[Federal Register Volume 61, Number 33 (Friday, February 16, 1996)]
[Notices]
[Pages 6276-6279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3578]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36827; File No. SR-MSRB-95-17]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to Reports
of Sales and Purchases
February 9, 1996.
On December 13, 1995 the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') a proposed rule change (File No.
SR-MSRB-95-17), pursuant to Section 19(b)(2) of the Securities Exchange
Act of 1934 (``Act''), 15 U.S.C. 78s(b)(2). The proposed rule change is
described in Items I, II, and III below, which Items have been prepared
by the Board. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Board is filing an amendment to Board rule G-14, concerning
reports of sales or purchases, and associated transaction reporting
procedures (hereafter collectively referred to as ``the proposed rule
change''). The purpose of
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the proposed rule change is to enhance the Board's transaction
reporting pilot program (``The program'') to improve support for market
surveillance and enforcement of Board rules. The proposed rule change
would require brokers, dealers and municipal securities dealers
(``dealers'') to include the time of trade execution when submitting
information on inter-dealer transactions to the Board under rule G-14.
This would make it possible to reconstruct the time sequence of the
transactions. Such information would be made available, through the
Board's automated transaction reporting system, to the Commission and
to organizations charged with inspection for compliance with, and
enforcement of, Board rules (``enforcement agencies''). The Board is
requesting that the proposed rule change become effective July 1, 1996.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Board included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the purposed rule change. The
texts of these statements may be examined at the places specified in
Item IV below. The Board has prepared summaries, set forth in Section
(A), (B), and (C) below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(a) Background
On November 9, 1994, the Commission approved an amendment to Board
rule G-14, on reports of sales or purchases of municipal securities,
and associated transaction reporting procedures for inter-dealer
transactions.\1\ The amendment enabled implementation of the Board's
transaction reporting program and operation of the supporting computer
system. The program is an important first step to increase transparency
in the municipal securities market.
\1\ See Securities Exchange Act Release No. 34955 (November 9,
1994), 59 FR 59810.
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The goals of the program are to help provide market participants
and the public with more information about the value of securities, and
to help enforcement agencies identify transaction patterns as they
carry out dealer inspections and conduct market surveillance. The Board
stated in 1994 its plans to implement the program (the ``1994
plan'').\2\ The 1994 plan called for the Board to disseminate a daily
public report summarizing market activity for those municipal
securities that traded ``frequently'' \3\ on the previous day (``T+1
reporting''). The plan also called for the construction of a
comprehensive ``surveillance database,'' that would include details of
each trade (the identity of the parties, the price, par value, etc.).
The 1994 plan had four phases, of which the first three covered
different types of municipal securities transactions: Inter-dealer
transactions in Phase I, institutional customer transactions in Phase
II,\4\ and retail customer transactions in Phase III. The time-of-trade
would be added to the surveillance database after initial
implementation of Phase I and also would be included as transaction
data in subsequent phases. Phase IV is the Board's plan ultimately to
improve the public reporting of transaction data by capturing and
reporting trade data intra-day, rather than reporting it on the
following business day.
\2\ See letter from Robert Drysdale, MSRB, to Arthur Levitt,
SEC, dated November 3, 1994.
\3\ Currently, the threshold for ``frequent'' trading is four or
more trades in one day.
\4\ ``Institutional'' transactions were defined for the purpose
of Phase II as customer transactions settled on a delivery versus
payment/receipt vs. payment (DVP/RVP) basis. These are transactions
in which the customer requires that settlement occur with an
exchange of money and securities at the time of settlement.
Generally, institutional customers require DVP/RVP settlement and
retail customers do not.
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The 1994 plan called for data taken from the central confirmation/
acknowledgment system to serve as the input stream for institutional
customer transaction reporting in Phase II. Currently, dealers submit
information on transactions with institutional customers to this
system, pursuant to Board rule G-15(d), to facilitate automated
clearance and settlement.\5\ For Phase III, however, retail customer
transaction data would be reported by dealers directly to the Board,
since there is no central system to receive such information.
\5\ This system, operated by Depository Trust Corporation (DTC),
is known as the Institutional Delivery (ID) system.
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A study by the Board of sample data from the confirmation/
acknowledgment system, conducted during the spring and summer of 1995,
revealed that data submitted by dealers to this system is unsuitable
for transaction reporting purposes, since the data available for T+1
reporting is not sufficiently reliable and complete to be usable as a
source of published T+1 prices. The Board examined a number of possible
measures to improve the data, but found no alternative to make
confirmation/acknowledgment data sufficiently reliable and complete.\6\
The Board consequently has revised the 1994 plan, and now plans to
combine reporting of all dealer-customer transactions in one phase
which will replace Phases II and III in a ``customer transaction''
phase. Under the revised plan, dealers, either directly or through
intermediaries, would report selected information about institutional
and retail customer trades to the Board by uploading the data from
their own systems to the central system operated by the Board. A notice
will be made available to the Commission and the industry, by the end
of 1995, outlining the new plan and requesting comment from industry
participants. Corresponding amendments to rule G-14 will be filed with
the Commission in mid-1996. The planned starting date for the customer
transaction phase is January 1998.\7\
\6\ In its study, the Board found nothing to indicate any
problem with the reliability of the information as it relates to
settlements. The data sample seems satisfactory for its intended
purpose of facilitating automated clearance and settlement.
\7\ The Commission notes that it has not approved this change in
schedule for the transparency pilot program.
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Operation of Phase I System
Phase I of the transaction reporting system has been operational
since January 23, 1995. Each day, the system has produced a report of
price and volume of inter-dealer transactions in municipal securities
that were executed the previous business day. In addition to the
transparency component which produces these daily reports, the system
has a second component, a surveillance database of detailed records
about every inter-dealer transaction that has been successfully
compared \8\ by the automated comparison system. The surveillance
database includes, among other things, the price and volume of each
compared transaction, the trade date, identification of the security
traded, and identification of all parties to each compared
transaction.\9\ This information is intended to enable the enforcement
agencies to construct audit trails of inter-dealer transactions. The
Board has provided on-line access to the surveillance database to the
National Association of Securities Dealers, Inc. (``NASD'') and is
making information
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from the surveillance database available to all agencies responsible
for enforcing Board rules.
\8\ In general, a ``compared'' transaction is one for which
salient information items, provided by both parties to a trade, are
matched and found to agree by the automated comparison system.
\9\ The Commission has recently approved the requirement to
identify all dealers that are parties to a trade when submitting
transaction information to the Board. See Securities Exchange Act
Release No. 35988 (July 18, 1995), 60 FR 38069.
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The input stream for inter-dealer transaction reporting is
transaction information reported by dealers, pursuant to rule G-14, to
the Board through the automated comparison system. The Board has
designated National Securities Clearing Corporation (``NSCC''), the
central facilities provider of the automated comparison system, as its
agent for receiving inter-dealer transaction information.
Need for Time-of-Trade Information
The Commission has noted the need to make an ``integrated audit
trail'' of transaction information available to the enforcement
agencies. The Commission has expressed its belief that an audit trail
will ``provide valuable information for market surveillance and
inspection purposes to the MSRB, the Commission, the NASD, and the
relevant banking agencies.'' \10\
\10\ Securities Exchange Act Release No. 34955, supra note 1, at
19.
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The proposed rule change will help to ensure that the audit trail
information in the surveillance database includes the time of execution
of each compared inter-dealer municipal securities transaction.
Enforcement agencies are expected to utilize the time-of-trade
information when examining a series of transactions in a given
municipal security. The information currently available from the
surveillance database enables one to determine the date on which a
trade or group of trades was executed; the addition of time-of-trade
will help determine the sequence of trades during the day.
The Requested Date of Effectiveness
Changes in the automated comparison system are underway to enable
that system to incorporate time-of-trade information collected as part
of the trade data submitted by dealers.'' \11\ Dealers and providers of
system services must make corresponding changes in dealer systems that
provide input to the automated comparison systems, and some time will
be needed to allow these changes to be made. Accordingly, the Board is
requesting that the Commission make the proposed rule change effective
on July 1, 1996, to provide market participants with sufficient time to
make the necessary internal system changes.
\11\ The Board understands from conversations with NSCC
representatives that the necessary changes to the automated
comparison system will be complete and tested during the first
quarter of 1996.
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Effect of Proposed Rule Change Upon Dealers
Requiring trade reports to the Board to contain the time-of-trade
would involve relatively minor changes in current practice. Currently,
under Board rule G-8 on books and records, dealers are required to make
and keep a record of the time of execution of each trade, to the extent
feasible,\12\ for each agency order and each transaction effected by
the dealer as principal. Under the proposed rule change, each dealer
reporting inter-dealer transactions to the Board would include the time
of execution in each transaction submitted to the automated comparison
system.\13\ The time-of-trade would be reported by both the buyer and
seller, to ensure that a time-of-trade is available on all transactions
even when one side does not report the trade on the night of trade
date.\14\
\12\ The Board has clarified that the phrase ``to the extent
feasible'' is intended to require municipal securities professional
to note the time of execution for each agency and principal
transaction ``* * * except in extraordinary circumstances when it is
impossible to determine the exact time of execution. In such cases,
the municipal securities professional should note the approximate
time of execution and indicate that it is an approximation.'' (MSRB
Interpretation of July 29, 1997 regarding rules G-8(a)(vi) and
(vii), MSRB Manual (CCH), para. 3536 [emphasis added].)
\13\ Rule G-14 Transaction Reporting Procedures stipulate that
the broker, dealer or municipal securities dealer may employ an
agent that is a member of NSCC or a registered clearing agency for
the purpose of submitting transaction information; however, the
primary responsibility for timely and accurate submission continues
to rest with the broker, dealer or municipal securities dealer that
executed the transaction.
\14\ The time, accurate to the nearest minute, would be reported
as Eastern time. The time-of-trade would not be used to match
submissions during the comparison process nor would it be made
public in the daily reports. Requiring both the buyer and seller to
report time-of-trade will ensure its presence in the surveillance
database for those transactions where advisories are ``stamped'' in
the automated comparison system. In ``stamping'' an advisory of a
transaction to achieve comparison, one party indicates agreement
with the transaction information submitted by the other party. If
time-of-trade information were to be required of the party on only
one side of the trade, transactions ``stamped'' by that party would
not include any time-of-trade information for reporting purposes. In
certain limited cases, involving syndicate transactions, however,
NSCC comparison procedures require a submission only from one
dealer: the syndicate manager. Accordingly, only one dealer (i.e.,
the syndicate manager) is required in such a case to report the
trade to the Board, and only that dealer would report the time-of-
trade.
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(b) The Board has adopted the proposed rule change pursuant to
Section 15B(b)(2)(C) of the Securities Exchange Act of 1934, which
requires, in pertinent part, that the Board's rules:
Be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating * * *
transactions in municipal securities, to remove impediments to and
perfect the mechanism of a free and open market in municipal
securities, and, in general, to protect investors and the public
interest * * *.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Board does not believe that the proposed rule change will
impose any burden on competition in that it applies equally to all
dealers in municipal securities.
C. Self-Regulatory Organization's Statement of Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Board published a notice in February 1995, which among other
things, described the proposed rule change and requested comment from
market participants.\15\ Two letters were received commenting on the
proposed rule change. One commentator \16\ stated that time-of-trade
reporting would involve ``major and possibly costly'' system changes to
dealer systems. This commentator believed time-of-trade reporting
should be delayed until retail customer transactions are added to the
transaction reporting program, so that dealers and clearing agencies
could make the needed changes in conjunction with more extensive
changes foreseen for the later phases. Another commentator \17\ stated
that many firms would incur development costs to modify their trading
systems to accommodate time-to-trade information.
\15\ See ``Transaction Reporting Program for Municipal
Securities: Phase II,'' MSRB Reports, Vol. 15, No. 1 (April 1995),
at 11-15.
\16\ The Public Securities Association provided this comment.
\17\ Goldman, Sachs & Co. provided this comment.
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The Board believes that the proposed rule change is essential to
facilitating effective surveillance and enforcement activities
regarding inter-dealer transactions and should not be delayed until
later phases of the transaction reporting program. The Board does not
believe that incorporating time-of-trade data into current trade
reporting systems represents a major system change. The proposed rule
change would merely add one item of information to an existing
reporting requirement. That information item already is required, for
recordkeeping purposes, to be recorded by the dealer. The Board is
proposing more than six months' lead time to allow dealers sufficient
time to schedule the necessary system changes. In many cases, it would
be expected that this
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change could be made in connection with other minor system adjustments
that must be implemented in the ordinary course of business.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
As discussed above, the Board is requesting that the Commission
make the proposed rule change effective on July 1, 1996, to provide
market participants with sufficient time to make the necessary internal
system changes.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies
of the submissions, all subsequent amendments, all written statements
with respect to the proposed rule change that are filed with the
Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of the filing will also be
available for inspection and copying at the Board's principal offices.
All submissions should refer to File No. SR-MSRB-95-17 and should be
submitted by March 8, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3578 Filed 2-15-96; 8:45 am]
BILLING CODE 8010-01-M