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Agency Transaction: Pricing

Agency transaction: pricing. Your letter of August 3, 1979 has been referred to me for response. In your letter you inquire as to the relationship between the requirements to show on customers confirmations the "yield at which transaction is effected" and the "resulting dollar price," particularly in the context of agency transactions where the professional receives a concession or other dealer reallowance as its remuneration.

Under rule G-15, the dollar price disclosed to a customer must be calculated on the basis of the yield at which the transaction was effected. This calculation is made without reference to any possible concession or other allowance which a municipal securities dealer may receive from another municipal securities professional. Accordingly, the dollar price shown on a customer confirmation will always be derived directly from the yield price.

For example, a municipal securities dealer seeking to purchase $100,000 fifteen-year bonds with a 5% coupon as agent for a customer would commonly purchase the securities from another professional at a yield price less a concession (e.g., "5.60½"), and confirm to the customer at the net yield price ("5.60"), retaining the concession as its remuneration. In our example, the customer confirmation would be required to disclose the "yield at which transaction is effected" ("5.60"), the "resulting dollar price" ("93.96"), and the fact that the dealer received $500 as its remuneration in the form of a dealer concession. The dollar price is computed directly from the yield price, and is not net of the concession received.

The confusion may arise from comparing the confirmation sent to a customer to the confirmation sent to the professional on the other side of a transaction. On the inter-dealer confirmation, the "yield at which transaction is effected" will be shown, as well as the amount of the concession, but the unit dollar price may be expressed net of the concession (in our example, "93.46," being the gross dollar price of "93.96" less the ½ point reallowance). This may give the appearance of a difference in price between the purchase and sale confirmations, but in fact both transactions are being effected at the same yield price (in our example, "5.60"), and the dollar price disclosed to the customer is the result of this yield. MSRB interpretation of September 20, 1979.

NOTE: The above letter refers to the text of rule G-15 as in effect prior to amendments effective on January 16, 1992.