[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Notices]
[Pages 37608-37611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18590]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40176; File No. SR-MSRB-98-9]
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
July 7, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 17, 1998, the Municipal Securities Rulemaking Board (``Board''
or ``MSRB'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Board is filing a proposed rule change to institute a service
(``the Service'') to provide daily reports from the Board's Transaction
Reporting Program (``the Program'') that will summarize information
about customer and inter-dealer transactions in municipal securities
reported to the Board under rule G-14. The Board is establishing a fee
for an annual subscription to the Service of $15,000. The proposed fee
is structured to defray the Board's cost of disseminating the
transaction data and to defray, in part, the cost of collecting and
compiling transaction data that will be used in the Program. The Board
does not expect or intend to make a profit from the Service.
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
text of these statements may be examined at the places specified in
Item IV below. The Board has prepared summaries, set forth in sections
A, B, and C below, of the most significant aspects of such statements.
[[Page 37609]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the Service is to increase transparency in the
municipal securities market by adding information about transactions
between dealers and customers (``customer transactions'') to the
information currently disseminated by the Program. Under the proposed
rule change, aggregate data about market activity, and certain volume
and price information about transactions in frequently traded
securities, would be disseminated to promote investor confidence in the
market and its pricing mechanism. The information provided by the
Service would be a daily public report summarizing prices and volumes
of trading in the municipal securities market during the previous day
(the ``Combined Daily Report''). The Combined Daily Report's format is
a revision of the Board's currently produced Inter-Dealer Daily Report.
Like the Inter-Dealer Daily Report, the Combined Daily Report will be
made available by approximately 6:00 a.m. each business day, reporting
on the previous day's market. Subscribers would transfer the report, in
electronic form, from the Board's system to their own computer systems.
A printed copy of the report would be available for examination, free
of charge, in the Board's Public Access Facility in Alexandria,
Virginia. These dissemination methods are the same as for the current
Inter-Dealer Daily Report.
Previous Filings Regarding the Program. As discussed below, the
Board has been operating a program for inter-dealer transaction
reporting since 1995. Dealers are required to report their inter-dealer
transactions to the Board under rule G-14. In 1996, the Board filed
with the Commission an amendment to rule G-14 to require dealers to
report their customer transactions in municipal securities to the Board
in certain prescribed formats and a description of the changes to the
inter-dealer transaction reporting program necessary to add customer
transaction information.\3\ The 1996 filing provided for a period from
July 1, 1997, to December 31, 1997, during which dealers would test
their customer transaction reporting capabilities with the Board. The
Commission approved this amendment and plan, with the amendments to
rule G-14 ultimately becoming effective March 1, 1998.\4\ In March
1998, the Board filed with the Commission its intention to release
samples of the Combined Daily Report for public comment and to make the
Report available on an operational basis in the third quarter of
1998.\5\
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\3\ Exchange Act Release No. 37859 (Oct. 23, 1996), 61 FR 56072
(Oct. 30, 1996).
\4\ Exchange Act Release No. 37998 (Nov. 29, 1996), 61 FR 64782
(Dec. 6, 1996) (approved of amendment to rule G-14); Exchange Act
Release No. 39495 (Dec. 29, 1997), 63 FR 585 (Jan. 6, 1998) (delay
of effectiveness to March 1, 1998).
\5\ Exchange Act Release No. 39835 (Apr. 7, 1998), 63 FR 18242
(Apr. 14, 1998).
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Background and Description of the Program. Since 1995, rule G-14
has required brokers, dealers and municipal securities dealers
(``dealers'') to report to the board their inter-dealer transactions in
municipal securities via the automated comparison system for municipal
securities operated by National Securities Clearing Corporation
(``NSCC''). The Board has used this information to create a database of
transaction information that can be used for market surveillance
purposes and for inspection and enforcement by agencies and
organizations charged with enforcement of Board rules. The Board also
uses the reported transaction information to create the Inter-Dealer
Daily Report, which is used by market participants to help gauge the
value of municipal securities. The Board currently has eight
subscribers to the Inter-Dealer Daily Report. Most of these are
information vendors that redistribute the information to their own
subscribers and/or use the information in various securities valuation
products that they market.\6\
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\6\ The current subscribers are Bloomberg Financial Markets,
Chapdelaine & Company, Dow Jones Telerate, Interactive Data Corp.,
J. J. Kenny Co., Inc., Muller Data Corp., Smith Barney, Inc., and
TradeHistory, LLC.
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Customer trades have been reported by dealers to the Board under
rule G-14 since March 1, 1998. Both customer and inter-dealer
transactions must be reported by midnight of trade date. Although
different mechanisms are used for reporting the two types of trades,
the Board's computerized Transaction Processing System (``TRS'') will
merge the reported trade data to produce the Combined Daily Report and
the surveillance database.
The criteria for including municipal securities information on the
proposed Combined Daily Report will be the same as that described in
the Board's March 1998 filing to produce sample daily reports. These
are essentially the same as the criteria for the current Inter-Dealer
Daily Report. If a municipal security (identified by its CUSIP number)
is reported, in compliance with rule G-14, as having been traded four
or more times on a given day, then the high, low, and average price and
total par value of all the reported trades in that security will be on
the Daily Report the next morning. The average price will be calculated
as the arithmetic mean of reported transaction prices of those trades
between $100,000 and $1,000,000 in par value. This reporting band is
meant to exclude odd lots and very large trades from the average price.
In applying these criteria, inter-dealer and customer transactions will
be considered together. This means that any combination of inter-dealer
and customer transactions totaling four or more in one CUSIP will
trigger the inclusion of price information in the Combined Daily
Report.
The Board expects to make the Combined Daily Report Service
available during the third quarter of 1998, and will file with the
Commission, in advance, an exact date for beginning operation. In
addition to the Combined Daily Report Service, the Board also will use
the data reported by dealers under rule G-14 to create a surveillance
database available to regulatory agencies and organizations responsible
for enforcement of Board rules. The surveillance database will not be
available to regulators until early 1999.
Methods for Reporting Transaction Reporting Data. Since 1995,
inter-dealer transactions have been reported to the Board by dealers
each night through the NSCC automated comparison system. 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 automated comparison system
processes the transaction data to determine, among other things,
whether both parties to each trade have agreed to certain details
(e.g., CUSIP number, par amount, final monies required for
settlement).\7\ Each night, the automated comparison system provides
electronic files to the TRS that include trade information reported by
dealers, plus an indication for each trade whether it was successfully
``compared'' as to its reported details.
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\7\ NSCC procedures provide an exception for transactions
involving the distribution of new issue securities from a syndicate
manager to syndicate members, wherein only the syndicate manager
submits information to the automated comparison system.
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Customer transactions have been reported to the Board each night by
dealers since March 1, 1998 in accordance with the rule G-14 amendment
that became effective on that date, requiring dealers to generate
[[Page 37610]]
a file of required information, in a format specified by the Board, and
transmit the file electronically to the TRS. For most high-volume
dealers, the first step in file transmission is to send the trade file
over existing ``computer-to-computer'' connections between their
computer systems and the NSCC. In the second step, NSCC forwards these
files to the Board without any processing of the trade data. Some
dealers, especially those with low volumes of customer trades who do
not have electronic connections to NSCC, submit customer transaction
files directly to the Board by means of personal computer software
provided free by the Board.
Correction of Data Submitted by Dealers. Corrections to inter-
dealer trade information are made by dealers according to NSCC
procedures, and, after processing, corrected data is provided by the
comparison system to the TRS. Regarding customer trade data, the TRS
sends messages to dealers, electronically or by facsimile,
acknowledging receipt of a day's file and identifying records that
appear to be in error. Dealers submit corrections using a methods
similar to that for repairing trades. A dealer may also ``cancel'' a
trade record if this is necessary to reflect cancellation of the trade
by the parties or to remove erroneous information submitted to the
system.
Description of the Combined Daily Report. Once all transaction
information for a business day has been received; the TRS generates the
Combined Daily Report. As noted, both inter-dealer and customer trades
are counted to determine whether an issue (CUSIP number) was traded
four or more times. Based upon transaction data reported to the Board
in March, April and May 1998, it appears that approximately one
thousand issues will be traded four or more times on a typical day.
The Combined Daily Report includes summary information describing
the day's market in municipal securities. The summary covers all
municipal securities trades, regardless of frequency of trading. The
average daily market statistics during the week of March 30, 1998 were:
Total par amount traded: $8.6 billion
Total number of trades reported: 22,199
Total number of issues traded: 11,499
Number of issues traded four or more times: 1,025
The following data elements of each issue would be published in the
Combined Daily Report.
CUSIP number: The CUSIP number that identifies the issue.
Security description: A short description of the issue that was
traded.
Number of trades: The total number of trades in the issue (both
inter-dealer and customer) that were reported to the MSRB.
Volume traded: The total dollar value of all trades in the issue on
the trade date.
High price: The highest price of all trades in the issue.
Low price: The lowest price of all trades in the issue.
Average price: The arithmetic mean of all trades whose par values
were between $100,000 and $1,000,000.
Trades in average: The number of trades whose par values were
between $100,000 and $1,000,000.
When issued: If ``yes,'' indicates that the issue was traded while
in ``when, as, and if issued'' status.
Assumed settlement date: In some cases, it is necessary to assume a
settlement date to calculate price from yield for inclusion of the
price in the Daily Report. The assumed settlement date for both inter-
dealer and customer trades will be 15 business days after the trade
date (T+15). When it has been necessary to assume a settlement date,
this date will be shown on the Daily Report.
Review Process for Customer Transaction Data Used in Combined Daily
Report. Customer transaction records submitted by dealers are reviewed
automatically as part of data processing within the Transaction
Reporting System. Trade records are excluded from eligibility for the
Combined Daily Report if: (i) the trade date reported in the record is
for a day other than the day being reported in the Daily Report; (ii)
the trade record or the file containing the trade record is not in the
required format or otherwise violates stated system input requirements;
\8\ (iii) the submitter of the file has not filed with the Board the
required information to identify itself; (iv) the trade record contains
a dealer identifier that is unknown to the Board; \9\ (v) the
information contained in the trade record is so substantially outside
expected parameters that an input error is suspected; (vi) the CUSIP
number submitted is not known to be a valid CUSIP number for a
municipal securities issue; \10\ or (vii) the trade record contains no
dollar price and a dollar price cannot be calculated from the reported
yield on the transaction using the Board's available data about the
security and standard yield-to-price calculation techniques for
securities with periodic interest payments and with more than six
months to redemption, contained in Board rule G-33(b)(i)(B)(2). \11\
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\8\ Format requirements and input procedures are described in
``Board to Proceed with Customer Transaction Reporting Program: Rule
G-14'' (MSRB Reports, Vol. 16, No. 3 (September 1996) at 3-16). This
document, along with explanatory questions and answers and the
latest information on the Program, can be found on the Board's World
Wide Web site (www.msrb.org).
\9\ To identify dealers, the Board uses symbols assigned to
dealers by the NASD. Dealers are required to obtain a valid symbol
under rule G-14(b)(iii). The transaction reporting procedures
contained within rule G-14 also require that each dealer effecting
customer transactions provide the Board with certain contact
information and testing-related information.
\10\ The Board currently receives updated information on
municipal securities CUSIP numbers each day from the CUSIP Service
Bureau and J.J. Kenny Co., Inc.
\11\ The current software used for calculation is provided by
TIPs, Inc. The securities information used to calculate price from
yield currently is provided by J.J. Kenny Co., Inc.
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2. Basis
The Board believes the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act, \12\ 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.''
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\12\ 15 U.S.C. 78o-4(b)(2)(C).
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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 on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The 1995 and 1996 Requests for Comments
The Board published a notice in February 1995,\13\ requesting
comment on a plan to collect and report information about transactions
between dealers and institutional customers, and in January 1996
published a revised plan \14\ to collect information about all
[[Page 37611]]
customer transactions. The Board received a number of comments in
response. The comments were provided to the Commission and addressed by
the Board in an August 1996 filing.\15\ Some commentators suggested
reporting individual transactions,\16\ while others suggested combining
data from all trades falling within a given par value range.\17\ One
commentator suggested combining prices and volumes for inter-dealer and
customer trades for public reporting,\18\ and another suggested
identifying retail prices as such.\19\ It was also suggested that
trades be summarized by par value in four categories ($5,000 to
$45,000, $50,000 to $95,000, $100,000 to $1,000,000, and over
$1,000,000).\20\ In considering various possible formats for the
report, the Board decided that it would serve the purpose of
simplicity, and aid users in comparing the new and old reports, to make
the Combined Report's format the same as that of the Inter-Dealer
Report, which has been in use for over three years. If experience with
the Combined Daily Report indicates revisions are needed, the Board
will revise the format to ensure that the Program will continue to
provide market transparency to market participants.
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\13\ ``Transaction Reporting Program for Municipal Securities:
Phase II,'' MSRB Reports, Vol. 15, No. 1 (April 1995) at 11-15.
\14\ ``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.
\15\ Exchange Act Release No. 37859 (Oct. 23, 1996), 61 FR 56072
(Oct. 30, 1996).
\16\ Letter from Ron Moore, Applied Financial Management, Inc.,
to Larry M. Lawrence, MSRB, May 22, 1995, and letter from Glenn
Burnett, Zia Corporation, to Larry M. Lawrence, July 2, 1996.
\17\ Letter from George Brakatselos, Public Securities
Association (PSA), to Larry M. Lawrence, MSRB, May 2, 1996.
\18\ PSA.
\19\ Zia.
\20\ PSA.
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The 1998 Request for Comments
In April 1998, the Board released samples of the Combined Daily
Report for comment.\21\ In response, comments were received from
Bloomberg L.P.\22\ and TradeHistory, LLC.\23\ One commentator \24\
requested that the Board continue to publish the Inter-Dealer Daily
Report after commencing publication of the Combined Daily Report. The
proposed Service would make no change to the publication of the Inter-
Dealer Daily Report.\25\ The other commentator \26\ requested that the
Board add ``filler'' (blank) fields in the new format to make the
format of the electronic Combined Daily Report compatible with its
programs that process the electronic Inter-Dealer Daily Report. This
change has been made and would be part of the proposed Service.
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\21\ Exchange Act Release No. 39835 (Apr. 7, 1998), 63 FR 18242
(Apr. 14, 1998). The Board also made the sample reports available
via the Internet at its Web site (www.msrb.org).
\22\ Letter from John Loza, Bloomberg L.P. , to Harold L.
Johnson, MSRB (April 20, 1998).
\23\ Electronic mail from Bruce Hechler, TradeHistory, LLC, to
Thomas A. Hutton, (May 4, 1998).
\24\ TradeHistory.
\25\ The Board will continue to provide, as it has since January
1995, daily reports of inter-dealer transactions in municipal
securities in a service whose annual fee will remain unchanged at
$15,000. The Board has chosen to make the price of the proposed
Service the same as the price of the existing Inter-Dealer Service.
\26\ Bloomberg.
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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 published its reasons for so finding or (ii) as to
which the MSRB 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.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street N.W., Washington, DC 20549.
Copies of the submission, 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, 450 Fifth Street, N.W., Washington,
DC 20549. Copies of such filing will also be available for inspection
and copying at the principal office of the MSRB. All submissions should
refer to File No. SR-MSRB-98-9 and should be submitted by August 3,
1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18590 Filed 7-10-98; 8:45 am]
BILLING CODE 8010-01-M