[Federal Register Volume 61, Number 211 (Wednesday, October 30, 1996)]
[Notices]
[Pages 56072-56078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-27806]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37859; File No. SR-MSRB-96-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to Reports 
of Sales and Purchases, Pursuant to Rule G-14

October 23, 1996.
    On August 29, 1996, 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-96-10), pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act''), 15 U.S.C. Sec. 78s(b)(1). 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

[[Page 56073]]

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 and purchases, and to the Rule G-14 Transaction 
Reporting Procedures. The purpose of the proposed rule change is to 
increase transparency in the municipal securities market by adding 
retail and institutional customer transaction information to the inter-
dealer transactions currently included in the Board's Transaction 
Reporting Program (``Program''). The proposed rule change would require 
brokers, dealers and municipal securities dealers to (1) obtain an 
executing broker symbol, if one has not already been assigned, from the 
National Association of Securities Dealers (``NASD''); (2) provide the 
Board with the name and telephone number of a person responsible for 
testing the dealer's capabilities to report customer transaction 
information; (3) test its capabilities to report such information; and 
(4) report to the Board each day its municipal securities transactions 
with customers. The Board is requesting that the proposed rule change 
become effective according to the following proposed schedule:
     Obtain executing broker symbol--Thirty days after 
Commission approval of proposed rule change.
     Provide contact information--July 1, 1997.
     Test reporting capabilities--July through December 1997, 
on a schedule to be announced by the Board.
     Effective date for customer transaction reporting--January 
1, 1998.
    Although portions of the proposed rule change would not become 
effective until 1998, the Board is requesting Commission approval of 
the proposed rule change now to allow dealers adequate time to change 
their internal systems to report customer transactions.

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 proposed rule change. The 
texts of these statements may be examined at the places specified in 
Item VI below. The Board has prepared summaries, set forth in Sections 
A and B below, of the most significant aspects of such statements.

A. Purpose

    The purpose of the proposed rule change is to increase transparency 
in the municipal securities market by adding retail and institutional 
customer transaction information to the inter-dealer transactions 
currently included in the Program. Under the proposed rule change, 
aggregate data about inter-dealer and customer market activity, and 
certain volume and price information about all transactions in 
frequently traded securities, would be disseminated to promote investor 
confidence in the market and its pricing mechanisms. The information 
would continue to be provided in the Program's daily report summarizing 
prices and volumes of trading in the municipal securities market during 
the previous day (the ``Daily Report'').\1\ In addition, the 
transaction information on all transactions reported would be made 
available to regulatory agencies responsible for enforcement of Board 
rules, as a means to assist in market surveillance.
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    \1\ The Board expects in the second quarter of 1997 to file and 
obtain Commission approval of an additional proposed rule change 
specifying revisions to the Daily Report format to accommodate 
customer trade information. The proposed rule change will also 
specify the fee for subscriptions to the Daily Report.
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The Transaction Reporting Program--Overview
    The Board has developed the Program to accomplish two objectives. 
The first is to increase the amount of information available about the 
market value of individual municipal securities, which has been a 
longstanding Board goal.\2\ This concept of disseminating information 
to the public about transactions is now generally referred to by the 
Board as bringing ``transparency'' to the market. The second, but 
equally important, purpose of the Program is to provide a centralized 
audit trail of municipal securities transactions by making available to 
the NASD, the Commission, and other enforcement agencies a computer 
database reflecting all municipal securities transactions reported to 
the Board. This ``surveillance database'' helps meet the requirements 
of those organizations for an audit trail of transaction data, in 
connection with their surveillance of the market and inspection for 
compliance with Board rules and securities laws.
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    \2\ See ``Planned Pilot Program for Publishing Inter-Dealer 
Transaction Information,'' MSRB Reports, Vol. 13, No. 3 (June 1993) 
at 3-6.
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    At this time, the Program is limited to inter-dealer transactions. 
Under Board rule G-14, dealers currently report their inter-dealer 
transactions to the MSRB each night through the automated comparison 
system operated by National Securities Clearing Corporation (``NSCC''). 
This reporting mechanism is convenient for dealers, since most of the 
trade data that must be reported to the Board has to be reported to 
NSCC in any event, for clearance and settlement purposes. The Board 
accomplishes the transparency function by making summary price and 
volume information available about these transactions on the Daily 
Report. If the inter-dealer trade data received by the Board indicates 
that there were four or more trades in an issue during that day, the 
next morning's Daily Report includes the high, low and average prices, 
and the total par traded, for that issue.\3\ Prices and volumes for 
approximately 100 municipal securities issues are reported daily.
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    \3\ Inter-dealer trades are reported publicly only if they were 
successfully ``compared'' on trade date in the automated clearance 
and settlement system, i.e., if the parties to the trade agreed on 
trade details such as par value, price, and yield. Average prices 
are reported only for those trades with par value between $100,000 
and $1 million.
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    The Board's Daily Report Service currently has nine subscribers who 
receive electronic copies of the Daily Report each morning. Some 
subscribers, such as news services, redistribute the information 
broadly to their own clienteles. Paper copies of the Daily Report are 
available for inspection in the Board's Public Access Facility in 
Alexandria, Virginia. Information from the Daily Report is also 
utilized in the Public Securities Association's transparency 
initiatives: a generic AAA insured yield scale for publication in 
newspapers, and an 800-number investor service.\4\
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    \4\ The generic AAA insured yield scale provides composite 
prices based on round lot trades ($250,000 or above) of municipal 
bonds which have coupons that reflect current market conditions. 
Certain yield scale data is published daily in a national newspaper, 
USA Today (see, e.g., ``Key Indicators Thursday,'' USA Today, 
Friday, August 23, 1996, at 3B). the 800 number investor service 
enables investors to obtain benchmark price quotes relating to 
particular issues of municipal bonds. Both PSA services incorporate 
information from the Daily Report, and, in the case of the 800-
number service, the caller receives prices from the Daily Report if 
they are available.
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    The surveillance database contains information on all transactions 
reported to the Board and is not limited to transactions in issues 
traded four or more times. The database also contains information 
reported to the Board but not included in Daily Reports, such as dealer 
identities. The NASD currently uses the database to assist in its 
surveillance of the market and provides direct access to the database 
to

[[Page 56074]]

surveillance staff at its headquarters and two of its District Offices.
History of Program
    In June 1994, the Board filed a proposed rule change to require 
that dealers report inter-dealer transactions and to operate a facility 
to report transaction information.\5\ This filing described the 
computer system that would obtain inter-dealer trading data from 
dealers and the Board's plan ultimately to include institutional and 
retail customer transactions in the system, with the goal of making 
available transaction information that is both comprehensive and 
contemporaneous. In 1994 the Board stated its plan to implement the 
Program in four phases.\6\
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    \5\ See Securities Exchange Act Release No. 34458 (July 28, 
1994) at 3.
    \6\ See ``Reporting Inter-Dealer Transactions to the Board: Rule 
G-14,'' MSRB Reports, Vol. 14, No. 5, (December 1994) at 3-6.
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    Phase I--Inter-dealer transaction reporting, in which dealers would 
use NSCC's comparison system as the reporting vehicle.
    Phase II--Institutional customer transaction reporting, in which 
dealers would use the clearance and settlement system as the 
transaction reporting mechanism for those trades. Since dealers already 
use this system to clear most of their transactions with institutional 
customers, it was though that this technique would provide a relatively 
quick and easy means to add institutional customer data to the Program. 
Time-of-trade reporting for inter-dealer and institutional customer 
trades also would be added in this phase.
    Phase III--Retail customer transaction reporting. Because retail 
customer transactions are not currently reported by dealers to any 
central location, such reporting would have to be accomplished by 
dealers modifying their own trade processing systems to generate files 
of customer trades that could be transmitted to a new, customized 
computer system at a central site.
    Phase IV--More contemporaneous trade reporting. Phases I-III would 
require dealer reporting of data by the end of trade date, with public 
dissemination on the next day.
    Phase IV of the Program would be a mechanism to accomplish more 
contemporaneous reporting of data to the Board and to the public.
    The Commission in November 1994 approved the proposed rule change 
for reporting inter-dealer transactions. Phase I Daily Reports went 
into production in January 1995. Two program modifications in Phase I 
were implemented over the next 18 months. A requirement to report the 
identify of the executing dealers in inter-dealer transactions (as 
opposed to only identifying the clearing dealers) became effective July 
9, 1995 \7\ and a requirement to report the time of execution of inter-
dealer transactions became effective July 1, 1996.\8\
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    \7\ See Securities Exchange Act Release No. 35988 (July 18, 
1995). The initial 1995 proposed rule change included a requirement 
to report executing dealer identities but did not specify which 
identification symbol was to be used. Some dealers have used NSCC 
clearing numbers, others NASD executing broker symbols, and others 
ad hoc symbols which they created themselves. Subsequent experience 
has shown that one identifier--the NASD executing broker symbol--is 
the most appropriate identifier for purposes of the Program. This is 
discussed below, under ``Dealer Reporting Requirements.''
    \8\ See Securities Exchange Act Release No. 37116 (April 16, 
1996). The time-of-trade data is currently being stored in the 
database and in the near future will be made available on the 
surveillance screens.
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Revised Strategy for Obtaining Customer Transaction Data
    In preparation for adding institutional customer transaction data 
in Phase II, during the summer of 1995 the Board conducted a thorough 
review of institutional customer trade data being submitted by dealers 
to the centralized clearance and settlement system for institutional 
customer trades.\9\ The review found that various aspects of this data 
made it unsuitable for transparency and surveillance support purposes. 
In general, the standards desired for timeliness, accuracy and 
completeness of trade data for transparency and market surveillance 
purposes were not met by the data flowing through the clearance and 
settlement system. The procedures for submitting, resubmitting and 
canceling trades are geared toward purposes of clearance and 
settlement, e.g., if the customer's account number is unknown, dealers 
must delay submitting the trade to the clearance and settlement system 
until it is known. Dealers also must cancel and resubmit trade reports 
to the clearance system to correct settlement-related information, such 
as name or identification number of the customer's agent. A number of 
procedures and practices employed by dealers for submitting information 
to the clearance and settlement system appeared to be acceptable for 
that purpose but would have hindered the purposes of transaction 
reporting.\10\
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    \9\ The centralized clearance system that dealers currently are 
required to use to help clear and settle institutional customer 
trades under rule G-15(d) is operated by the Depository Trust 
Company (DTC), and is generally known as the Institutional Delivery 
(ID) System. The ID System produces confirmations and 
acknowledgements of institutional trades and is linked to the 
automated system for book-entry settlement.
    \10\ The Board's review found that dealers submit a substantial 
portion of institutional trades to the clearance and settlement 
system after trade date, because of unknown customer account 
numbers, unknown settlement dates, and other reasons. The relatively 
high cancellation rate of submissions also creates questions about 
accuracy of the data available on trade date. Only a small fraction 
of dealer-submitted trade information is acknowledged as correct by 
the customer or its agent by the end of trade date. Of the remaining 
data, some is later acknowledged but a substantial portion is not 
acknowledged before settlement occurs. For those trades not 
acknowledged by customers on trade date, it is not possible, on the 
morning of the day after trade date (T+1), to distinguish between 
those transactions that were submitted with correct price and 
quantity and those which were not.
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    The ability of the Board and the industry to overcome the problems 
with the use of clearance and settlement data for transaction reporting 
would have required changes in the clearance and settlement system and 
substantial changes in internal dealer systems and procedures that feed 
trade data to the clearance and settlement system. This would have been 
a costly and time-consuming project and, at its conclusion, it would 
immediately have been necessary to solve similar problems in collecting 
retail transaction data. The Board decided instead to combine 
institutional customer transactions with the planned retail trade 
reporting component of the Program so that retail and institutional 
customer transactions could be collected using a single mechanism 
designed specifically to accommodate the purposes of transaction 
reporting. This new plan, and the recognition of the full extent of 
changes that would need to be made by dealers to their operations, also 
necessitated a delay in the previously announced date for implementing 
institutional and retail transaction reporting.\11\
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    \11\ Initially the Board had anticipated that retail customer 
transactions would be added to the Program by the end of 1996. Under 
the revised plan, this function would be delayed to January 1, 1998.
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The Customer Transaction Reporting Program
    Overview. Under the Board's revised approach, included in the 
proposed rule change, each dealer that effects transactions with 
customers would generate a file of certain required information about 
its customer transactions, in a specified format, and would transmit 
the file electronically to the MSRB by midnight of each trading day. 
The Board expects that most dealers will modify existing internal 
processing systems to produce the file required by the proposed rule 
change. This approach will be less costly to

[[Page 56075]]

dealers than if the Board were to mandate the use of an independent 
transaction reporting system with stand-alone terminals that would have 
to be acquired by dealers and operated by dealer staff.
    The dealer could use any available method to transmit the specified 
file to the Board's system. Most dealers are expected to use existing 
telecommunications links with NSCC for this purpose, but, 
alternatively, dealers with low volumes of customer trades may dial-in 
to the Board's system and upload the file by modem.
    The Board plans to build a subsystem of the Transaction Reporting 
System for accepting customer transaction information. The resulting 
Customer Transaction Reporting Subsystem (``CTRS'') would encompass the 
system originally planned for retail transactions, but will process 
institutional customer transaction data as well. Therefore, dealers 
will have consistent operational requirements for reporting both retail 
and institutional customer transactions.
    Trade Information to be Reported. Dealers would report 
approximately a dozen data items about each customer trade. These 
items, and their purpose in the customer transaction reporting 
subsystem, are as follows:
    CUSIP Number. The number assigned by the CUSIP Service Bureau to 
identify the security. Other identification numbers will be considered 
errors. This item is needed for transparency and surveillance 
purposes.\12\ Format: 9 alphanumeric characters.
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    \12\ Items needed for transparency purposes will appear on the 
public Daily Report. Items needed for surveillance purposes will be 
stored the Board's surveillance database and used by the enforcement 
agencies for audit trail construction and other enforcement 
purposes.
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    Trade Date. The date the trade was executed. This item is needed 
for transparency and surveillance purposes and to determine compliance 
with the Board's rule G-14 requirement that the trade be reported on 
trade date. Format: 8 digits, CCYYMMDD.
    Time of Trade Execution. The time of day, stated as Eastern time to 
the nearest minute, at which the trade was executed. This item is 
needed for surveillance purposes. Format: 4 digits, HHMM, Military 
format.
    Dealer Identifier. The executing broker symbol, assigned by the 
NASD, that identifies the executing dealer. The dealer identity is 
needed for surveillance purposes. Format: 4 letters, e.g., ABCD.
    Buy/Sell Indicator. An indicator of the dealer's capacity as buyer 
or seller in the transaction. This item is needed for surveillance 
purposes. Format: ``B'' or ``S''.
    Par Value Traded. The par value, in dollars, of the securities in 
the transaction. The maturity value of zero coupon securities will be 
given if it differs from the par value. Par value is needed for 
transparency and surveillance purposes. Format: 9 digit integer.
    Dollar Price. The price of the security, in dollars per hundred 
dollars par value. Dollar price will be reported to the CTRS excluding 
any commission; the CTRS will include the commission (a separate item, 
described below) in dollar prices as shown in the Daily Reports. If the 
dollar price cannot be computed precisely because the settlement date 
of a ``when-issued'' transaction is unknown, the CTRS will estimate the 
dollar price based upon the reported yield and an estimated settlement 
date (see below). Dollar price is needed for transparency and 
surveillance purposes. Format: 9 digits plus explicit decimal point, 
e.g., 100.123456 or 098.765432. The decimal point may ``float,'' e.g., 
both 00099.5000 and 99.5000000 are valid.
    Yield. The yield of the transaction, in percent, as reported on the 
confirmation. Yield will not be required on transactions in municipal 
variable-rate or collateralized mortgage obligations. Yield will be 
used to validate dollar price. Format: 8 digits plus explicit decimal 
point. Units are per cent, e.g., 03.500000 denotes 3.5%.
    Dealer's Capacity and, if Agent, Commission Charged. The dealer's 
capacity indicates whether the dealer acted as agent or principal 
toward the customer. It is needed for surveillance purposes. 
Commission, if any, will be stated as dollars per hundred dollars par 
value, and is needed for computing the net price including commission. 
Format ``A'' or ``P''. Commission: 7 digits plus explicit decimal, 
e.g., 00.05000.
    Settlement Date. The date the transaction is due to settle. The 
dealer must provide the settlement date if it is known. If the 
settlement date for an issue in ``when-issued'' status is not known at 
the time the trade information is reported, the CTRS will estimate it 
as 20 business days after the first trade in the issue, until the 
actual settlement date for the issue is determined. This item will be 
used to validate the consistency of dollar price and yield as reported. 
Format: 8 digits, CCYYMMDD.
    Dealer's Control Number for Transaction. An identifier, assigned by 
the executing dealer, sufficient to identify the transaction from among 
the dealer's other transactions. Dealers may use any coding method, 
provided that no two transactions done by a dealer within a three-year 
period have the same control number. This item is needed for 
surveillance purposes (so that submissions can be associated with 
entries in the dealer's record-keeping system) and for data management 
(so that a dealer may identify a transaction to be revised after it is 
first reported to the CTRS). Format: 20 alphanumeric characters.
    Cancel/Amend Code and Previous Record Reference. An indicator of 
whether the dealer is reporting an update to data previously reported 
about a transaction, and, if necessary, the dealer's control number for 
the transaction whose data is to be updated. Cancel/Amend code format: 
``F'': First report of this transaction to the MSRB. ``C'': Cancel the 
record of the trade identified by the dealer's control number. ``A'': 
Amend the record of the trade identified by the dealer's control 
number. ``V'': Verification that a record of a transaction containing 
possible errors is correct.
    Use of Intermediaries. An important feature of the Program is a 
provision for dealers to submit customer transaction data to the Board 
through an intermediary that could handle the technical details of 
preparing files in the specified format and/or the function of 
transmitting correctly formatted files to the CTRS. For example, 
clearing dealers (dealers that submit transactions for clearance and 
settlement on behalf of other dealers) could report transactions on 
behalf of the dealers for whom they clear. Clearing dealers themselves 
may use service bureaus (firms offering confirmation or other 
processing services) to collect, format and transmit data to the Board. 
By using the same telecommunication links for CTRS data as for clearing 
data, the expense to dealers of customer transaction reporting would be 
minimized.
    The Submission Process. Dealers or intermediaries will perform two 
steps in submitting customer trade data to the Board. First, they will 
prepare a file containing the necessary information in the physical 
format specified by the Board. Second, they will transmit the file to 
the CTRS.
    The dealer may extract the necessary information from its record-
keeping or automated confirmation systems, or may key in the data to a 
program designed specifically to create a file in the correct format. 
For dealers who wish to key in data on a personal computer, data entry 
and editing software will be made available by the Board. It is 
expected that only dealers with low volumes of trades will use this 
method, since higher-volume dealers already store

[[Page 56076]]

most of the required trade data in existing computer systems and are 
expected to adapt those systems for reporting purposes rather than 
manually re-enter the data into another system.
    For file transmission, the Board expects most dealers to use 
intermediaries, as discussed above. Existing links between dealers and 
NSCC are expected to be used to transmit most files.\13\ If a dealer 
does not wish to use a intermediary to transmit files to the Board, the 
dealer will be able to upload files directly to the CTRS from a 
personal computer. The Board will make telecommunications software 
available for uploading files, which will run on the dealer's computer 
under Microsoft Windows. To upload files by dialing in, a dealer will 
need a modem and any version of Windows supported by Microsoft 
Corporation. The Board expects this option to be utilized only by 
lower-volume dealers because most high-volume dealers are already 
linked with NSCC. The CTRS is being designed initially with sufficient 
capacity for up to 100 dial-in submissions per day, although fewer are 
expected.
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    \13\ The Board currently is in discussion with NSCC and it 
appears that NSCC will offer telecommunications services to dealers 
for customer transaction reporting.
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    Errors and corrections. The system will send messages to dealers, 
by facsimile, acknowledging receipt of a day's file and identifying 
records that appear to be in error or questionable. (The system also 
will make available an electronic copy of the receipt and error message 
file, which the dealer may optionally download to its computer if it 
prefers.) Dealers will submit corrections using a method similar to 
that for reporting trades. A dealer may also ``cancel'' a trade, that 
is, inform the system that a trade previously reported did not occur or 
was cancelled by the parties. Dealers will report only changes relevant 
to the Board's transaction reporting purposes, for example, a change in 
the price or par value of a trade.
Dealer Reporting Requirements
    The proposed rule change would require dealers to report their 
customer transactions to the Board by midnight of trade date. Dealers 
also would be required to report corrections and cancellations as soon 
as the need for such change is known. Dealers would be able to make 
changes to data previously reported for two months after the trade 
date.
    The proposed rule change would also require each dealer to use a 
NASD four-letter executing broker symbol (e.g., ``ABCD'') to identify 
itself as the party that effected a transaction. Dealers reporting 
inter-dealer trades to the Board through NSCC currently are required by 
rule G-14 to identify the executing brokers (as well as the clearing 
brokers), but the specific symbol to be used is not specified in rule 
G-14 procedures. Specifying the use of the NASD executing broker symbol 
will enable users of the surveillance database to determine the 
executing dealer unambiguously in all cases. The NASD assigns such 
symbols, on request, to all dealer firms including bank dealers. A 
dealer not already assigned such a symbol will be required to obtain 
one from the NASD. Executing broker symbols are already in wide use by 
many dealers. Since identification symbols are already needed for the 
audit trail of inter-dealer transactions and it would improve the 
functions of the surveillance database for this uniform identifier to 
be used, the Board requests that this provision become effective 30 
days after Commission approval of the proposed rule change.
    The requirement to report customer trades would become fully 
effective January 1, 1998, with a testing requirement, discussed below, 
effective beginning July 1997.
Proposed Mandatory Testing
    Dealers will need to test their own trade processing systems to 
ensure they can produce files containing the required information in 
the proper format. Such testing would clarify system input 
specifications with dealers and ensure that dealers' systems are able 
to correct erroneous input. Mandatory testing by dealers is the only 
way to ensure that dealers' systems are ready to submit customer trade 
data before the reporting requirement becomes effective.
    To begin system operations by January 1, 1998, the proposed rule 
change would require testing with dealers between July and December 
1997. Procedures would involve testing first by the dealers with the 
greatest volume of customer trades, followed by the lower-volume 
dealers. Each dealer would be required to report all its customer 
trades, on a test basis, to the Board for a specified time. None of the 
test submissions would be publicly reported or provided to the 
enforcement agencies. The Board would inform the dealers of any 
problems found, and the dealer would re-test its system and reporting 
procedures within two months of the initial run. The proposed rule 
change would require dealers to provide the Board with the name of a 
dealer staff person responsible for testing, and to participate in a 
testing program, which would begin in July 1997. The Board plans to 
test first with larger submitters, giving consideration to the test 
readiness of individuals firms.
The Daily Report
    All transactions in municipal securities will be recorded in the 
surveillance database. The Daily Report, however, will not include 
price data on every transaction, since it reports on those issues that 
were traded most frequently during the previous day. As noted above, 
currently the Daily Report includes summary information on those 
securities which were traded four or more times the previous business 
day. Including customer trades will substantially increase the number 
of issues trading above this ``reporting threshold.'' It is impossible 
at this time, however, to predict quantitatively the effect on the 
Daily Report of including retail customer trades, since there is no 
existing source of comprehensive retail transaction information in the 
industry. The Board is requesting and has begun receiving samples of 
customer trade data from certain dealers, on a voluntary basis, and has 
begun to measure the frequency with which issues are traded, trade 
sizes, and other factors needed to structure the Daily Report to 
include customer transaction data. The Board plans to determine the 
reporting threshold and other formatting aspects of the Daily Report by 
mid-1997 and will describe it in an additional proposed rule change, to 
be filed before system operations begin.\14\
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    \14\ The planned proposed rule change will also specify the fee 
for subscriptions to the Daily Report, along with any Program 
modifications found to be necessary.
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Customer Transaction Data as a Measure of Dealers' Market Participation
    The Board currently levies four types of fees that are generally 
applicable to dealers. Rule A-12 provides for a $100 initial fee paid 
once by a dealer when it enters the municipal securities business. Rule 
A-14 provides for an annual fee of $200 from each dealer that conducts 
municipal securities business during the year. Rule A-13 provides for 
an underwriting fee based on the par value of a dealer's participation 
in primary offerings of municipal securities, and for a transaction fee 
based on the par value of a dealer's transactions reported to the 
Board. The transaction fee is currently .0005 per cent (one-half cent 
per $1,000) of the total par value of inter-dealer sales of municipal 
securities, since the current

[[Page 56077]]

reporting requirement applies only to inter-dealer trades.
    The Board's goal in allocating fees among dealers is to reflect as 
accurately as possible each dealer's involvement in the municipal 
securities market. The Board believes underwriting activity and inter-
dealer transaction volume currently are the best available and 
auditable means upon which to base fees, but the Board has noted that 
these measures of dealer activity do not track every important activity 
in the market.\15\ When customer transaction data becomes available, 
the Board will consider revising the basis of the transaction fee to 
include all trades in municipal securities, not just the inter-dealer 
transactions as under the current transaction fee structure.
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    \15\ See Securities Exchange Act Release No. 36492 (November 20, 
1995) at 4-5 and ``Revisions to Board Fee Assessments: Rules A-13, 
A-14 and G-14,'' MSRB Reports, Vol. 16, No. 1 (January 1966) at 29.
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B. Statutory Basis

    The Board has proposed the rule change pursuant to Section 
15B(b)(2)(C) of the Act, 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. * * *

III. 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.

IV. Self-Regulatory Organization's Statement of Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

The 1995 Request for Comments

    The Board published a notice in February 1995,\16\ requesting 
comment on the institutional customer transaction phase of the Program 
and proposing that, to produce the Daily Report in this phase, 
institutional customer and inter-dealer transactions would be reviewed 
together to identify those issues in which four or more transactions 
occurred on a given day. Once these frequently traded issues were 
identified, the prices for all transactions in the issue would be 
reviewed to determine the high and low prices, which would be reported 
on the next day. An ``average price'' would be computed based upon all 
transactions in that issue involving par values between $100,000 and $1 
million, if any. In response, six comment letters were received from 
the following:
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    \16\ ``Transaction Reporting Program for Municipal Securities: 
Phase II,'' MSRB Reports, Vol. 15, No. 1 (April 1995) at 11-15.
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    A.G. Edwards & Sons, Inc. (``Edwards'') \17\
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    \17\ Letter from Douglas L. Kelly, Vice President, A.G. Edwards 
& Sons, Inc. to Larry M. Lawrence, Policy and Technology Advisor, 
MSRB (May 30, (1995).
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    Goldman, Sachs & Co. (``Goldman'')\18\
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    \18\ Letter from Edward C. Briscotti, Vice President, Goldman, 
Sachs & Co., to Judith A. Somerville, Uniform Practice Specialist, 
MSRB (May 31, 1995).
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    Kemper Securities, Inc. (``Kemper'')\19\
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    \19\ Letter from Kathleen M. Burns, Municipal Bond Dept., Kemper 
Securities, Inc., to Hal Johnson, Deputy General Counsel, MSRB 
(August 22, 1995).
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    The Public Securities Association (``PSA 1995'') \20\
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    \20\ Letter from Joseph W. Sack, Senior Vice President, Public 
Securities Association (``PSA 1995'') to Larry M. Lawrence (June 2, 
1995).
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    The Regional Municipal Operations Association (``RMOA'')\21\
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    \21\ Letter from Bruce L. Vernon, Regional Municipal Operations 
Association (``RMOA 1995'' to Judith Somerville (June 13, 1995).
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    Applied Financial Management, Inc. (``Applied Financial'')\22\
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    \22\ Letter from Ron Moore, Senior Market Analyst, applied 
Financial Management, Inc. (``Applied Financial'') to Larry M. 
Lawrence (undated).
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    The Board described its revised plan to implement reporting of both 
institutional and retail customer transactions in a January 1996 notice 
in which preliminary technical specifications were also proposed for 
comment.\23\ In response, three comment letters were received from the 
following:
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    \23\ ``Reporting Customer Transactions in Municipal Securities: 
Rule G-14,'' MSRB Reports, Vol. 16, No. 1 (January 1996) at 15-18, 
and ``Customer Transaction Reporting: Proposed Technical 
Specifications and Request for Comment,'' Ibid. at 19-22.
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    The Public Securities Association (``PSA 1996'')\24\
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    \24\ Letter from George Brakatselos, Vice President, Public 
Securities Association, to Larry M. Lawrence (May 2, 1996).
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    The Regional Municipal Operations Association (``RMOA 1996'')\25\ 
and Zia Corporation (``Zia'')\26\
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    \25\ Letter from Executive Committee of the Regional Municipal 
Operations Association to Harold Johnson (March 22, 1996).
    \26\ Letter from Glenn Burnett, President, Zia Corporation to 
Larry M. Lawrence (July 2, 1996).
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Discussion of Comments
    Use of Institutional Transaction Data from the Clearance and 
Settlement System. One commentator \27\ stated its preference that the 
Board use institutional trade data reported by dealers to the clearance 
and settlement system (referred to in its letter as the Depository 
Trust Company's (``DTC'') Institutional Delivery [ID] System). Another 
commentator \28\ recommended that the DTC develop a program for 
reporting retail customer transaction data. A commentator\29\ suggested 
that the Board focus on reporting institutional customer transactions 
because they are ``much more illustrative of the activities of the 
municipal market'' than are retail transactions.
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    \27\ RMOA 1996
    \28\ Goldman
    \29\ RMOA 1995
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    Although the Board had hoped to use clearance and settlement data 
for institutional customer transaction reporting, after a careful 
review the Board found that various aspects of the clearance and 
settlement system data make it unsuitable for transparency 
purposes.\30\ Regarding the suggestion that the Program should focus on 
institutional, rather than retail, customer transactions, the Board 
notes the retail transactions are a necessary and integral part of the 
Program, both for disclosing prices in the Daily Report and for 
constructing the comprehensive audit trail.
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    \30\ See above and see also ``Reporting Customer Transactions in 
Municipal Securities: Rule G-14,'' MSRB Reports, Vol. 16, No. 1 
(January 1996), at 16 and footnote 6.)
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    The Daily Report. The Board received a variety of suggestions for 
changing the Daily Report. Some commentators \31\ suggested reporting 
individual transactions, while others \32\ suggested combining data 
from all trades falling within a given par value range.
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    \31\ Kemper, Zia and Applied Financial
    \32\ PSA 1995, PSA 1996
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    The Board does not intend to raise the threshold of four or more 
trades a day for Daily Report purposes. At this time, however, it is 
impossible to predict how the inclusion of retail customer data will 
affect the Daily Report, since retail transactions are not available to 
conduct a simulation. The system is being designed to have the 
capability to produce the Daily Report in various formats, based upon 
alternative criteria, so that this decision can be made when more 
information is available. As noticed above, the Board has deferred a 
decision on the Daily Report criteria until next year, by which time 
sample customer trade data, provided voluntarily to the Board by 
several dealers for study, can be analyzed. The Board, at that time, 
will reconsider all of the comments received on the structure of the 
Daily Report.

[[Page 56078]]

    Transactions to be Reported. The Board's 1996 request for comment 
asked whether transactions in certain types of municipal securities 
should be excluded from reporting. The securities that might be 
excluded are those that may require special processing by dealer 
systems, e.g., variable-rate securities, collateralized mortgage 
obligations, securities prepaying principal and securities trading 
``flat.'' One commentator \33\ stated that all municipal transactions 
should be included in the scope of transactions reported, except those 
in securities that are ineligible for CUSIP number assignment. The 
proposed rule change would require dealers to report customer 
transactions in all securities eligible for CUSIP number assignment. 
The Board notes, however, that it may be impossible, at least 
initially, to calculate meaningful and reliable dollar prices from 
yield for some of these instruments with non-standard payment 
structures. Thus, although the separate trade information will go into 
the surveillance database for audit trail purposes, some transactions 
in municipal securities with non-standard payment or call features may 
not be included as part of the Daily Report.
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    \33\ PSA 1996
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    Data Items to be Reported by Dealers. One commentator \34\ stated 
its belief that there is no need for data items in addition to those in 
the request for comment. The Board has determined that, with one 
exception, the data items proposed in the January 1996 notice are 
sufficient for processing customer transaction data and has included 
those items in the proposed rule change.\35\
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    \34\ PSA 1996.
    \35\ The exception is the ``cancel/amend code,'' an indicator 
whether the dealer is reporting a change to data previously reported 
about a transaction. This indicator was not specified in the 1996 
notice, but is logically necessary to enable the dealer to correct 
erroneous reports made to the Board.
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    Estimating the Settlement Date. Transactions involving the 
distribution of new issue securities sometimes are effected before the 
first settlement date is determined. Often the parties to such ``when-
issued'' transactions agree on the yield of the transaction when 
effecting the trade, and calculate the corresponding dollar price after 
the settlement date is determined. The proposed rule change would 
require the reporting of such transactions on trade date. The system is 
designed to estimate the dollar price for next-day reporting based upon 
the reported yield and an estimated settlement date. The 1996 request 
for comment asked whether the dealer or the Board should estimate the 
settlement date, and a commentator \36\ proposed the date should be 
estimated by the Board. Accordingly, the Board will estimate the 
settlement date as the date of first trade plus 20 business days.
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    \36\ PSA 1996.
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    Information about Calls or Pre-refunded Securities. One commentator 
\37\ suggested that the Board require the dealer to report whether the 
security was priced to call or was known to be pre-refunded, in order 
to be sure the dealer took such information into account. The planned 
system is designed to verify the reported dollar price and yield by 
recalculating the dollar price from the reported yield, using data 
about the security obtained from one or more securities information 
vendors. The calculations should be the same if issue information used 
by the Board and the dealer is the same. If the system's recalculated 
price indicates there may be erroneous input caused by typographical 
errors, the dealer will be informed and the transaction will not be 
included in the Daily Report. Therefore, it is unnecessary to request 
call or pre-refunding information from the dealer as part of trade 
input.
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    \37\ Zia.
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    Program Costs and ``Open Systems'' Approach. One commentator \38\ 
expressed concern that the Board remain sensitive to the cost to 
dealers of reporting customer transactions. This commentator also 
commended the Board for taking the ``open system'' approach to provide 
flexibility to dealers and intermediaries in configuring their 
reporting systems.
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    \38\ PSA 1996.
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    The Board notes that the system design and approach to the 
Transaction Reporting Program are intended to minimize long-term 
resource commitments from dealers. Instead of requiring dealers to 
lease a terminal from the Board and hire personnel to input 
transactions, the program is designed so that dealers can generate 
nightly files of trade data from their existing trade processing 
systems. In addition, NSCC has stated its willingness to allow dealers 
to utilize existing telecommunications links as the means for 
transmitting these files to the Board. The Board, as well as dealers, 
will benefit from dealers using existing links with NSCC, since the 
Board's system then will need less hardware and staff to support dial-
in submissions.
    Standardized Format for Vendor Reports. A commentator \39\ posited 
that the Board may desire to have uniformity among transaction reports 
distributed by information vendors, and recommended that the Board 
impose standards for vendor-produced ``Official MSRB Daily Reports.'' 
The Board desires to provide maximum flexibility for value-added 
vendors to reformat the public transaction information to meet the 
needs of the marketplace, and does not intend to define an ``official'' 
report format for redistribution of data obtained via its Daily Report 
Service.
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    \39\ Applied Financial.
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V. 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.

VI. 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-96-10 and should be 
submitted by November 20, 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. 96-27806 Filed 10-29-96; 8:45 am]
BILLING CODE 8010-01-M