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MSRB Notice

Notice of Filing of Proposed Rule Change Relating to RTRS Procedures, Under Rule G-14 Reports of Sales or Purchases

On December 13, 2005, the Municipal Securities Rulemaking Board (“MSRB”) filed with the Securities and Exchange Commission (the “Commission”) a proposed rule change to Rule G-14, Reports of Sales or Purchases (the “proposed rule change”).[1]  The proposed rule change would extend the expiration date of the three-hour exception to the 15 minute reporting deadline under Rule G-14 RTRS Procedures, paragraph (a)(ii)(C).  Under the current language of this provision, the three hour reporting exception will automatically expire on January 31, 2006.   The proposed rule change provides that for when, as and if issued transactions (“when-issued” transactions), the three-hour exception will expire on December 31, 2007; and for all other transactions, the three-hour exception will expire on December 29, 2006.  The proposed rule change will become effective upon approval by the Commission.


MSRB Rule G-14 trade reporting procedures require that transactions effected with a time of trade during the hours of the Real-Time Transaction Reporting System (“RTRS”) business day be reported within 15 minutes of the time of trade to an RTRS Portal.  Under MSRB Rule G-14, there are three exceptions to this 15 minute reporting requirement.  The exception addressed by the proposed rule change allows a dealer three hours to report a security that the dealer has not traded in the previous year.[2]   This exception is not available to a managing underwriter or syndicate member. The MSRB included a sunset date of January 31, 2006 for the three-hour exception in order to provide time for information vendors and the industry to move to real-time techniques for securities master updates.  This exception was designed to give a dealer time to add a security to its securities master file so that a trade can be reported through the dealer’s automated processing systems. 

Historically, dealers have not been able to maintain a database of formatted municipal securities information for the full universe of approximately 1.5 million municipal securities due to the cost of mainframe storage.  A securities master file contains the information about a municipal security issue that is necessary for a dealer to be able to process transactions in the issue.  It includes such items as interest rate, dated date, interest payment cycle, put and call schedules.  This data is stored in the dealer’s trade processing system in a database commonly called the “securities master file.”[3] The dealer’s securities master file sometimes contains information only for securities held in custody for customers and for securities that have been recently traded.  In that case, if a dealer trades a secondary market security that is not in its securities master file, the relevant securities information must be obtained from a vendor by the dealer before the trade can be processed.  

Since implementation of real-time transaction reporting on January 31, 2005, the municipal securities industry has made some progress in improving timely access to information on municipal securities.  Some dealers and service bureaus have elected to store the full universe of municipal securities in their securities master files.  In addition, some links have been set up so that dealers are able to obtain a real-time update from a vendor upon request after an issue is traded for the first time.  Notwithstanding some progress, dealers have indicated that difficulty continues to exist in ensuring adequate real-time access to securities data for the 1.5 million outstanding municipal securities and are concerned about the upcoming expiration of the three-hour exception.  This delay in obtaining relevant security information can cause the dealer’s trade to be reported as late.  The Bond Market Association (“TBMA”) has requested that MSRB extend the three-hour exception to provide additional time for the industry to develop solutions to the problems of disseminating municipal securities information. 

The MSRB believes that the industry can complete the necessary systems changes to address access to securities information in the secondary market by December 29, 2006.  The MSRB does not intend to provide any additional extensions of this date.  This date will allow the municipal securities industry to work on solutions for dealers to obtain municipal securities information in a timely manner from information vendors in order to process trades not in the dealer’s securities master file. 

For new issue transactions, a dealer’s access to necessary securities information depends not only on its link with the information vendor but also on whether that vendor itself has the information on the new issue.  Vendors currently obtain much of their new issue information through voluntary cooperation from underwriters.  This process does not always result in all the vendors having the necessary securities information by the time of formal award when trade executions begin.  Dealers trading a new issue for the first time need the three-hour exception from the 15 minute trade reporting for their first trades in a new issue because the securities information is not available at the time the trade is executed.[4]  The industry has expressed concern that it needs more time to work on the current infrastructure for the collection and dissemination of securities information in order to move towards real-time techniques to update securities master files and thereby allow dealers to report trades within 15 minutes.  Accordingly, the MSRB is proposing an extension of the three-hour exception for when-issued transactions to December 31, 2007.

In addition, in order to expedite the process of moving to real-time techniques for securities master updates by vendors and the industry with a particular emphasis on newly issued securities, TBMA and The Depository Trust Company (“DTC”) are currently working on a project that will address inefficiencies in the collection of new information securities data.  As proposed, DTC will act as a central collection point for standardized electronic files of new issue information provided by underwriters.  DTC then would provide the information in real-time to information vendors. Underwriters would provide the information to DTC on a specific timeframe.  This project is scheduled for implementation in mid- 2007.  It will make it possible for dealers to report new issue trades earlier and will eliminate the need for the three-hour exception for new issue trades.  An extension of the three-hour exception for when-issued transactions to December 31, 2007, will also allow time for this project to be implemented and for initial operational details to be addressed before the 15 minute reporting requirement becomes effective for trades that currently qualify for the three-hour exception.

The proposed rule change would revise MSRB Rule G-14 RTRS Procedures, paragraph (a)(ii)(C), by deleting the language regarding the expiration of the three-hour exception on January 31, 2006 and replacing the language to state that for when-issued transactions, the three-hour exception to the 15 minute reporting rule will expire on December 31, 2007; and for all other transactions, the exception will expire on December 29, 2006.

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Questions concerning this notice may be directed to Karen A. Caplan, Associate General Counsel, or Justin Pica, Uniform Practice Specialist.

December 13, 2005

Text of Proposed Amendment[5]

Rule G-14 Reports of Sales or Purchases

        (a)- (b)  No change.

        Rule G-14 RTRS Procedures

        (a) General Procedures. 

(i)  No change.

(ii)  Transactions effected with a Time of Trade during the hours of the RTRS Business Day shall be reported within 15 minutes of Time of Trade to an RTRS Portal except in the following situations:

(A)  No change.

(B)  No change.

(C)  A dealer shall report a trade within three hours of the Time of Trade if all the following conditions apply: (1) the CUSIP number and indicative data of the issue traded are not in the securities master file used by the dealer to process trades for confirmations, clearance, and settlement; (2) the dealer has not traded the issue in the previous year; and (3) the dealer is not a syndicate manager or syndicate member for the issue.  If fewer than three hours of the RTRS Business Day remain after the Time of Trade, the trade shall be reported no later than 15 minutes after the beginning of the next RTRS Business Day.  This provision (C) will cease to be effective [one year after the Announced RTRS Start-Up Date.] on December 31, 2007 for when, as and if issued transactions and December 29, 2006 for all other transactions

        (iii) – (vi)  No Change.

        (b)-(d) No change.

[1] SR-MSRB-2005-16.  Comments on the proposed rule change should be submitted to the Commission and should reference this file number.

[2] The other two exceptions to the 15 minute reporting rule are: (1) that syndicate managers, syndicate members and selling group members that effect trades in new issues on the first day of trading at the list offering price are permitted to report these trades by the end of the day on which they were executed; and (2) that a dealer effecting a trade in a short-term instrument under nine months in effective maturity (including variable rate instruments, auction rate products, and commercial paper) shall report such trades by the end of the business day on which the trades were executed. See MSRB Rule G-14 RTRS Procedures, paragraph (a)(ii)(A), (B). 

[3] Many dealers use service bureaus for various trade processing functions, including the maintenance of securities master files.  Securities master file update procedures for service bureaus and the challenges in moving to a real-time environment for service bureaus are the same as those described for dealers. 

[4] In the new issue market, information vendors seek to collect information on each issue and deliver it to customers in time for trade reporting in the new issue.  There are several challenges for vendors and dealers to meet the reporting deadlines.  For example, there are approximately 15,000 new municipal issues that must be set up in databases each month.  Another problem for the industry is the fact that approximately 85 different information fields for each issue must be successfully gathered, which in large part depends on the timely cooperation of the underwriters. 

[5] Underlining indicates new language; brackets indicate deletions.