(Volume 16, Number 2) JUNE 1996
Route To: Manager, Muni Department Trading Sales Operations Compliance
Notice Under Board rule G-14, dealers must report their inter-dealer transactions to the Board each day.Failure to make timely and accurate transaction reports may subject dealers to enforcement actions by the NASD, bank regulatory agencies or the Securities and Exchange Commission. This notice includes an overview of the Board's Transaction Reporting Program, a brief summary of the procedures for transaction reporting and a description of the most common reporting errors that should be avoided by dealers.
Questions about this notice may be directed to the Board's Transaction Reporting Department.
The Board has implemented the Transaction Reporting Program to accomplish two major objectives in the municipal securities market: to provide price transparency and to provide an audit trail of transactions that can be used for market surveillance and enforcement of Board rules. Phase I of the Program, which is limited to inter-dealer transactions, became operational in January 1995. The Board plans to expand the Program to include reporting of customer transactions by January 1998 and, eventually, to move toward intra-day reporting of transactions.
In Phase I, dealers report inter-dealer municipal securities transactions on the night of trade date through the automated comparison system operated by National Securities Clearing Corporation (NSCC). By arrangement with NSCC, the trade data and certain associated reports are provided to the Board each night. On the following morning, the Board releases a summary report containing certain price and volume information about the previous business day's transactions ("T+1 price report"). Price and volume information currently is being made public for each issue that, on a given day, trades four or more times. To accomplish the audit trail function, the Board stores all trade data reported by dealers in a comprehensive surveillance database which is made available to the agencies responsible for enforcement of Board rules. In addition to serving these purposes, transaction data in the Phase I surveillance database is used to compute monthly transaction fees that provide revenue for Board operations.
Need for Timely and Accurate Trade Reporting Both the transparency and the audit trail functions of the Program make it important that the transaction information reported under Phase I be as timely, accurate, and complete as possible. A dealer's failure to submit trade data in a timely and accurate manner constitutes a violation of rule G-14 on transaction reporting and, because the Phase I transaction reports are provided in the context of the automated comparison process, also may violate Board rule G-12(f) on automated comparison.
To assist dealers in complying with these rules and submitting transactions correctly, the Board is providing the following guidance on the procedures for transaction reporting.
Transaction Information Dealers must report specific items of information about each inter-dealer trade under rule G-14. In general, this is the same information identity of the clearing parties, buy/sell indicator, CUSIP number, par value, trade and settlement dates, final monies, etc. that is required by the automated comparison system to produce a compared trade on the night of trade date. The two additional items of information that currently are required by rule G-14 are: (i) the identity of the executing dealers (i.e., the dealers that actually executed the transaction, which may differ from those that submitted the transaction data for clearing); and (ii) the accrued interest for any transaction for which the settlement date is known. Although these are optional input items for purposes of automated comparison, they are mandatory input under rule G-14.
Time-of-Trade Information Beginning on July 1, 1996, the time of trade execution also will be required information under rule G-14. Adding this information will require dealers to use a new trade input format for the automated comparison system. NSCC currently is testing with dealers the system changes needed to incorporate this new function. The Board encourages dealers at this time to make any internal system changes that are necessary to provide this information and to test them with NSCC as soon as possible.
Basic Procedures for Reporting Transaction Information The procedures that dealers must use for transaction reporting under rule G-14 generally are the same ones used for automated comparison of transactions under rule G-12(f), with some minor additions. Information about each inter-dealer trade must be reported to NSCC, either directly or through an intermediary. Intermediaries include clearing brokers who agree to submit transactions for automated comparison on behalf of other dealers and registered clearing agencies linked with NSCC for purposes of comparison. Rule G-14 requires that the trade information be submitted to NSCC in sufficient time to produce a compared trade in the initial comparison cycle. Normally, this requires that NSCC receive the information by midnight of trade date.
The automated comparison procedures generally require both the "buy" and "sell" sides of a transaction to input the trade correctly on trade date to produce a compared trade in the initial comparison cycle. If a dealer fails to submit a trade correctly in the initial comparison cycle and the contra-party does correctly submit the trade, the dealer will receive an "advisory" notice through NSCC. If the information items necessary for settlement are correct on the advisory, the dealer who failed to submit correctly then must "stamp" the advisory to produce a compared trade. If a trade must be submitted late, and no advisory exists to be stamped, the dealer and its contra-party both must submit the trade to NSCC with a code indicating that it is "as of" a specific trade date. This will result in a compared trade. As described in more detail below, other "post-original-comparison" procedures also are available to help ensure that a comparison is obtained for each valid inter-dealer trade. Use of these procedures is required under rule G-14 and rule G-12(f) to help ensure that each valid inter-dealer trade is compared.
An examination of transaction records in the surveillance database has revealed several common reporting errors made by dealers. These errors constitute violations of rule G-14, affect the completeness and accuracy of the T+1 price reports published by the Board, and may affect the accuracy of the surveillance database. The following guidelines will help dealers avoid the most common errors.
Submit trade information on trade date "Stamped advisories" and "as of" submissions reflect trades that were not successfully compared on trade date. As such, they represent trades not included in the T+1 price reports and thus diminish the transparency function of the Program. Dealers with high percentages of "stamped advisories" or "as of" submissions should monitor the reasons for trades being compared by "stamped advisories" and "as of" submissions and should revise internal procedures as necessary to input these trades correctly, on trade date.
Accurately submit all the information necessary for comparison Submitting inaccurate trade information will not produce a compared trade but will cause an advisory notice with incorrect data to be sent to the contra-party. The contra-party will not (and should not) stamp an advisory if the advisory has inaccurate information crucial to settlement, such as CUSIP number, par value, final monies, or settlement date. A dealer that is submitting a relatively high number of trades that its contra-parties refuse to "stamp" should determine whether these submissions represent inaccurate trade data. If so, corrective procedures should be implemented to improve the accuracy of submissions. Alternatively, if a dealer determines that the uncompared submissions represent accurate trade information on valid trades that were not stamped by the contra-parties, the dealer should make use of "demand-as-of" procedures to obtain compared trades, as discussed below.
Avoid inaccurate take-down submissions One type of submission the syndicate take-down submission is an exception to the general rule that both the buy and sell sides submit a trade report. For take-down trades, the automated comparison system requires that only the syndicate manager submit the trade. Syndicate managers should specifically take care to ensure that these transactions are submitted correctly since they automatically are considered to be "compared" by the automated comparison system and thus automatically are eligible for inclusion in the T+1 price reports.
Correctly communicate information about new issues Under rule G-34(a)(ii)(D), underwriters must communicate to a registered clearing agency the final interest rate and maturity information, and the settlement date, for a new issue as soon as this information is known. This information is needed by the Transaction Reporting System (and the registered clearing agency) for accurate calculation of price and final monies and for successful comparison and settlement of "when, as and if issued" transactions in the new issue. Underwriters of new issues should take particular care to ensure that this information is provided to the registered clearing agency in a timely fashion since failure to do so may result in the T+1 price reports being incomplete.
Monitor deletes and withholds Inaccurate take-down submissions, as well as other trades that have been "compared," may be removed from the comparison system under certain circumstances by use of procedures known as "one-sided deletes" and "withholds." Although it is important that these procedures be used to correct erroneous trade data that has become "compared," dealers that have significant numbers of one-sided deletes and withholds lodged against their submissions should review such transactions to determine if data is being entered correctly.
Ensure that each valid trade is eventually compared Even though a trade may fail to compare in the initial comparison cycle and thus may not be included in the T+1 price reports, it nevertheless is important that each valid trade be successfully compared, both for purposes of clearance and settlement and so that the trade will appear in the surveillance database. Failure to take the necessary steps to obtain a compared trade is a violation of rule G-14 on transaction reporting and rule G-12(f) on automated comparison. Therefore, while dealers should seek to minimize the number of stamped advisories and as-of submissions, they must not violate rules G-12(f) and G-14 by refusing to stamp an advisory of an accurately reported trade that has not otherwise been compared. If a contra-party refuses to stamp a legitimate advisory, the submitting dealer should submit a "demand-as-of" submission in the automated comparison system to obtain a compared trade. When the "demand-as-of" procedure is used, a contra-party's inaction will result in a compared trade.
Correctly report accrued interest whenever the settlement date is known For trades in which the settlement date is known at the time of trade, the Transaction Reporting system calculates dollar price from final monies submitted by dealers. Failure to report accrued interest, or reporting incorrect accrued interest, may result in an inaccurate dollar price on the T+1 price reports and in the surveillance database. If accrued interest is zero on a transaction, it should be reported as such. Dealers should review their internal procedures to ensure that accrued interest is included as trade data on all transactions for which the settlement date is known.
Correctly report the identity of the "executing brokers" Each transaction submitted should include not only the identity of the parties "clearing" the transaction, but also the identity of the dealers that actually executed the trade. This means that, in addition to providing the "clearing numbers" (e.g., "0123") used for purposes of automated comparison, it also is necessary, under rule G-14, to provide the appropriate NASD "executing broker symbol" (e.g., "ABCD") in the fields in automated comparison formats for "executing brokers." Should any dealer executing inter-dealer trades not already have an assigned executing broker symbol, it should be obtained as soon as possible. Although the executing broker symbols, are not considered by NSCC for purposes of comparison, the identities of the executing brokers are important to the surveillance database because they enable enforcement agencies to construct audit trails.
Clearing brokers who submit transactions on behalf of other dealers and who receive monthly invoices for the transaction fee will also benefit by accurate reporting of executing broker information. Executing broker information is shown on the monthly invoice to help the clearing broker identify the executing dealers on whose behalf it has submitted transactions. Incorrect identification of executing brokers in transaction reports will affect the accuracy of the executing broker information provided on these invoices. It should be noted that erroneous executing broker information does not affect the total amount of the fee billed to a specific clearing number, which will be accurate based upon total par value of compared transactions for that clearing broker number.
The table below depicts correct and incorrect ways of identifying dealers in reports of transactions.
CORRECT AND INCORRECT REPORTING OF DEALER IDENTITIES ________________________________________________________________
DATA REPORTED BY THE CLEARING DEALER ________________________________________________________________
EXECUTING CLEARING CLEARING EXECUTING FIRM FIRM FIRM FIRM (SELL SIDE) (SELL SIDE) (BUY SIDE) (BUY SIDE) ________________________________________________________________
CORRECT ABCD 0123 0789 EFGH
INCORRECT 0123 0789 EFGH (The sell/ side executing dealer has not been identified) ________________________________________________________________
INCORRECT 0123 0123 0789 EFGH (Dealer 0123 has not identified its executing dealer properly) ________________________________________________________________
INCORRECT ABCD 0123 0789 3456 (Dealer 0789 has identified its executing dealer by number instead of by an executing broker symbol) ________________________________________________________________
May 28, 1996
 "See Reporting Customer Transactions," MSRB Reports, Vol.16, No. 3 (January 1996) at 15-18.
 The transaction fee was approved by the SEC on May 10,1996, and went into effect for transactions that settled after March 1, 1996. See MSRB Reports, Vol. 16, No. 2 (June 1996) at 13.
 See "Reporting Time of Trade to the Board in Inter-Dealer Transactions," MSRB Reports, Vol. 16, No. 2 (June 1996) at 7-8.
 See "Fixed Income Transaction System: MSRB Requirement for Time-of-Trade Submission Testing," NSCC Important Notice A4405 (March 27, 1996) and Important Notice A4370 (February 6, 1996).
 As discussed below, syndicate "take-down" trades are submitted only by the syndicate manager.
 Rule G-12(f), for example, states: "In the event that a transaction submitted to a registered clearing agency for comparison in accordance with the requirements of [rule G-12(f)(i)] shall fail to compare, the party submitting such transaction shall 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 dealer without an executing broker symbol may obtain one from NASD Subscriber Services by calling (800) 777-5606 and denoting itself specifically as a MUNICIPAL securities dealer.
 When customer transactions are added to the Board's Program, executing dealers will be reported to the Board, but clearing dealers in customer trades will not. For that purpose, the executing broker symbol will be a mandatory input item.
 Stamped advisories also may cause erroneous information about executing broker identities to be included on monthly transaction fee invoices. When a dealer stamps an advisory, the executing broker information for the dealer's side of the trade is taken from the contra-party's submission.
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