[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 

[[Page 6277]]
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 

[[Page 6278]]
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 

[[Page 6279]]
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