PUBLIC REPORTING OF INDIVIDUAL TRANSACTIONS IN FREQUENTLY-TRADED MUNICIPAL SECURITIES: RULE G-14

PUBLIC REPORTING OF INDIVIDUAL TRANSACTIONS IN FREQUENTLY-TRADED MUNICIPAL SECURITIES: RULE G-14

The proposed service will offer a new Daily Transaction Report, containing transaction information on individual transactions in frequently traded municipal securities reported to the Board by dealers under Board rule G-14.

Questions about rule G-14 and criteria for including trades in the Daily Transaction Report may be directed to Harold L. Johnson, Deputy General Counsel, or Larry M. Lawrence, Policy and Technology Advisor. Questions about subscriptions to the proposed service may be directed to Thomas A. Hutton, Director, Municipal Securities Information Library.

On September 3, 1999, the Municipal Securities Rulemaking Board filed with the Securities and Exchange Commission ("Commission") a plan to produce a daily report containing information on individual transactions in frequently traded municipal securities (the "Daily Transaction Report").⁽¹⁾ The transaction information on the report would come from dealer reports made to the Board under Board rule G-14 on transaction reporting. This rule requires dealers to report essentially all inter-dealer and customer transactions in municipal securities to the Board by midnight of trade date.

The proposed report would be the third product offered by the Board to increase the amount of price transparency in the municipal securities market. Like the Board's current Combined and Inter-Dealer Daily Reports, the proposed Daily Transaction Report would provide information on "frequently traded" issues - issues on which at least four transaction reports were received for a given trade date. Also like the current Daily Reports, the proposed report would be produced and made available electronically by approximately 7:00 a.m. on the next business day following trade date. Electronic reports will be produced in the same three formats--printable, comma-delimited, and fixed record length--as the current Daily Reports.⁽²⁾ However, unlike the current Daily Reports, the proposed Daily Transaction Report has been designed to provide transaction detail on each reported trade in a frequently traded issue, rather than merely providing the daily high, low and average prices.⁽³⁾

The proposed Daily Transaction Report will display, for each transaction in a frequently traded security: the CUSIP number, a short description of the issue, the par value traded, the time of trade reported by the dealer, and the price of the transaction.⁽⁴⁾ Transactions will be categorized as in one of three transaction "types": (i) sales by dealers to customers; (ii) purchases by dealers from customers: (iii) inter-dealer trades. Reports will be organized by issue, with the most frequently traded issues listed first. Within an issue, trades will be listed in order of time of trade, from the earliest reported time of trade to the latest.⁽⁵⁾ Although the size of each day's report will depend on market activity, it is expected that the proposed Daily Transaction Report on average will provide information on approximately 9,000 individual transactions in approximately 1,000 frequently-traded issues each day. Sample copies showing the appearance of the proposed Daily Transaction Report can be obtained at the Board's web site.

The proposed Daily Transaction Report will be available by subscription. To obtain a subscription, it will be necessary to sign a subscription agreement, but there will be no fee. In addition, recent Daily Transaction Reports will be available for examination, also free of charge, in the Board's Public Access Facility in Alexandria, Virginia. The Board expects to disseminate the Daily Transaction Report to subscribers mainly via the internet.⁽⁶⁾ The details on how to subscribe, how to obtain a subscription agreement, and the method for accessing files via the internet will be made available in a future notice.⁽⁷⁾ The Board expects that the new Daily Transaction Report will be made available by December 1999.

A long-standing goal of the Board is to provide market participants with information about the value of securities.⁽⁸⁾ Over the past five years, with the advent of the Transaction Reporting Program, the Board has been working toward making transaction price information "transparent" in the marketplace and seeking ways to make that transparency information more comprehensive and contemporaneous.⁽⁹⁾ The new Daily Transaction Report represents the next step in that continuing process.

The Daily Transaction Report builds upon two earlier phases of transparency - the Board's Inter-Dealer Daily Report and the Combined Daily Report. Whereas the Inter-Dealer and Combined Daily Reports provide daily high, low and average prices for frequently traded issues of municipal securities, the proposed Daily Transaction Reports will provide individual information for each reported transaction in frequently traded issues. The Board believes that the individual transaction data on the new report, which will include par value and time of trade for each transaction as well as price, will provide a more complete picture of the market than the currently available Daily Reports.

As with the Inter-Dealer and Combined Daily Reports, "frequently traded" issues will be defined as those issues trading at least four or more times on the business day for which the prices are reported, and the Daily Transaction Report will be made available on the morning of the next business day after trade date. As part of its effort to make more comprehensive transparency data available, the Board intends to monitor the impact of the new report in the market. After the new report has been operational for a period of time, the Board will review its operation and will consider whether to lower the "frequently traded" threshold. Doing so would have the effect of listing more issues and more prices in each day's report and would make the report even more comprehensive in its representation of market activity.

The Board also is reviewing various options for collecting and disseminating transaction transparency information on a more contemporaneous basis. As part of this effort, the Board has created a web site that simulates the kind of information that a "real-time" transparency system might provide and how it might be presented to investors. This demonstration system is available at the Board's web site. The Board welcomes comments from market participants on the demonstration system.

The Board began disseminating price and volume information on municipal securities in 1995 after adopting an amendment to Board rule G-14 that requires essentially all inter-dealer transactions to be reported to the Board via the automated comparison system operated by National Securities Clearing Corporation.⁽¹⁰⁾ This transaction reporting requirement dovetailed with existing automated clearance requirements in Board rule G-12(f) and allowed dealers to begin transaction reporting with relatively few changes to their own trade processing systems.

Each business day since its inauguration in January 1995, the Inter-Dealer Daily Report has provided statistics on total inter-dealer market activity reported for the previous day and information about price and volume for each issue that was frequently traded on that day. The report includes the total par value traded in each frequently traded issue, and the high, low and average⁽¹¹⁾ prices for the trading day.

The design of the Inter-Dealer Daily Report was based upon aspects of the municipal securities market that distinguish it from the exchange-listed and NASDAQ markets. A primary distinguishing characteristic of the municipal securities market is the large number of outstanding issues. There are approximately 1.3 million municipal securities that are distinct, non-fungible entities for purposes of trading and reporting, compared to a much smaller number of equity issues. The frequency of trading also differs substantially from patterns in the exchange and NASDAQ markets. While, on any given day, a certain number of municipal securities are traded frequently, the list of these frequently traded issues is continually changing over time. When frequent trading does occur in an issue, it generally occurs in connection with issuance and then subsides as "buy and hold" investors obtain the securities and offerings in the issue disappear completely.

In designing the Inter-Dealer Daily Report, the Board adopted a threshold of four trades a day as the definition of "frequently traded." Only on issues for which there are four or more transaction reports on a given day are prices given on the Daily Report. The Board constructed the Daily Report in this manner because of the concern that an isolated transaction may not necessarily provide a reliable indicator of "market price" and might be misleading to an observer not familiar with the market. At the same time, the Board made a commitment to review the use of the Inter-Dealer Daily Report as experience was obtained and eventually move to a more contemporaneous and comprehensive price transparency report.⁽¹²⁾

In August 1998, after adopting amendments to rule G-14 to require dealers to report their customer transactions to the Board each night, production of a Combined Daily Report began.⁽¹³⁾ This report incorporates both inter-dealer and customer transaction information. Like the Inter-Dealer Daily Report, the format of high, low and average prices was used and only issues that are reported as having traded four or more times on a given trade date are included. However, since both customer and inter-dealer transactions are taken into account, the number of issues meeting the "frequently traded" threshold each day went from approximately 200 appearing each day on the Inter-Dealer Report to approximately 1,000 on the Combined Daily Report.⁽¹⁴⁾

During 1999, the Board began to consider how to improve upon the Combined Daily Report and decided to release individual transaction data on frequently traded issues. On April 29, 1999, the Board made five sample Daily Transaction Reports available for public comment at its web site and in printed form at Board offices. As discussed below, the sample reports were formatted essentially the same as that now being filed with the Commission, except that transactions were divided into two, rather than three, "types." Responses to the request for comment on the sample Daily Transaction Reports were received from five commentators.

Four commentators supported the proposed Daily Transaction Report and believe it will be useful to market participants. The fifth commentator supported the new report in a first letter to the Board but expressed doubt about its usefulness in a second letter.

One commentator suggests adding a summary table to the Report, keyed to bond ratings, which would show yields and the changes in yield that occur each day. The Board determined not to add such a summary table. Ratings of municipal securities assigned by private bond rating organizations are not currently part of dealer reports to the Board. The Board recognizes that various types of end-users of transaction data may need enhancements and additions to the data (calculated yields, ratings, extended securities descriptions, etc.) and different means to access and use the data (such as automated search mechanisms or historical records). The Board's long-standing position has been that its primary role is to make available the basic transaction information that is reported to it by dealers. At the same time, the Board has encouraged other organizations to re-disseminate the data, and to "add value" to the data to target the needs of specific end users.⁽¹⁵⁾

With respect to bond ratings, the Board notes that the Bond Market Association ("TBMA") currently makes a web site available that includes data from existing Daily Reports and that this data includes ratings as well as search features and other enhancements designed to make the information particularly useful to investors. The Board also notes that TBMA, in its comment letter on the proposed report, indicates that it will continue to provide this kind of service, using the data that will be included in the proposed Daily Transaction Report. The Board believes that organizations such as TBMA are well positioned to meet specific end-user needs and that the Board's role should continue to be as provider of basic transaction data unless it becomes clear that a critical need for enhanced information in the market is not being met.

One commentator suggests that where the displayed yield on the Daily Transaction Report is a "yield to call," the transaction record should include the date and price of the call feature used for the price-yield calculation. The proposed Daily Transaction Report shows a yield for a transaction only if the dealer reported a yield. When reporting yields to the Board, dealers do not report the call features used for yield calculation, so the information requested by the commentator is not available for inclusion on the Daily Transaction Report. While it would be possible for the Board to calculate yields from dollar prices for most transactions, and to show whether the yield was calculated to a call date and call price or to maturity, the Board has chosen not to add this enhancement to the report. In this regard, the Board notes that TBMA's web site currently does include calculated yields for the dollar prices shown.

In the format released for comment, the Daily Transaction Report identified a transaction as one of two types: (i) a sale to a customer; or (ii) "other," i.e., a purchase by a dealer. Purchases by dealers either are purchases from customers or purchases on the inter-dealer market, but these two types of dealer purchases were not separately identified in the initial draft version of the Daily Transaction Report. One commentator suggests that the Daily Transaction Report should segregate the two types of purchases by dealers, noting that it may be relevant to some market analyses whether securities were bought on the inter-dealer market or bought from a customer. Another commentator also believes the Report should present inter-dealer prices and retail customer prices separately, in order to avoid misleading customers.

The Board agrees that it would be useful to distinguish between purchases by dealers from customers and from other dealers. Thus, in the proposed report, there are separate columns showing the prices for: (i) sales to customers; (ii) purchases from customers; and (iii) inter-dealer transactions.

One commentator states that, since the proposed report shows the prices of actively traded municipal securities, it should also show the name and telephone number of any dealer selling the securities. The Board notes that the existence of transaction information reported by a dealer does not indicate whether the dealer has additional securities of that issue to sell. The Board believes that this kind of proposal would be more appropriate to a quotation system rather than a transaction transparency system and therefore has declined to adopt this suggestion.

One commentator suggests that the Board adopt a rule that a transaction is voidable by a customer if the "spread" is more than 25 basis points. This view may be based upon the concern that a customer may buy a security from a dealer and on the next day find that the transaction was not effected at a fair market price.

Board rule G-30 already addresses the issue of mis-priced securities transactions with customers. The rule states that prices to customers must be fair and reasonable, taking into account all relevant factors about the transaction. The Board historically has allowed the enforcement agencies charged with enforcing Board rules to make determinations on whether a particular transaction price is fair and reasonable, because the enforcement agency is in the best position to determine the facts and circumstances of individual transactions. The Board notes that the surveillance data from the Transaction Reporting Program now provides to the enforcement agencies comprehensive, searchable, information on transactions and transaction prices occurring in the market. This will enhance the ability of the enforcement agencies to enforce rule G-30. Consequently, the Board is not undertaking further rulemaking with respect to the commentator's suggestion.

One commentator, TBMA requests that the Board continue to produce the Combined Daily Report because that report's summary information could serve as the "gateway" to the detailed information of the Daily Transaction Report. TBMA notes that, if the Board does not continue production of the Combined Daily Report, the TBMA might create a similar summary report for its web site. This would be possible since the Daily Transaction Report includes all of the information necessary to produce a Combined Daily Report.

The Board intends to continue, at least initially, production of both the Combined Daily Report and the Inter-Dealer Daily Report after the new report goes into operation. However, the number of subscriptions to these older Daily Reports may diminish in the future as subscribers to the existing reports program their systems to use the more detailed information in the new report. After some time, if subscribership to the older Daily Reports diminishes markedly, the Board may file a proposed rule change with the Commission to discontinue production of the older Reports.

The Inter-Dealer and Combined Daily Reports are each available by subscription for $15,000 annually. One commentator states that the proposed Daily Transaction Report should be made available free of charge. TBMA also urges the Board to make transaction information available, electronically and without charge, to dealers for their internal use in market analysis and in their compliance efforts. As noted above, the Board has decided to make subscriptions to the proposed report free. Subscribers, however, will need to sign a subscription agreement that outlines the Board's disclaimer of liability, the proprietary nature of and usage restrictions on the CUSIP numbers and CUSIP descriptions contained in the report, and certain other matters.

The Board intends to make the Service operational in the fourth quarter of 1999.

Contents

Description of the MSRB's Sample Daily Transaction Report

Sample Daily Transaction Reports

1. File No. SR-MSRB-99-8. Comments on the proposed amendment may be made to the Commission and should refer to this file number.

2. The "printable" format can be printed with little or no change by an end-user. The "comma-delimited" and "fixed record length" files can easily be sorted or converted by an end-user's spreadsheet or other application program (e.g., Microsoft Excel).

3. The Board also will continue to use all the transaction information reported by dealers to maintain a market surveillance database. The surveillance database is available to the Commission, the National Association of Securities Dealers (NASD) and the bank regulatory agencies responsible for enforcement of Board rules.

4. A dollar price is given for each transaction listed on the report. If a yield is submitted by the dealer with the transaction report, the yield is included with the dollar price. Yields are not submitted by dealers for secondary market inter-dealer transactions because this information cannot be submitted via the automated comparison system, which is the vehicle used for transaction reporting of inter-dealer trades. In certain customer transactions, such as those in defaulted or variable rate securities, it also may be impossible for the dealer to submit a yield. Transactions in new issues for which no settlement date has been set may be effected and reported by dealers either with a dollar price or a yield. It is not possible for the dealer to report both yield and dollar price on those transactions. The MSRB Transaction Reporting System will calculate a dollar price from submitted yield on these transactions, using an assumed settlement date if necessary. To do this, however, there must be sufficient securities data available to make the calculation (e.g., coupon, dated date, maturity date, first interest payment date, etc.). For additional information, see "Public Reporting of Transactions in Municipal Securities: Rule G-14," MSRB Reports, Vol. 18, No. 2 (August 1998) at 25-27.

5. Where trades are submitted by dealers with an invalid time or no time of trade, the report shows the time of trade as "0."

6. Current subscribers to the Inter-Dealer and Combined Daily Reports now download their files from the Board's electronic bulletin board system. The Board plans to eventually phase out the electronic bulletin board system and rely exclusively on the internet delivery mechanism. However, the Board plans to continue to offer the existing Daily Reports and the proposed new Daily Transaction Report via the electronic bulletin board to current subscribers until sufficient time has been given for them to make the conversion to the internet delivery mechanism. Access to electronic copies of the new Daily Transaction Report will be made available each day at the same time to all subscribers regardless of whether the means of access of the specific subscriber is via the internet or the electronic bulletin board.

7. Persons interested in being notified by e-mail of such notices as soon as they are posted to the Board's web site may obtain this service by visiting the Board's web site and clicking on "Subscribe to E-mail."

8. See, e.g., "From the Chairman," MSRB Reports, Vol. 8, No. 5 (December 1988) at 2.

9. See, e.g., "Board to Proceed with Pilot Program to Disseminate Inter-Dealer Transaction Information," MSRB Reports, Vol. 14, No. 1 (January 1994) at 13; "Reporting Inter-Dealer Transactions to the Board: Rule G-14," MSRB Reports, Vol. 14, No. 5 (December 1994) at 3-6; and "Transaction Reporting Program for Municipal Securities," MSRB Reports, Vol. 15, No. 1 (April 1995) at 11-15.

10. See "Reporting Inter-Dealer Transactions to the Board; Rule G-14, MSRB Reports, Vol. 14, No. 1 (January 1994), at 13.

11. Unlike the reported high and low prices, the average price in the daily report is computed including only those trades having a par value between $100,000 and $1 million. Since the prices of smaller, "odd lot" transactions and large position movements over $1,000,000 may be affected by the very size of the transaction, the Board decided to omit these transactions from the "average price" computation.

12. See, e.g., "Board to Proceed with Pilot Program to Disseminate Inter-Dealer Transaction Information," MSRB Reports Vol. 14, No. 1 (January, 1994). In its approval order for the Inter-Dealer Daily Report, the Securities and Exchange Commission noted that the Board, in proceeding to subsequent levels of transparency, "should continue to work toward publicly disseminating the maximum level of useful information to the public while ensuring that the information and manner in which it is presented is not misleading." See Securities Exchange Act Release No. 34955 (November 9, 1994).

13. See "Availability of Information on Transactions in Municipal Securities: Rule G-14," MSRB Reports, Vol. 19, No. 1 (February 1999) at 23.

14. In determining whether a reported customer transaction will be included for purposes of any transparency report, reported transactions are checked for errors and certain transactions are eliminated from consideration if they contain what appear to be obvious errors (e.g., invalid or unknown CUSIP number, missing dollar price). The Board monitors the data it receives for errors and informs the dealer or its agent of each error that would eliminate a transaction from the Daily Report. The Board is working with dealers and enforcement agencies such as the NASD to improve the quality of reported data and to increase dealer compliance with rule G-14 reporting requirements.

15. See e.g., "Board to Proceed with Pilot Program to Disseminate Inter-Dealer Transaction Information," MSRB Reports, Vol. 14, No. 1 (January 1994) at 14.