Volume 16, Number 1 JANUARY 1996
Route To: Manager, Muni Department Trading Sales Operations Compliance
Comments Requested The Board plans to expand its Transaction Reporting Program for municipal securities, which currently requires reporting of inter-dealer transactions, to include transactions with institutional and retail customers. Toward this end, the Board plans to develop a central facility to which dealers will report all customer transactions. Prices and volumes of customer transactions in the more frequently traded municipal securities will be dis seminated daily in public reports, and all customer transactions will be stored in a database for market surveillance and enforcement purposes. This Notice seeks comment on various planned features of the Transaction Reporting Program that are related to customer transactions.
Questions on this notice should be submitted no later than May 1, 1996, and may be directed to Larry M. Lawrence, Policy and Technology Advisor. Written comments will be available for will be available for public inspection.
The Board is in the process of implementing a Transaction Reporting Program for the municipal securities market, with the goals of providing market participants and the public with more information about the value of securities, and of helping agencies charged with enforcing Board rules identify transaction patterns as they carry out dealer inspections and conduct market surveillance. The first phase in implementation was the reporting of inter-dealer transactions, which began in January 1995. Each day, inter-dealer transactions are reported to the Board and, on the next day, price and volume data on the more frequently traded issues are disseminated in a public report ("T+1 price reporting"). All reported inter-dealer transactions are entered into a comprehensive database, which is made available to the National Association of Securities Dealers (NASD) and other enforcement agencies, for market surveillance and enforcement purposes.
The Board now is preparing for the development and implementation of the customer transaction reporting phase of the program. In this phase, dealers will be required to report all municipal securities transactions with customers both institutional and retail to a central Customer Transaction Reporting Subsystem (CTR Subsystem), to be developed specifically for this purpose as a component of the current Transaction Reporting System. The CTR Subsystem will add price and volume information about customer transactions to the information already disseminated about inter-dealer transactions. All customer transaction data reported by dealers will be stored in the comprehensive surveillance database, for market surveillance and enforcement purposes. In this Notice, the Board seeks specific comment on various program features that are planned for customer transaction reporting.
In 1994, the Board announced that as a first step toward providing transparency to the market, it was going forward with a pilot program to report inter-dealer transactions, and that it intended to enhance the program by including institutional and retail customer transactions in the future. The initial plan for enhancement was announced in late 1994. This plan contemplated four developmental phases, of which the first three covered different types of municipal securities transactions: inter-dealer transactions in Phase I, institutional customer transactions in Phase II, and retail customer transactions in Phase III. In Phases I and II, transaction data would be collected from dealers through the existing centralized clearance and settlement systems that currently are used to process these transactions. Because there is no centralized processing system for retail customer transactions, the initial plan for Phase III called for reporting of retail customer transactions to the Board by dealers either directly or through intermediaries. By the end of Phase III, all transactions for a given day would be summarized in the T+1 price reports, and each transaction would be recorded in detail in the surveillance database.
At its November 1995 meeting, the Board decided to combine Phases II and III of the Transaction Reporting Program and to obtain customer transactions directly, rather than collect institutional and retail transaction data separately through different systems. This decision was based on the Board's study of institutional customer trade data currently being submitted by dealers to centralized clearance and settlement systems. Although the data submitted, the procedures employed, and the procedures employed, and the overall level of dealer participation in the clearance and settlement system appear to be adequate to achieve timely settlement of transactions, various aspects of the learance and settlement date make it unsuitable for transparency and surveillance support purposes, particularly for T+1 price reporting.
Under the Board's revised plan for the Transaction Reporting Program, the subsystem originally planned for retail transactions will be developed to process institutional customer transaction data as well. Therefore, dealers will have consistent operational requirements for reporting all types of customer transactions. With respect to the Board's overall system expenses, little or no additional development cost will arise from combining all customer transaction data in a single subsystem. Total program costs will be lower because the development costs and efforts for a separate subsystem for institutional customer transactions will be avoided. By creating the dedicated CTR Subsystem for both retail and institutional customer transactions, the Board believes that accurate, complete and timely information about institutional customer transactions can be obtained in a cost-effective manner.
The general concept for the CTR Subsystem is that each dealer will "upload" certain institutional and retail customer transaction data to a central computer system by midnight of each trading day. In recent years, dealers have invested substantial resources in developing automated systems for transaction processing, and the Board believes that these systems can be used efficiently by dealers to report the data necessary for transparency and market surveillance support. Thus, it is expected that most dealers will use their existing trade processing, confirmation or recordkeeping systems to generate the transaction data required by the CTR Subsystem. The Board expects this approach will be less costly to dealers than if the Board were to mandate the use of an independent transaction reporting system with stand-alone terminals that would have to be acquired by dealers and operated by dealer staff.
The Board expects that service bureaus (firms offering confirmation or other processing services), clearing firms, vendors (providers of hardware and software) and others will wish to act as intermediaries to assist dealers in collecting, formatting or transmitting data to the CTR Subsystem. Various service bureaus and clearing firms now assume this role with regard to clearance and settlement data, and others likely will begin doing so in the future. Dealers choosing to use intermediaries would rely on them to address most of the technical issues associated with data transmittal. Concentrating submissions through intermediaries also would reduce the number of sources from which the Board would receive data and thereby would reduce total costs to the Board of the CTR Subsystem.
The Board's plan is to create an "open" system, providing dealers and intermediaries with maximum flexibility in configuring equipment, software and procedures for reporting purposes. Accordingly, the Board will define standard data items required from dealers for each customer trade, a standard file format, and a standard telecommunications protocol by which the information can be transmitted to the CTR Subsystem. Dealers and intermediaries may choose any appropriate computer platform and processing method that will deliver the required information within the required time frame each day. The standard file format and telecommunications protocol will be specified in terms independent of any specific vendor or equipment type. The proposed standards are presented for comment in the technical specifications document accompanying this Notice.
Only municipal securities transactions between dealers and customers will be reported. Both institutional and retail customer transactions would be reported together. (Inter-dealer transactions will continue to be reported to the Board through the automated comparison system, as is currently required by rule G-14.)
Trade data submissions to the CTR Subsystem will have a number of required data items. Whereas price and par value are the most critical items for transparency purposes, certain other data items, such as dealer identity, buy/sell indicator, and capacity as agent or principal, are needed for surveillance and audit trail purposes, or for checking the validity of submitted data. Dealers' automated trade processing systems already process most of the items. The technical specifications portion of this Notice contains a discussion of several of the items and outlines their use in the CTR Subsystem. The required data elements will be:CUSIP Number Trade Date (if not Date of Submission) Par Value Traded Dollar Price Yield Dealer Identifier Buy/Sell Indicator Time of Trade Execution Dealer's Capacity (Agent/Principal), and, if Agent, Commission Charged Settlement Date, if not Regular-Way Dealer's Control Number for Transaction
The Board realizes that, as with any data input procedure, typographic and other types of errors (e.g., misplacement of a decimal point) may occasionally occur in trade data submissions. To help guard against public price and volume reporting of such errors, the CTR Subsystem will remove transactions with apparent or suspected errors before the daily report is generated. The CTR Subsystem will use automated means to check each submission to ensure that all required data items are present, data items are in the expected form and of reasonable magnitude (e.g., dollar price should be greater than $1 per $100 par value), submitted data about a trade is internally consistent (e.g., with respect to price and yield), and submissions are free of typographic errors. The system will allow dealer input to correct errors, whether detected by the dealer or by the CTR Subsystem, so that transactions are correctly recorded in the surveillance database. Feedback will be provided to dealers on trade reporting accuracy based upon validity checks done by the Subsystem.
In addition to adding customer transaction data to the surveillance database for purposes of audit trail construction, the customer transaction data also will be used to provide additional price transparency in the municipal securities market by the production and dissemination of T+1 reports summarizing the prices and volumes of securities traded. Currently, the daily report of inter-dealer transactions includes summaries of trading in each security traded four or more times during the previous business day. For each such security, the report shows the CUSIP number and summary security description, the total volume traded, the high and low dollar prices, the number of trades, and the average price of all trades in a reporting band of $100,000 to $1 million par value. With the addition of customer transactions, there are various options for formatting the daily report. As noted below, the Board is asking for comment on the format to be used for public reporting of price and volume information on customer transactions.
The Board's initial plan for the Transaction Reporting Program, announced in 1994, called for institutional customer transaction reporting and retail customer transaction reporting to begin late in 1995 and 1996, respectively. Based on the information and experience obtained in connection with inter-dealer transaction data and on the study of automated clearance data from the confirmation/acknowledgment system, the combined approach for all customer transactions is expected to be delayed somewhat from this initial projection. Testing of the CTR Subsystem with dealers is scheduled to start in July 1997 and full system implementation is to be complete in January 1998. This schedule will provide sufficient time for all dealers to modify their internal systems for transaction reporting purposes in the normal course of scheduled maintenance and development. This additional time will also provide an opportunity for service bureaus and other intermediaries to design, implement and offer services to dealers that will assist them in meeting the customer transaction reporting obligation. Following are the scheduled milestones for the Transaction Reporting Program:
December 1995 Board publishes this Notice for comment
May 1, 1996 Comment period ends
August 1996 Board files plan and proposed rule G-14 amendments with SEC for approval
Last Quarter 1996 One-year period begins during which dealers acquire systems or subscribe to services to report customer transactions
July 1997 Live testing of customer transaction reporting begins
January 1998 Mandatory customer transaction reporting begins
The following questions are provided to guide commentators in addressing issues that are of concern to the Board.
The Board believes that it is important to implement transaction reporting for essentially all municipal securities customer transactions to make the surveillance database sufficiently comprehensive to support market surveillance purposes. However, it may not be possible to include certain trades, e.g., trades in securities that are ineligible for CUSIP number assignment. Comment is requested whether certain other categories of transactions or securities should be exempted from the reporting requirement for technical reasons, such as the need for separate specialized processing of certain transactions by the dealer's internal systems.
The Board requests comment whether additional data items should be added to the requirement for more effective transaction reporting, and whether any data item proposed above is inapplicable or unobtainable in the case of certain transactions.
For certain when-issued trades, the settlement date is unknown, so for purposes of reporting price and yield the settlement date must be estimated. The Board requests comment on how best to estimate the settlement date when that date is unknown, e.g., by assuming it is 10 days after trade date (T+10), assuming it is the last day of the month, etc.
In the current daily report, the securities reported are those that were traded between dealers four or more times on the previous day. Should the listing of a given security and its price levels be determined by the total number of all trades in the inter-dealer and customer markets combined, or should some other measure of activity be the determining factor? What level of transaction activity would be an appropriate threshold for listing?
Should a security's prices and trading activity in the inter-dealer, institutional customer, and retail customer markets be reported separately, or should all transactions in an issue be combined to show total volume and price levels?
Should the daily report separate high, low and average price levels for transactions within certain par value ranges (e.g., should it separately show price levels for transactions between $5,000 - $100,000 par value and for transactions between $100,000 - $1 million)?
To approximate the average market price, the average price reported for a security in the inter-dealer market excludes very large blocks (over $1 million) and odd lots (below $100,000). Would modification of this average price reporting band make the report more useful? Should the same block size limits apply to customer transactions, and if not, what limits should be used?
Will it be possible to submit both institutional and retail customer trades together to the CTR Subsystem? Are there widespread technical or operational reasons making it easier for these two types of customer transactions to be submitted to the Board through different channels?
In submitting customer transaction data directly to the CTR Subsystem, would there be technical or operational difficulties in suppressing inter-dealer transaction data (which will continue to be reported to the comparison system)?
The Board is considering use of the four-character alphabetic over-the-counter (OTC) executing broker symbol to identify dealers in transactions. Are there technical or operational difficulties in requiring each dealer to identify its transactions by means of this symbol?
December 27, 1995
[I] See "Board to Proceed with Pilot Program to Disseminate Inter-Dealer Transaction Information," MSRB Reports, Vol. 14, No.1 (January 1994), at 13-16, and "Reporting Inter-Dealer Transactions to the Board: Rule G-14," MSRB Reports, Vol.14, No.4 (August 1994), at 7-9.
 See "Reporting Inter-Dealer Transactions to the Board: Rule G-14," MSRB Reports, Vol.14, No.5 (December 1994), at 3-6.
 "Institutional" transactions were defined for the purpose of Phase II as customer transactions settled on a delivery vs. payment/receipt vs. payment(DVP/RVP) basis. These are transactions in which the customer requires that settlement occur with an exchange of money and securities at the time of settlement. Generally, institutional customers require DVP/RVP settlement and retail customers do not.
 Phase IV is a plan to improve the public reporting of transaction data by capturing and reporting trade data during the day, instead of T+1 reporting.
 Clearance and settlement of institutional customer trades is carried out by a centralized, automated confirmation/acknowledgement system that dealers currently are required to use to help clear and settle institutional customer trades under rule G-15(d), and by ancillary systems. The centralized confirmation/acknowledgement system (formally, the Institutional Delivery (ID) System) is operated by the Depository Trust Company (DTC). See, e.g., "Report of the Municipal Securities Rulemaking Board on T+3 Settlement for the Municipal Securities Market," MSRB Reports, Vol. 14, No.2 (March 1994), at 8.
 A study of the data found that a substantial portion of trade data submissions to the confirmation/acknowledgement system are being made on T+1 or later. These late-submitted trades could not be included in T+1 price reports. An additional number of trades evidently are being cleared outside the automated system. Therefore, relying on current clearance and settlement data would give an incomplete picture of prices and volumes in the institutional customer market.
In addition, the reliability of the customer clearance data available on trade date is not sufficient for price reporting purposes. For example, only a small fraction of institutional customer data is acknowledged as correct by the dealer's contra-party by the end of the trade date. Of the remaining data, some is later acknowledged by customers by T+2 or T+3, but a substantial portion is not. Thus, on T+1 it is not possible to distinguish which transactions are being submitted with correct price and volume and which are not.
Although it would be possible to attempt to address the major deficiencies through a variety of system changes and enforcement efforts, this endeavor essentially would amount to changing the confirmation/acknowledgment system from its primary purpose of confirming transactions and facilitating settlement to a system primarily designed for T+1 price reporting. Even assuming these efforts would be successful, the resulting system would be unlikely to achieve the same timeliness, completeness and accuracy as a system specifically designed for T+1 price reporting.
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