[Federal Register Volume 67, Number 223 (Tuesday, November 19, 2002)]
[Notices]
[Pages 69779-69780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29311]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46819; File No. SR-MSRB-2002-10]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of the Proposed Rule Change Relating to 
Rule G-14, on Reports of Sales or Purchases

November 12, 2002.
    On September 24, 2002, pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ 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-
2002-10). The proposed rule change relates to MSRB Rule G-14, on 
reports on sales or purchases, by lowering the trade per day threshold 
for frequently traded municipal securities.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Commission published the proposed rule change for comment in 
the Federal Register, October 18, 2002.\3\ The Commission did not 
receive any comment letters relating to the forgoing proposed rule 
change.
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    \3\ See Release No. 34-46636 (October 10, 2002) 67 FR 64435.
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I. Description of the Proposed Rule Change

    The MSRB filed with the Commission the proposed rule change 
relating to Rule G-14, on reports of sales or purchases, to increase 
transparency in the municipal securities market. The Board has a long-
standing policy to increase price transparency in the municipal 
securities market, with the ultimate goal of disseminating 
comprehensive and contemporaneous pricing data. One product of the 
Board's Transaction Reporting Program is its Daily Transaction Report, 
which has been provided to subscribers each day since January 2000. The 
report is made available each morning by 7 am and includes details of 
transactions in municipal securities which were ``frequently traded'' 
the previous business day. From the beginning of the Transaction 
Reporting Program in 1994 through the spring of 2002, ``frequently 
traded'' securities were defined as those that were traded four or more 
times on a given business day. In May 2002, the Board defined 
``frequently traded'' securities as those that were traded three or 
more times on a given day.\4\
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    \4\ See Release No. 34-45861 (May 1, 2002) 67 FR 30989-30990.
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    When transparency was initially being introduced into the municipal 
securities market, the Board was concerned that an observer unfamiliar 
with the market might mistake an isolated reported transaction or pair 
of transactions as providing a reliable indicator of ``market price.'' 
Because of this concern, the Board adopted the ``frequently traded'' 
threshold of four trades. At the same time, the Board has made a 
commitment to review the use of these reports as experience is obtained 
and eventually to move to transparency reporting on a more 
contemporaneous and comprehensive basis.\5\
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    \5\ See, e.g., ``Board to Proceed with Pilot Program to 
Disseminate Inter-Dealer Transaction Information,'' MSRB Reports, 
Vol. 14, No. 1 (January 1994). In its approval order for the Inter-
Dealer Daily Report, the Securities and Exchange Commission noted 
that the Board, in proceeding to subsequent levels of transparency, 
``should continue to work toward publicly disseminating the maximum 
level of useful information to the public while ensuring that the 
information and manner in which it is presented is not misleading.'' 
See Release No. 34-34955 (November 9, 1994) 59 FR 59810.
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    Since 1994, the Board has made ongoing efforts to increase price 
transparency in the municipal securities market in measured steps, 
culminating in comprehensive, real-time price transparency. The first 
price transparency report, begun in 1995, was a report, published the 
day after trading (``T+1''), that summarized inter-dealer trades in 
frequently traded municipal securities. In 1998, the Board added 
customer trades to the T+1 summary reports, and in January 2000 began, 
as well, to publish individual transaction data on frequently traded 
securities. The Board has also introduced ``comprehensive'' transaction 
reports for this market, which list all municipal securities 
transactions (regardless of frequency of trading), but which are 
available no less than one week after trade date.\6\
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    \6\ The first comprehensive report was introduced in October 
2000 and listed all trades after a one-month delay. The latest 
comprehensive report began operation in August 2002 and has a one-
week delay. See Release No. 34-46380 (August 19, 2002) 67 FR 54831-
54832.
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    At this time, the Board believes that the next appropriate step in 
this process is to change the threshold for determining that 
information about a municipal security is to be disseminated in the T+1 
Daily Transaction Report. The proposed rule change would lower the 
threshold from three to two trades per day.

Impact of Proposed Report on Transparency

    The proposed threshold would increase substantially the proportion 
of municipal securities market activity that is reported on the day 
after trading. On a typical day, there are approximately 26,000 
transactions in about 10,000 issues, with a total par value traded of 
about $9.5 billion. The present Daily Transaction Report, with a 
threshold of three or more trades per day, includes an average of 
14,400 trades in 2,600 different issues, with a total par value of 
about $5.2 billion. Under the proposed threshold, the report is 
expected to include an average of 19,760 trades in 5,600 issues, with a 
total par value of about $7.7 billion. This represents a 37 percent 
increase in the number of trades reported, a more-than-twofold increase 
in the number of issues reported, and a 48 percent increase in par 
value reported.\7\
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    \7\ Data is based upon market activity from April 1, 2001 
through July 31, 2001.
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Description of Service

    The enhanced Daily Transaction Report with the two-trade threshold 
will replace the current report and will be made available each day to 
subscribers via the Internet. Subscribers to the current Service 
receive the report free of charge, and their subscriptions will 
continue should the proposed Service be implemented. New subscriptions 
will be available free to parties who sign a subscription agreement. In 
addition,

[[Page 69780]]

recent reports will continue to be available for examination, also free 
of charge, at the Board's Public Access Facility in Alexandria, VA.

Implementation Schedule

    The enhanced report will be available to subscribers as soon as 
practical after Commission approval of the proposed rule change. It is 
estimated that the period between approval and implementation will not 
exceed two weeks.

II. Summary of Comments

    The Commission did not receive any comment letters addressing the 
Board's proposed rule change, but the Board had earlier received a 
comment letter from The Bond Market Association (``TBMA'').\8\ TBMA 
sent the comment letter in reference to the August 2002 change to the 
comprehensive daily report, in which TBMA also commented on the Board's 
announced plan to lower the threshold to two trades.\9\ In its letter, 
TBMA expressed its continued support for the Board's steps to expand 
transparency in the municipal securities market. TBMA also stated its 
belief that T+1 dissemination of information on bonds that have traded 
at least twice a day ``would provide useful information to investors 
and other market participants and is not likely to have a deleterious 
impact on the market for such bonds or mislead investors.''\10\ TBMA 
did state a reservation regarding the method of counting trades toward 
the reporting threshold. TBMA believes that when a dealer ``matches or 
crosses purchase and sale transactions,'' this constitutes a single 
trade because this is the economic reality of such transactions, 
regardless of whether dealers report two transactions to the MSRB.\11\
    Consistent with the Board's previous decisions,\12\ the transaction 
reporting system will continue to treat two transactions that 
constitute ``matched'' or ``crossed'' transactions like other trades. 
In the general case, only the dealer that effects a purchase and 
subsequent sale could identify the two trades as crossed agency trades 
or matched riskless principal transactions. The transaction reporting 
system does not require dealers to match the two sides of agency trades 
nor specifically to match or identify riskless principal transactions. 
Therefore, it is not possible to count those trades differently in the 
current system for purposes of the T+1 reporting threshold.
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    \8\ See letter from Frank Chin, Chair, Municipal Executive 
Committee, The Bond Market Association, to Jonathan G. Katz, 
Secretary, U.S. Securities and Exchange Commission, dated August 8, 
2002.
    \9\ Id.
    \10\ Id., at 2.
    \11\ Id.
    \12\ In 1994, a commentator made a similar suggestion with 
reference to the Board's filing that initiated the transaction 
reporting program. The commentator, a brokers' broker, suggested 
that the Board should count as one transaction the situation in 
which a brokers' broker purchases securities from a dealer and sells 
them to another dealer. The Board noted in its reply that these are 
``riskless principal'' transactions and that other dealers may also 
do riskless principal transactions. The Board noted that its 
transaction reporting system would treat the sale to the 
intermediate dealer (e.g., the brokers' broker) and the intermediate 
dealer's subsequent sale as two transactions, and that it would 
treat these trades like any other trades.
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III. Discussion

    The Commission must approve a proposed MSRB rule change if the 
Commission finds that the proposal is consistent with the requirements 
set forth under the Act and the rules and regulations thereunder, which 
govern the MSRB.\13\ The language of Section 15B(b)(2)(C) of the Act 
requires that the MSRB's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principals of trade, to foster cooperation and coordination with 
persons engaged in regulating, settling, processing information with 
respect to, and facilitating transactions in 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.\14\
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    \13\ Additionally, in approving this rule, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78o-4(b)(2)(C).
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    The MSRB does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act in that it applies equally to all dealers in 
municipal securities.
    After careful review, the Commission finds that the MSRB's proposed 
rule change relating to Rule G-14, on reports of sales or purchases, 
meets the requisite statutory standard. The Commission believes that 
this proposed rule change is consistent with the requirements of the 
Act, and the rules and regulations thereunder. In addition, the 
Commission finds that the proposed rule is consistent with the 
requirements of section 15B(b)(2)(C) of the Act, as set forth above.

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act,\15\ that the proposed rule change (File No. SR-MSRB-2002-
10) be and hereby is, approved.
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    \15\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-29311 Filed 11-18-02; 8:45 am]
BILLING CODE 8010-01-P