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Certain Inter-Dealer Transfers of Municipal Securities: Rules G-12(f)and G-14
The MSRB has received questions about whether certain transfers of municipal securities between dealers to move securities between safekeeping locations are required to be reported to the MSRB Transaction Reporting System under Rule G-14, on transaction reporting. When a transfer of municipal securities does not represent a purchase-sale transaction and is not required to be recorded on a dealer's books and records under MSRB Rule G-8 or SEC Rule 17a-3, such transfers should not be reported under Rule G-14 and a transaction report must not be sent to the MSRB.
One scenario that has been brought to the MSRB's attention is when a dealer ("Dealer A") that self-clears inter-dealer transactions contracts with another dealer ("Dealer B") for the safekeeping and maintenance of customer accounts. As part of this process, Dealer A transfers securities sold to customers to Dealer B for safekeeping. The transfer of securities from Dealer A to Dealer B in this example is not an inter-dealer purchase-sale transaction and must not be reported to the MSRB as such. However, Dealer A and Dealer B may wish to utilize the comparison and netting facilities of a registered clearing agency to effect the delivery of securities.
In March 2004, the MSRB published a notice addressing the processing of certain inter-dealer transfers of securities that do not represent inter-dealer purchase-sale transactions through the automated comparison facilities of National Securities Clearing Corporation (NSCC).[1] Since data sent to NSCC for comparison of an inter-dealer purchase-sale transaction also is sent to the MSRB for transaction reporting purposes, the March 2004 notice described use of the "B" indicator for identifying such data submissions relating to transfers of securities so that they are not confused with transaction reports between dealers that represent trades made through the comparison system. Dealers should refer to the March 2004 notice if they chose to use the facilities of NSCC for such transfers to ensure that erroneous inter-dealer transaction reports are not sent to the MSRB Transaction Reporting System.[2]
[1] See MSRB Notice 2004-9, "Notice on Deliveries of Step Out Transactions Through the Automated Comparison System," March 3, 2004, on www.msrb.org.
[2] Note, however, that a different procedure will be used to effect inter-dealer transfers of securities, using the NSCC comparison system, and without reporting the transfer to the MSRB as a transaction when MSRB's Real-Time Transaction Reporting System goes into operation, currently planned for January 2005.
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Reminder Regarding Accuracy of Information Submitted to the MSRB Transaction Reporting System: Rule G-14
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.
Transaction Reporting of Multiple Transactions Between Dealers in the Same Issue: Rules G-12(f) and G-14
The MSRB has become aware of problems in transaction reporting as a result of dealers "bunching" certain inter-dealer transactions in the comparison system. Recently, some dealers have reported the sum of two trades as one transaction in instances when two dealers effected two trades with each other in the same issue and at the same price. When two transactions are effected, two transactions should be reflected in each dealer's books and records and two transactions are required to be reported to the MSRB. The time of trade for each transaction also must accurately reflect the time at which a contractual commitment was formed for each quantity of securities. For example, if Dealer A purchases $50,000 of a municipal issue at a price of par from Dealer B at 11:00 am and then purchases an additional $50,000 at par from Dealer B at 2:00 pm, two transactions are required to be reflected on each dealers' books and records and two transactions are required to be reported to the MSRB.
Since the same inter-dealer trade record submitted for automated comparison under Rule G-12(f) also is used to satisfy the requirements of Rule G-14, on transaction reporting, each inter-dealer transaction should be submitted for automated comparison separately in order to comply with Rule G-14's requirement to report all transactions. Failure to do so causes erroneous information concerning transaction size and time of trade to appear in the transparency reports published by the MSRB as well as in the audit trail used by regulators and enforcement agencies. To the extent that dealers use the records generated by the comparison system for purposes of complying with MSRB Rule G-8, on recordkeeping, it may also create erroneous information as to the size of transactions effected or time of trade execution.
