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MSRB Notice

Notice on Deliveries of Step Out Transactions Through the Automated Comparison System


In a notice dated May 23, 2003 (the “May notice”), the MSRB addressed questions relating to certain kinds of transactions in which independent investment advisors instruct selling dealers to make deliveries to other dealers.[1]  The May notice reminded dealers that, since the selling dealer is delivering to other dealers but has not traded with them, no inter-dealer transaction has occurred.  Therefore, in this situation, commonly referred to as a step out transaction, reporting an inter-dealer transaction to the MSRB would constitute an erroneous report.  The May notice also reminded dealers that any trade submitted for automated comparison resulted in an inter-dealer transaction report being sent to the MSRB.

How to Designate Step Out Transactions

Dealers have requested NSCC and MSRB to enable them to use the comparison system to facilitate inter-dealer deliveries that occur as a result of events other than inter-dealer transactions.  To this end, NSCC in a notice dated December 4, 2003 announced that it is providing a means whereby an NSCC participant can designate a step out transaction for comparison and delivery on a trade-for-trade basis, and yet exclude it from the MSRB inter-dealer transaction reporting system.[2]  The participant, when submitting the report to NSCC for comparison, will populate the NSCC Settlement Type/Special Trade Indicator as “B” to designate it as a step out.  This method will be used only as long as FITS continues to send batch files to the MSRB.  A different means will be used when NSCC’s Real-Time Trade Matching system and MSRB’s Real-time Transaction Reporting System go into operation.  At that time, it is expected that NSCC matching procedures will be altered to allow step out transactions to be eligible to settle in NSCC’s Continuous Net Settlement (CNS) system, rather than trade-for-trade as currently.

When MSRB’s current Transaction Reporting System receives a submission marked in this way as a step out, it will recognize the comparison as one made in connection with an inter-dealer delivery that is not related to an inter-dealer transaction.  MSRB will exclude the submission from its transparency products and will not count it as either for or against dealers in their reports on late or inaccurate comparison data.

Accurate Reporting of Inter-Dealer Trades

The MSRB has become aware that some dealers continue to submit step out transactions to the comparison system without correctly coding them with the Settlement Type/Special Trade indicator “B.”  This has the effect of reporting an inter-dealer transaction when none has taken place.  Consistent with the May notice, the MSRB reminds dealers that it is a violation of Rule G-14 to submit step out transactions without correctly populating the Settlement Type/Special Trade indicator with “B.”  Similarly, it would be a violation of Rule G-14 for a dealer to use the new step out code to exclude any inter-dealer transaction from transaction reporting.   Dealers are advised to make the necessary changes to their current internal systems promptly to ensure correct processing of step outs.

“Ex Legal” Deliveries

The use of the value “B” in the Settlement Type/Special Trade indicator supplants the previous use of the same value for inter-dealer confirmations, as noted by NSCC in its December 4 notice.  Previously, “B” indicated that a physical delivery of securities would be made without a copy of the legal opinion for the issue (“ex legal” delivery).  When physical certificates were the normal form of delivery, the “B” code served as a reminder to cashiers and other operations personnel that the traders had agreed to settle the transaction even though the legal opinion was missing from the particular certificates that were to be delivered.  Today, inter-dealer deliveries of physical certificates are rare because inter-dealer transactions in depository-eligible issues must be settled by book-entry pursuant to Rule G-12(f).  It would be even more rare for a physical delivery to occur when a copy of the legal opinion is missing, since most legal opinions are now printed on the back of bond certificates when the issue is certificated.  Consequently, there has not been any appreciable usage of the “ex legal” code in many years.

Since “B” has been redefined to indicate a step out situation rather than an “ex legal” delivery, in the unlikely event that in the future a dealer encounters a situation where traders have agreed on a delivery of physical certificates without a copy of the legal opinion,[3] the parties to the transaction should take particular effort to ensure that operations personnel are aware of this condition of the trade to avoid unnecessary settlement problems.

Comments on this notice should be directed to Larry M. Lawrence, Policy and Technology Advisor, or Justin R, Pica, Uniform Practice Specialist.

March 3, 2004

[1] MSRB Notice 2003-20, “Notice on Reporting and Comparison of Certain Transactions Effected by Investment Advisors:  Rules G-12(f) and G-14,” May 23, 2003, on

[2] NSCC Important Notice A5728/P&S5298, “Step Out Transactions,” December 4, 2003, on

[3] Physical delivery is permissible only for a non-depository-eligible security.