Date

On occasion, inter-dealer secondary market transactions are effected in variable rate demand obligations (VRDOs) in which the interest rate reset date occurs between trade date and the time of settlement.  Since the dealers cannot calculate accrued interest or final money on trade date, they cannot process the trade through RTTM until the interest rate reset has occurred.  Reporting the trade after the interest rate reset occurs would result in a late trade report.

The draft procedures would require both dealers that are party to the transaction to report the transaction by the end of the day that the interest rate reset occurs, including the trade date and time of trade that the original trade was executed.  Both dealers would be required to include a special condition indicator that would cause RTRS not to score either dealer late.  RTRS would disseminate the trade reports without an indicator and the trade report would reflect the original trade date and time.

Resubmission of an RTTM Cancel

A dealer may submit an inter-dealer trade to RTTM and find that the contra party fails to report its side of the trade.  Such “uncompared” trades are not disseminated by RTRS on price transparency products.  After two days, RTTM removes the uncompared trade report from its system and the dealer originally submitting the trade must resubmit the transaction in a second attempt to obtain a comparison with its contra-party. 

The draft procedures would require the dealer that originally submitted information to RTTM to resubmit identical information in the second attempt to compare and report the trade.  By the end of the day after RTTM cancels the trade, the resubmitting dealer would include a new special condition indicator that would cause RTRS not to score the dealer late.  The indicator may only be used by a dealer resubmitting the exact same trade information for the same trade.  For example, the contra-party that failed to submit its side to the trade accurately, thus preventing comparison of the transaction, may not use the indicator.  RTRS would disseminate the trade without an indicator once it compares and the trade report would reflect the original trade date and time. 

END-OF-DAY DEADLINE FOR “AWAY FROM MARKET” TRADE REPORTS

Currently, the two special condition indicators used to identify “away from market” trade reports, M9cc and M2cc,[4] do not provide dealers with an extension to the fifteen minute transaction reporting deadline.  The purpose of fifteen minute reporting is to provide real-time price transparency.  Transactions that are not included on price transparency products are not relevant to the transparency purpose of RTRS so there is not a need to have such transactions reported to RTRS in real-time.  In addition, many special condition indicator situations described in this notice require manual processing on behalf of dealers or use of different trade processing systems.  Therefore, the MSRB proposes to provide an end-of-day exception from the fifteen minute transaction reporting deadline for any transaction that includes the M9cc or M2cc special condition indicator. 

REQUEST FOR COMMENT

Comment is requested on the proposed revisions to the transaction reporting procedures.  The following questions may be helpful to commentators and would assist the MSRB in considering its action on the proposal.

• The MSRB believes that a period of six months following the publication of final Specifications should be adequate for dealer programming and implementation of the proposals in this notice.  The MSRB recognizes that the industry prefers to institute multiple RTRS system changes on a single implementation date because it is less costly and more efficient if such changes are effected collectively.  Are there major technical or operational challenges to implementation of the proposals that would require a longer lead time?

• The MSRB is sensitive to dealer concerns regarding the number of special condition indicators.  Using the existing generic M9cc special condition indicator on transactions executed at special prices has the advantage of not creating additional indicators.  However, the generic indicator does not provide the MSRB with the flexibility of including such trade reports in price transparency products with a specific explanation of why the price may not be at market price.  Would a new special condition indicator specific to any of the special trading situations described, which would give the MSRB the option to publish trade reports with the indicator, be useful to users of the price transparency products?

Questions about this notice may be directed to Justin Pica, Uniform Practice Specialist or Jay Jackson, Uniform Practice Assistant.

July 31, 2006

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Text of Draft Amendment*

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 15 minutes of Time of Trade to an RTRS Portal except in the following situations:

(A) – (C) No Change.

(D) A dealer effecting a trade with a special pricing condition as described in Section 4.3.2 of the Specifications for Real-Time Reporting of Municipal Securities Transactions shall report such trades by the end of the day on which the trade is executed.

(E) A dealer reporting a “VRDO ineligible on trade date” as described in Section 4.3.2 of the Specifications for Real-Time Reporting of Municipal Securities Transactions shall report such trades by the end of the day on which the trade becomes eligible for automated comparison by a clearing agency registered with the Commission.

(F) A dealer reporting a “resubmission of an RTTM cancel” as described in Section 4.3.2 of the Specifications for Real-Time Reporting of Municipal Securities Transactions shall resubmit trade information identical to the trade information cancelled to the Message Portal or RTTM Web by the end of the RTRS Business Day following the day the trade was cancelled.

 (iii) – (vi) No change.

(b) No change.

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