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Rule G-14
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Background Rule G-14 requires a dealer which distributes or publishes a report of a sale or purchase of municipal securities to know or have reason to believe that the purchase or sale was actually effected and no reason to believe that the transaction is fictitious or in furtherance of any fraudulent, misleading or deceptive purpose. A report of a short sale is not prohibited by the rule. Further, Rule G-14 requires each dealer to report every municipal security transaction to the Board or its designee. Such information collected by the Board will be used to make public reports of market activity and prices, and also will be made available to the Commission and the agencies charged with inspection for compliance with, and enforcement of, Board rules. The associated Transaction Reporting Procedures define certain details of inter-dealer transaction reporting. Further information and specifications are contained in the User's Manual and in various notices, all of which are on the MSRB's web site (www.msrb.org)
Notice Concerning Executing Broker Symbols: Rule G-14 December 16, 1996 MSRB Rule G-14 on Transaction Reporting requires that every dealer obtain an executing broker symbol, if one has not already been assigned, from National Association of Securities Dealers Automated Quotations (NASDAQ). NASDAQ will assign executing broker symbols to all dealers including bank dealers. NASDAQ Subscriber Services can be reached at 212-231-5180, option 3. When calling NASDAQ Subscriber Services for an executing broker symbol, dealers should state that they need the symbol for use in reporting transactions in municipal securities to the MSRB. If dealers experience difficulties in obtaining executing broker symbols, then they can send an e-mail to subscriber@NASDAQ.com. NOTE: This notice was revised to reflect updated information. Rule G-14 Transaction Reporting Procedures—Time of Trade Reporting August 1, 1996 1. Q: When is the inter-dealer time of trade reporting requirement effective? A: The amendment to the rule G-14 transaction reporting procedures requiring the submission of time of trade execution for inter-dealer transactions became effective on July 1, 1996. 2. Q: What is the purpose of submitting the time of trade to the Board? A: The Board’s Transaction Reporting Program has two functions – public dissemination of price and volume information about frequently traded securities and the maintenance of a surveillance database to assist regulators in inspection for compliance with, and enforcement of, Board rules and securities laws. The surveillance database includes, among other things, the price and volume of each reported transaction, the trade date, the identification of the security traded, and the parties to the trade. The addition of the time of trade execution will enable the enforcement agencies to construct audit trails of inter-dealer transactions. When customer transactions are added to the system in 1998, these transaction records also will include time of trade. Time of trade will not be made public. 3. Q: How is time of trade reported? A: Under rule G-14, inter-dealer transaction information is reported to the Municipal Securities Rulemaking Board using the same system used for automated comparison of inter-dealer transactions, operated by National Securities Clearing Corporation. Rule G-14 requires that the transaction information be submitted in the format specified by NSCC, and within such timeframe as required by NSCC to produce a compared trade for the transaction in the initial comparison cycle on the night of trade date. A broker, dealer or municipal securities dealer may employ an agent that is a member of NSCC or a registered clearing agency for the purpose of submitting transaction information. For example, the clearing broker generally reports transactions to the MSRB through NSCC when there is an introducing/clearing broker arrangement. Under the new amendment to rule G-14, the transaction information submitted in accordance with the rule G-14 procedures must include the time of trade execution. NSCC has provided a space designated for this purpose in the standard format used for submitting trade data into the automated comparison system. 4. Q: Which dealer in an inter-dealer transaction reports the time of trade? A: Under NSCC’s automated comparison procedures, both sides of a transaction generally are required to submit transaction information. Therefore, time of trade will be reported by each side of the transaction in most cases. For "syndicate take-down" transactions, which are reported by only the seller, the time of trade is reported only by the seller. 5. Q: If the time of trade that I submit does not agree with the time of trade that the contra party submits, will this cause the trade not to compare? A: No. The time of trade is not a match item in the automated comparison system. 6. Q: Why do both sides to the transaction have to submit the time of trade? A: In some cases, even though both sides of a transaction are supposed to submit transaction information, the Board receives transaction information from only one party to a transaction. This may occur, for example, when a dealer "stamps an advisory" to create a compared trade. It therefore is necessary for each side of a transaction to report the time of trade to ensure that the surveillance data base has at least one report of the time of trade. 7. Q: Does the time of trade reporting requirement apply only to secondary market transactions? A: No. The time of trade is required for all inter-dealer transactions including those in the primary market. 8. Q: How does a dealer determine the time of trade for transactions? A: In general, this is the same time as the "time of execution," as currently required for recordkeeping purposes under rule G-8(a)(vi) and (vii). 9. Q: What is the time of trade for syndicate allocations on new issues? A: First it should be noted that the "initial trade date" for an issue of municipal securities cannot precede the date of award (for competitive issues) or the date that the bond purchase agreement is signed (for negotiated issues). See rule G-34(a)(ii)(C)(2) and MSRB Interpretations of April 30, 1982, MSRB Manual and October 7, 1982, MSRB Manual. Similarly, the time of trade may not precede the time of award (for competitive issues) or the time that the bond purchase agreement is signed (for negotiated issues). In the typical case involving a competitive issue in which allocations are made after the date of award, the time of trade execution is the time that the allocation is made. If allocations have been "preassigned," prior to a competitive award, or prior to the signing of a bond purchase agreement, the time of award or signing of the bond purchase agreement should be entered as the "time of trade." Reminder Regarding MSRB Rule G-14 Transaction Reporting Requirements March 3, 2003 The Municipal Securities Rulemaking Board (“MSRB”) and NASD would like to remind brokers, dealers and municipal securities dealers (collectively “dealers”) about the requirements of MSRB Rule G-14, on transaction reporting. This document also describes services provided by the MSRB designed to assist dealers in complying with Rule G-14. Transactions reported to the MSRB under Rule G-14 are made available to the NASD and other regulators for their market surveillance and enforcement activities. The MSRB also makes public price information on municipal securities transactions using data reported by dealers. One product is the Daily Report of Frequently Traded Securities (“Daily Report”) that is made available to subscribers each morning by 7:00 am. Currently, it includes details of transactions in municipal securities issues that were “frequently traded” the previous business day.[1] The Daily Report is one of the primary public sources of municipal securities price information and is used by a variety of industry participants to evaluate municipal securities. [2] Dealers can monitor their municipal transaction reporting compliance in several ways. For customer and inter-dealer transaction reporting, the MSRB Dealer Feedback System (“DFS”) provides monthly statistical information on transactions reported by a dealer to the MSRB and information about individual transactions reported by a dealer to the MSRB. For daily feedback on customer trades reported, the MSRB provides dealers a “customer report edit register” on the day after trades were submitted. This product indicates trades successfully submitted and those that contained errors or possible errors.[3] For inter-dealer transactions, National Securities Clearing Corporation (“NSCC”) provides to its members daily files, sometimes called “contract sheets,” that can be used to check the content and status of the transactions the member has submitted. Inter-Dealer TransactionsEven before Rule G-14 imposed requirements for transaction reporting, MSRB Rule G-12(f), on use of automated comparison, clearance and settlement systems, required dealers to submit data on their inter-dealer transactions in municipal securities to a registered clearing agency for automated comparison on trade date (“T”). NSCC provides the automated comparison services for transactions in municipal securities. The same inter-dealer trade record dealers submit to NSCC for comparison also is used to satisfy the requirements of MSRB Rule G-14 to report inter-dealer transactions to the MSRB. NSCC forwards the transaction data it receives from dealers to the MSRB so that dealers do not have to send a separate record to the MSRB. However, satisfying the requirements for successful trade comparison under Rule G-12(f) does not, by itself, necessarily satisfy a dealer's Rule G-14 transaction reporting requirements. In addition to the trade information necessary for a successful trade comparison, Rule G-14 requires dealers to submit accrued interest, time of trade (in military format) and the effecting brokers' (both buy and sell side) four-letter identifiers, also known as executing broker symbols (“EBS”). Failure to include accrued interest, time of trade and EBS when submitting transaction information to NSCC's automated comparison system is a violation of MSRB Rule G-14 on transaction reporting even though the trade may compare on T. As noted above, the MSRB provides dealers with statistical measures of compliance with some important aspects of MSRB Rules G-12 and G-14 through its Dealer Feedback System.[4] The statistics available for inter-dealer trades include:
Note on Stamped AdvisoriesFirms often stamp advisories on T+1 after failing to submit accurate inter-dealer transaction information on trade date. A stamped advisory essentially is a message sent through the NSCC comparison system by the clearing firm on one side of a trade indicating that it agrees with the trade details submitted by the contra party. A significant percentage of stamped advisories is a concern for two reasons. First, trades compared via a stamped advisory cannot be published in the Daily Report because they do not compare on trade date. Second, unless the dealer stamping the advisory verifies every data element submitted by the contra party (including accrued interest, time of trade and EBS) stamping the advisory may effectively confirm erroneous data about the trade, which will be included in the surveillance data provided to market regulators. With particular respect to EBS, both the MSRB and the NASD have observed that dealers do not always include accurate contra parties' EBSs in transaction reports. As a result, when a firm “stamps” a contra party's submission, its own EBS may not be correctly included in the transaction report sent to the MSRB. In lieu of stamping an advisory, it is possible for a dealer to submit an “as of” trade record to match an advisory pending against it. This serves the same purpose as stamping an advisory but in addition allows the dealer to input its own EBS (and other data elements) and thus ensure the accuracy of the information about its side of the trade. While the trade will still be reported late, the data about the trade will be more likely to be correct. Note on Clearing Broker-Correspondent IssuesWhile Rule G-14 notes that accurate and timely transaction reporting is primarily a responsibility of the firm that effected a trade, it also notes that a firm may use an agent or intermediary to submit trade information on its behalf. For inter-dealer trades, a direct member of NSCC must be used to input transaction data if the dealer effecting the transaction is not itself a direct member. This Rule G-14 requirement that a clearing broker and correspondent work together to submit transaction reporting data in a timely and accurate manner is the same as exists in Rule G-12(f) on inter-dealer comparison. Where there is a clearing-correspondent relationship between dealers, timely and accurate submission of trade data to NSCC generally requires specific action by both the direct member of NSCC (who clears the trade) as well as the correspondent firm. The MSRB has noted that the responsibility for proper trade submission is shared between the correspondent and its clearing broker.[7] Clearing brokers, their correspondents and their contra-parties all have a responsibility to work together to resolve inaccurate or untimely information on transactions in municipal securities. A clearing firm's use of a large number of stamped advisories may indicate systemic problems with the clearing broker's procedures, the correspondents' procedures, or both.[8] Customer TransactionsDealers that engage in municipal securities transactions with customers also are required to submit accurate and complete trade information to the MSRB by midnight of trade date under Rule G-14. MSRB customer transaction reporting requirements include the reporting of time of trade and the dealer's EBS for each trade. Dealers have flexibility in the way they report customer transactions to the MSRB Transaction Reporting System. The three options available allow dealers to: 1) transmit customer transaction data directly to NSCC, which, using its communications line with MSRB, forwards trade data to the MSRB the evening on which it is received; 2) send the data via an intermediary, such as a clearing broker or service bureau, to NSCC, which forwards the data to the MSRB; or 3) submit the data directly to the MSRB using a PC dial-up connection and software provided by the MSRB. The MSRB Dealer Feedback System also provides dealers with performance statistics for customer trade reporting. These statistics include:
Questions / Further InformationQuestions about this notice may be directed to staff at either MSRB or NASD. At MSRB, contact P. John Baughman, Senior Data Analyst, or Justin R. Pica, Uniform Practice Specialist, at (703) 797-6600. At NASD's Department of Member Regulation, contact Malcolm Northam, Director, Fixed Income Securities, at (202) 728-8085, or Cynthia Friedlander, Regulatory Specialist, at (202) 728-8133. For more information on transaction reporting, including questions and answers and the customer transaction reporting system user guide, or to sign up for the Dealer Feedback System, we encourage dealers to visit the MSRB Web site at www.msrb.org, particularly the Municipal Price Reporting / Transaction Reporting System section. Endnotes 1 The Daily Report is available by subscription at no cost. Currently, “frequently traded” securities are those that traded two or more times during a trading day. As noted below, inter-dealer transactions must be compared on trade date to be eligible for this report. 2 The MSRB also publishes a “Daily Comprehensive Report,” providing details of all municipal securities transactions that were effected during the trading day one week earlier. The Daily Comprehensive Report is available by subscription for $2,000 per year. Along with trades in issues that are not “frequently traded,” this report includes transactions reported to the MSRB late, inter-dealer trades compared after trade date, and transaction data corrected by dealers after trade date. 3 A dealer may call the MSRB at (703) 797-6600 and ask to speak with a Transaction Reporting Assistant who can check to see if its firm is signed up for this free service. 4 A complete description of the service is available at www.msrb.org in the Municipal Price Reporting / Transaction Reporting System section. NASD also has informed dealers of this service in “Municipal Transaction Reporting Compliance Information,” Regulatory and Compliance Alert (Summer 2002). 5 Under NSCC procedures, no buy-side trade report should be submitted for comparison against a syndicate “takedown” trade submitted by the syndicate manager. Syndicate transactions are “one-sided submissions” and compare automatically after being submitted by the syndicate manager. Paragraph (a) (ii) of Rule G-14 procedures thus requires that only the syndicate manager submit the trade. 6 The EBS statistics reflect the aggregate number of such errors found in transaction data submitted by a particular NSCC member firm for itself and/or for its correspondents. This statistic cannot be generated individually for each correspondent because the EBS needed to identify the correspondent is itself missing or invalid. EBS statistics only measure the validity of the input the submitter provides to identify its own side of the trade and do not measure the accuracy with which a dealer uses EBSs to identify its contra-parties. 7 In 1994, the MSRB stated that, “introducing brokers share the responsibility for complying with [Rule G-12(f)] with their clearing brokers. Introducing brokers who fail to submit transaction information in a timely and accurate manner could subject either or both parties to enforcement action for violating [Rule G-12(f)].” See “Enforcement Initiative,” MSRB Reports, Vol. 14, No. 3 (June 1994) at 35. NASD has since reiterated this policy; see the following articles in Regulatory and Compliance Alert: “Introducing Firm Responsibility When Reporting Municipal Trades Through Service Bureaus and Clearing Firms” (Winter 2000) and “Municipal Securities Transaction Reporting Compliance Information” (Spring 2001). 8 As explained above, one of the problems often associated with stamped advisories is that the EBS on transaction records may be missing or inaccurate. Since a clearing broker may have many correspondents, stamping an advisory can make it impossible for market regulators to know which correspondent actually effected the trade. 9 Of course, if the initial information reported to the MSRB, such as total par value, is changed, the trade record must be amended to make it correct. Reminder Regarding Accuracy of Information Submitted to the MSRB Transaction Reporting System: Rule G-14 February 10, 2004 The Municipal Securities Rulemaking Board (“MSRB”) wishes to remind brokers, dealers and municipal securities dealers (collectively “dealers”) of the need to carefully monitor error reports sent by the Transaction Reporting System on T+1. Under Rule G-14, dealers are required to report all transactions to the MSRB on trade date and have an obligation to report the information specified in the Transaction Reporting Procedures accurately and completely. The MSRB provides several services that allow dealers to monitor their transaction reporting compliance. The MSRB Dealer Feedback System (“DFS”) provides a “snapshot” report two days after trade date of inter-dealer transactions reported. The DFS also provides a monthly report covering both customer and inter-dealer transactions that provides statistical information on transactions reported and information about individual transactions. An important report, that should be reviewed daily, is the report that provides feedback on customer transactions. This report is known as the “customer report edit register” and it indicates trades successfully submitted and those that contained errors or possible errors.[1] In addition to the reports the MSRB generates to assist dealers in their compliance with Rule G-14, staff members of the MSRB's Transaction Reporting Program contact various dealers on a daily basis to alert them to specific errors or possible errors. However, the MSRB cannot contact each dealer with a transaction reporting error or possible error on a daily basis. Dealers should review the customer report edit register and make any necessary corrections to ensure trades are reported accurately with valid formats and values. Failure to do so will affect the accuracy of the information published in price transparency reports as well as the information retained in the surveillance database.[2] For additional information on the services the MSRB provides to assist dealers in complying with Rule G-14, please visit the Transaction Reporting System section of the MSRB's web site at www.msrb.org or call the MSRB at 703-797-6600 and ask to speak with a Transaction Reporting Assistant. Endnotes 1 For additional information about these services and the compliance information they provide, see “Reminder Regarding MSRB Rule G-14 Transaction Reporting Requirements,” MSRB Notice 2003-7 dated March 3, 2003, on www.msrb.org. 2 Transactions reported to the MSRB are made available to the NASD and other regulators for their market surveillance and enforcement activities. Reporting of Transactions Arising from Repurchase Agreements: Rule G-14 June 18, 2004 The MSRB has received inquiries from dealers as to whether they must report purchase and sale transactions that arise from repurchase agreements as “transactions” under Rule G-14, on transaction reporting. Typically, a bona fide, properly documented repurchase agreement (“repo”) is an agreement consisting of two transactions whereby one party purchases securities from a second party, and the second party agrees to repurchase the securities on a certain future date at a price that will produce an agreed-upon rate of return. The parties may be dealers, investors, or others. There is a repo program known to the MSRB in which one party to the repo transaction is a dealer and the other party is a customer, so this type of repo results in a sequence of two customer transactions. The Transaction Reporting Program, which disseminates prices of municipal securities trades reported to the Board by dealers under Rule G-14, has an objective to provide price transparency about the current market. Repos, however, are not the type of transactions that were intended for reporting under Rule G-14. This is because the paired transactions of a repo function as a financing agreement and the underlying transactions, while technically purchase-sale agreements, are not necessarily effected at market prices. Since there is no way in today's batch Transaction Reporting System to suppress customer transaction reports from being portrayed as market prices, dealers should not report repos to the current Transaction Reporting Program. This approach is consistent with the practice for reporting of corporate bond transactions to the NASD's TRACE system, in that NASD advises dealers not to report corporate bond repo transactions.[1] In January 2005, the MSRB plans to begin operation of the Real-Time Transaction Reporting System (RTRS) and to require reporting of transactions in real-time under a proposed change to Rule G-14.[2] In RTRS there is an indicator by which a dealer can report that a trade was done under special conditions, including trades done at other than the market price.[3] The MSRB plans to amend the RTRS specifications to add a value to this indicator by which a dealer would report that a transaction was done at a price away from the market because it was a customer transaction and was part of a repo. Such reporting will support the creation of a complete “audit trail” for market surveillance purposes. The indicator in this case will cause the trade to be suppressed from publication to avoid misleading transparency reports. When the RTRS Specification is amended to add the value for “repo not at market price,” an effective date will be stated for required reporting of such repos. Between January 2005 and the effective date of the amended Specification, dealers have the option to report such repos, or not, depending upon the configuration of their trade reporting systems. Before the effective date, if a dealer reports a repo that is a customer transaction away from the market, the report should include the value “R004” in the SPXR field, to indicate that it is a non-market price with “reason not listed” among currently used values. ENDNOTES 1 See, e.g., “TRACE Frequently Asked Questions (Reporting)” on www.nasd.com/mkt_sys/trace_faqs_reporting.asp. 2 The proposed amendment was filed with the Commission on June 1, 2004. See “Real-Time Transaction Reporting: Notice of Filing of Proposed Rule Change to Rules G-14 and 12(f),” Notice 2004-13, on www.msrb.org. 3 See Specifications for Real-time Reporting of Municipal Securities Transactions, Version 1.2, section 4.3.2, field “SPXR.” Reminder Notice on “List Offering Price” And Three-Hour Exception for Real-time Transaction Reporting: Rule G-14 December 10, 2004 The MSRB has received questions concerning the meaning of “list offering price” in Rule G-14 Real-Time Transaction Reporting Procedures. As used in this context, the term means the publicly announced “initial offering price” at which a new issue of municipal securities is to be offered to the public. Real-time transaction reporting requires dealers to report most transactions within fifteen minutes of the time of trade execution.[1] Transactions effected at the “list offering price” by syndicate or selling group members[2] on the first day of trading in a new issue are eligible for an exception found in Rule G-14 RTRS Procedures section (a)(ii)(A). Such transactions instead are required to be reported by the end of the day. Note that syndicate and selling group members are not required to wait to report such transactions at the end of the day and may choose to report prior to the end of the day. The exception from fifteen-minute transaction reporting for list-price syndicate trades is based on operational difficulties that otherwise might be presented for dealers when large numbers of transactions at the initial offering price must be reported by a dealer at one time. The MSRB viewed these operational considerations as sufficiently important to allow trades to be reported at the end of the day given that the price of such trades (the “list offering price”) is public. Note that transactions by syndicate or selling group members at prices other than the “list offering price” on the first day of trading in a new issue are required to be reported within fifteen minutes of the time of trade execution. For example, transactions between the syndicate manager and syndicate members (“takedown” transactions) that are at prices other than the “list offering price” must be reported within fifteen minutes of the time of execution. Similarly, transactions done at offering prices that have not been publicly announced, e.g. “not reoffered” prices, also must be reported within fifteen minutes of the time of execution since these prices are not public. Questions also have been asked about the availability of the three-hour trade reporting exception found in Rule G-14 RTRS Procedures section (a)(ii)(C). When a dealer effects a trade in an issue it has not traded in the past year and does not have CUSIP numbers and indicative data for the issue in its securities master file used to process trades for confirmations, clearance and settlement, it is allowed three hours to report.[3] This exception is designed to allow a dealer time to set-up a security it has not traded and is available for transactions on the first day of trading in a new issue. Note this exception is not available for syndicate and selling group members. ENDNOTES [1] Rule changes to MSRB Rules G-14, on transaction reporting, and G-12(f), on automated comparison of inter-dealer transactions, that will require dealers to report transactions in real-time become effective January 31, 2005. See MSRB Notice 2004-36 (November 17, 2004) on www.msrb.org. [2] References to “syndicate and selling group members” in this context are meant to include managers of syndicates as well as sole underwriters or placement agents in non-syndicated offerings. [3] The three-hour exception sunsets one year after real-time transaction reporting is implemented. Real-Time Transaction Reporting: January 10, 2005 Full implementation of real-time transaction reporting rules will take place on January 31, 2005.[1] As dealers prepare for this event, various questions related to transaction reporting requirements and the transition to real-time transaction reporting have been posed to MSRB staff. Some of the subjects frequently discussed with dealers are included below. Regulatory Information Required on Inter-Dealer Transactions Rule G-12(f) requires dealers to submit data on their inter-dealer transactions in municipal securities to National Securities Clearing Corporation (NSCC) for automated comparison. The same inter-dealer trade record submitted to NSCC for comparison also is used to satisfy the transaction reporting requirements of Rule G-14. However, satisfying the requirements for successful trade comparison under Rule G-12(f) does not, by itself, satisfy a dealer's transaction reporting requirements. Dealers using the new RTTM Web capabilities provided by NSCC to compare trades should be particularly careful to ensure that all MSRB-required data is being properly entered. For real-time transaction reporting, the Specifications for Real-Time Reporting of Municipal Securities Transactions lists the trade details required by NSCC for comparison and the additional items of information required by the MSRB. Dealers are required to provide both types of information on inter-dealer trade reports submitted for comparison at NSCC. As is currently required in the present “batch” transaction reporting system, these additional items include, among others, time of trade and the Effecting Broker Symbol (EBS) for both the sell-side and buy-side of each transaction. Beginning January 31, 2005, each dealer that is a party to a transaction also will be required to identify whether it acted as agent or as principal on the transaction. These items of information required by the MSRB on inter-dealer trade reports are necessary for a complete audit trail. Failure to correctly include these additional items on inter-dealer trade reports represents a violation of Rule G-14.[2] Time of trade and EBS have been required reporting fields for many years and the MSRB has noted that a number of trade reports are now being entered through RTTM Web without this information. Processing Step Out Deliveries Beginning January 10, 2005 the procedure for comparing “step out deliveries” through NSCC's automated comparison system changes.[3] A “step out delivery” for this purpose is a transfer of securities between dealers using the facilities of NSCC's automated comparison system that is not the result of a purchase-sale transaction between the dealers.[4] Since trade data submitted for automated comparison also is sent to the MSRB to satisfy a dealer's requirement to report transactions, dealers effecting “step out deliveries” should refer to NSCC's procedures so that the delivery is not reported to the MSRB as a transaction.[5] The MSRB reminds dealers that erroneously reporting a “step out delivery” as an inter-dealer transaction is a violation of Rule G-14. Similarly, it is a violation of Rule G-14 for a dealer to use the “step out” procedure on an inter-dealer purchase-sale transaction. Questions about whether a particular type of delivery is reportable as an inter-dealer purchase-sale transaction may be directed to MSRB staff and additional clarifying notices will be published as necessary. Clarification of “Time of Trade” on Transaction Reports Dealers are required to include time of trade (along with trade date) on all transaction reports. Transaction reporting procedures define “time of trade” as the time when a contract is formed for a sale or purchase of municipal securities at a set price and set quantity. For transaction reporting purposes, this is considered to be the same as the time that a trade is “executed.” Although existing recordkeeping rules and trade reporting rules already require the dealer to know the time of trade, the requirement in real-time transaction reporting to report most transactions within fifteen minutes of the time of trade places additional importance on the term.[6] The time that the trade is executed is not necessarily the time that the trade information is entered into the dealer's processing system. For example, if a trade is executed on a trading desk but not entered for processing until later, the time of execution (not the time of entering the record into the processing system) is required as the “time of trade.” Similarly, when a dealer executes a transaction outside of the RTRS Business Day,[7] the time the trade was executed (rather than the time that the trade report is made) is the “time of trade” required to be reported. For new issue securities, a transaction effected on a “when, as and if issued” basis cannot be executed, confirmed and reported until the municipal security has been formally awarded by the issuer. For a negotiated issue, this “time of formal award” is defined as the time of the signing of the bond purchase agreement and for competitive issues it is the time of the official award by the issuer. While dealers may take orders for securities and make conditional trading commitments prior to the award, dealers can not execute transactions, send confirmations or make a trade report prior to the time of formal award. Once a new issue of municipal securities has been formally awarded, trade executions can begin. The time of execution then is reported to the MSRB on the trade report.[8] ENDNOTES [1] See “Notice of Filing of Implementation Plan for Real-Time Transaction Reporting System,” MSRB Notice 2004-36, November 15, 2004. See also “Approval by the SEC of Real-Time Transaction Reporting and Price Dissemination: Rules G-12(f) and G-14,” MSRB Notice 2004-29, September 2, 2004. [2] Dealers should take special care to ensure that these items of information are included on “as of” submissions of trade data and when a dealer “affirms” a trade via RTTM web. Dealers that choose to affirm trades via RTTM web should be aware that when a dealer selects a trade record listed on the NSCC advisory report, only those trade details necessary for comparison are automatically populated on the RTTM web trade entry screen. To satisfy the requirements of Rule G-14 dealers must manually input those data elements identified as “required by MSRB” on the RTTM web trade entry screen prior to “affirming” a trade. For additional information on including these additional items on RTTM Web, see NSCC Important Notice A5961/P&S5531, “CMU RTTM Web Screen Enhancements to Accommodate Regulatory Reporting for Municipal Bonds,” January 6, 2005, on www.nscc.com. [3] The current procedure is detailed in “Notice on Deliveries of Step Out Transactions Through the Automated Comparison System,” MSRB Notice 2004-9, March 3, 2004. [4] For example, a selling dealer may choose to use NSCC's “step out delivery” procedure when an investment advisor instructs it to deliver securities to an account housed at another dealer. The movement of securities between the selling dealer and the dealer housing the account is not a purchase-sale transaction and must not be reported to the MSRB as such. Another example was provided in “Notice on Certain Inter-Dealer Transfers of Municipal Securities: Rules G-12(f) and G-14,” MSRB Notice 2004-14, June 4, 2004. [5] NSCC Important Notice A5943/P&S5513, “Changes to Municipal Bond ‘Step Out' Processing,” December 2, 2004, on www.nscc.com. [6] There are several exceptions available to dealers from the requirement to report within fifteen minutes. Under those exceptions: (i) dealers that are members of a syndicate or selling group that effect trades in a new issue at the list offering price may report trades by the end of the first day of trading, (ii) trades in short-term instruments such as variable rate securities, auction rate products, and commercial paper may be reported by the end of the day on which the trades are effected; and (iii) for the first year of real-time transaction reporting, dealers that are not syndicate managers or syndicate members and that have not traded an issue in the previous year may report trades within three hours of the time of trade execution. [7] Transactions effected during the RTRS Business Day (from 7:30 A.M to 6:30 P.M. Eastern time) are required to be reported in real-time. Transactions effected outside of those hours are required to be reported within fifteen minutes after the start of the next RTRS Business Day. [8] For a more in-depth discussion of time of trade on transactions in new issue securities, see “Notice Requesting Comment on Draft Amendments to Rule G-34 to Facilitate Real-Time Transaction Reporting and Explaining Time of Trade for Reporting New Issue Trades,” MSRB Notice 2004-18, June 18, 2004.
Reporting of Transactions in Certain Special Trading Situations: Rule G-14 January 2, 2008 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, on transaction reporting, with limited exceptions, requires dealers to report all of their purchase-sale transactions to RTRS within fifteen minutes. All reported transactions are entered into the RTRS surveillance database used by market regulators and enforcement agencies. However, the special nature of some transactions effects their value for price transparency and the ability of dealers to meet the fifteen minute reporting deadline. To address these issues, 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 condition.[1] TRANSACTIONS EXECUTED WITH SPECIAL PRICING CONDITIONS Three trading scenarios recently have generated questions from dealers and users of the MSRB price transparency products. Each of the three trading scenarios described below represents situations where the transaction executed is not a typical arms-length transaction negotiated in the secondary market and thus may be a misleading indicator of the market value of a security. To clarify transaction reporting requirements and to prevent publication of a potentially misleading price, dealers are required to report these transactions with the M9c0 special condition indicator.[2] Transactions reported with this special condition indicator are 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. Customer Repurchase Agreement 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. Both the sale and purchase transactions resulting from a customer repo do not represent typical arms-length transactions negotiated in the secondary market and are therefore required to be reported with the M9c0 special condition indicator. UIT-Related Transactions Dealers sponsoring Unit Investment Trusts (“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, does not represent a typical arms-length transaction negotiated in the secondary market. Dealers are required to report the subsequent transfer of securities from the accumulation account to the UIT with the M9c0 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 transfer of securities into the derivative trust and the transfer of securities back to the customer upon liquidation of the trust do not represent typical arms-length transactions negotiated in the secondary market. Such transactions are required to be reported using the M9c0 special condition indicator.[3] INTER-DEALER TRANSACTIONS REPORTED “LATE” Inter-dealer transaction reporting is accomplished by both the purchasing and selling dealers submitting the trade to the Depository Trust and Clearing Corporation’s (DTCC) automated comparison system (RTTM) following DTCC’s procedures. RTTM forwards information about the transaction to RTRS. The inter-dealer trade processing situations described below are the subject of dealer questions and currently result in dealers being charged with “late” reporting or reporting of a trade date and time that differs from the date and time of trade execution. To allow dealers to report these types of transactions without receiving a late error and to allow enforcement agencies to identify these trades as reported under special circumstances, the MSRB has added two new special condition indicators.[4] New special condition indicator Mc40 is used to identify certain inter-dealer transactions that are ineligible for comparison on trade date, and new special condition indicator Mc50 is used to identify resubmissions of certain uncompared inter-dealer transactions that have been cancelled by RTTM. Described below are the procedures for reporting transactions arising in three inter-dealer transaction reporting scenarios using the new special condition indicators. Inter-Dealer Ineligible on Trade Date Certain inter-dealer transactions are not able to be submitted to RTTM on trade date or with the accurate trade date either because all information necessary for comparison is not available or because the trade date is not a “valid” trade date in RTTM. The two inter-dealer trading scenarios described below are required to be reported using the new Mc40 special condition indicator. 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 dealers in this scenario cannot calculate accrued interest or final money on trade date, they cannot process the trade through RTTM until the interest rate reset has occurred. To report such transactions, both dealers that are party to the transaction are required to report the transaction by the end of the day that the interest rate reset occurs, including the trade date and time that the original trade was executed. Both dealers are required to include the new Mc40 special condition indicator that causes RTRS not to score either dealer late. Transactions reported using this procedure are disseminated without a special condition indicator and the trade reports reflect the original trade date and time. Invalid RTTM Trade Dates Dealers sometimes execute inter-dealer transactions on weekends and on certain holidays that are not valid RTTM trade dates. Such trades cannot be reported to RTRS using the actual trade date if they occur on a weekend or holiday. To accomplish automated comparison and transaction reporting of such transactions, dealers are required to submit these inter-dealer transactions to RTTM no later than fifteen minutes after the start of the next RTRS Business Day and to include a trade date and time that represents the next earliest “valid” values that can be submitted.[5] Dealers also are required to include the new Mc40 special condition indicator that allows RTRS to identify these transactions so that enforcement agencies can be alerted to the fact that the trade reports were made under special circumstances using a special trade date and time. RTRS disseminates these trade reports without a special condition indicator and the trade report includes the trade date and time reflecting the next earliest “valid” values that can be submitted.[6] 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, which currently results in RTRS scoring the resubmitted trade report “late.” The dealer that originally submitted information to RTTM is required to resubmit identical information about the transaction in the second attempt to compare and report the trade by the end of the day after RTTM cancels the trade. The resubmitting dealer also is required to include the new Mc50 special condition indicator that causes RTRS to not score the resubmitting dealer late. The indicator may only be used by a dealer resubmitting the exact same trade information for the same trade.[7] For example, the contra-party that failed to submit its side to the trade accurately, thus preventing comparison of the transaction, is not allowed to use the indicator. RTRS disseminates trade reports made under this procedure without a special condition indicator once RTTM compares the trade and the trade report reflects the original trade date and time. Questions about this notice may be directed to Justin R. Pica, Uniform Practice Policy Advisor, or Sara K. Pranio, Uniform Practice Assistant. ENDNOTES [1] See Specifications for Real-Time Reporting of Municipal Securities Transactions Section 4.3.2. [2] In addition to the special trading situations identified in this notice, the M9c0 special condition indicator, “away from market – other reason,” is required to be included on a trade report if the transaction price differs substantially from the market price for multiple reasons or for a reason not covered by another special condition indicator. [3] In some cases, the transfer of securities into the derivative trust and the transfer of securities back to the customer upon liquidation of the trust do not represent purchase-sale transactions due to the terms of the trust agreement. MSRB rules on transaction reporting do not require a dealer to report a transfer of securities to RTRS that is not a purchase-sale transaction in municipal securities. [4] See MSRB Notice 2007-25 (August 13, 2007). [5] The MSRB previously provided an example of a trade date and time that would be included on a trade report using this procedure. See “Reporting of Inter-Dealer Transactions That Occur Outside of RTRS Business Day Hours or on Invalid RTTM Trade Dates,” MSRB Notice 2007-12 (March 23, 2007). [6] Using this procedure will result in transactions reported with a trade date and time that differs from what is recorded in a dealer’s books and records. Dealers are reminded that books and records are required to reflect the date and time of trade execution. [7] The resubmitting dealer would not be required to resubmit the same reference number or preparation time on the resubmitted transaction; however, other information about the transaction, such as price, quantity, trade date and time, would be required to be identical to information included in the original trade submission.
CROSS-REFERENCES Rule G-12 Interpretations - Locked-In Transactions, March 1, 2001
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