[Federal Register Volume 69, Number 172 (Tuesday, September 7, 2004)]
[Notices]
[Pages 54170-54172]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2076]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50294; File No. SR-MSRB-2004-02]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Approving Proposed Rule Change Relating to Amendments to 
the MSRB's Rule G-12(f) on Automated Comparison and G-14 on Transaction 
Reporting, and to the Implementation of a Facility for Real-Time 
Transaction Reporting and Price Dissemination

August 31, 2004.
    On June 2, 2004, the Municipal Securities Rulemaking Board 
(``MSRB'' or ``Board''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the MSRB's 
implementation of real-time transaction reporting and price 
dissemination. The proposed rule change was published for comment in 
the Federal Register on June 29, 2004.\3\ The Commission received one 
comment letter on the proposal.\4\ This order approves the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 49902 (June 22, 
2004), 69 FR 38925 (June 29, 2004) (``Notice'').
    \4\ See letter to Jonathan G. Katz, Secretary, Commission, from 
Leslie M. Norwood, Vice President and Assistant General Counsel, The 
Bond Market Association (``TBMA''), dated July 20, 2004 (``TBMA 
Letter'').
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I. Description of the Proposed Rule Change

    The MSRB's proposed rule change relates to Rule G-12(f), on 
automated comparison, Rule G-14, on transaction reporting, and the 
implementation of a facility for real-time transaction reporting and 
price dissemination (the ``Real-Time Transaction Reporting System'' or 
``RTRS''). The purpose of the proposed rule change is to increase 
transparency in the municipal securities market and to enhance the 
surveillance database and audit trail of transaction data used by 
enforcement agencies. The proposed rule change to Rule G-14 would 
require brokers, dealers, and municipal securities dealers 
(``dealers'') to report transactions in municipal securities to RTRS 
within 15 minutes of the time of trade execution instead of by midnight 
on trade date, as is currently required. Upon receipt of this 
transaction data, RTRS would immediately perform automated error

[[Page 54171]]

checking and would electronically disseminate prices, providing the 
municipal securities market with real-time transaction price 
transparency.
    The MSRB expects the proposed RTRS facility for real-time 
collection and dissemination of transaction prices will become 
operational in January 2005, at which time MSRB would begin to 
disseminate transaction data electronically in real time. MSRB expects 
to make a second filing on the RTRS facility in the future, stating the 
date of effectiveness, describing the technical means of data 
dissemination, and proposing fees to be charged for RTRS data products.
    The proposed RTRS facility would replace the existing Transaction 
Reporting System (TRS), which currently receives and disseminates 
transaction data in an overnight batch process. The proposed amendments 
to Rules G-12 and G-14 require dealer participation in RTRS and are 
designed to ensure that transactions are reported to RTRS in a timely 
manner.

II. Summary of Comments

    The Commission received one comment letter addressing the proposed 
rule change.\5\ The TBMA Letter expressed support for the MSRB's goals, 
but expressed reservations regarding the proposal in its current 
form.\6\ Specifically, TBMA believes that all trades on the first day 
of trading in a new issue should be exempt from the requirement to 
report within 15 minutes of trade execution (i.e. real-time 
reporting).\7\ In addition, TBMA states that they ``continue to express 
liquidity concerns for immediate dissemination of trades of bonds rated 
``BBB'' or below in sizes over $1 million.'' \8\
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    \5\ See supra note 4.
    \6\ See TBMA Letter, at 2.
    \7\ See TBMA Letter, at 3.
    \8\ See TBMA Letter, at 4.
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A. New Issue Reporting

    The proposed rule change generally would require dealers to report 
trades to the MSRB within 15 minutes, with certain limited exceptions. 
First, syndicate managers, syndicate members, and selling group members 
that effect trades in new issues on the first day of trading at the 
list offering price would be required to report such trades by the end 
of the first day of trading in the issue. Second, on a temporary basis, 
a dealer would be required to report trades within three hours of the 
time of trade if the CUSIP number and indicative data of the issue 
traded are not in the dealer's securities master file, the dealer has 
not traded the issue in the previous year, and the dealer is not a 
syndicate manager or syndicate member for the issue. This provision 
would sunset automatically one year after RTRS implementation.
    In its comment letter, TBMA reiterated its suggestion made in 
previous comment letters to the MSRB that all trades on the first day 
of a new issue be exempt from 15-minute reporting and, be submitted no 
later than end of day.\9\ In the proposed rule change, MSRB 
acknowledged that the existing information dissemination services in 
the municipal securities market may not, in some cases, be capable of 
providing a dealer with such indicative information in a sufficiently 
timely manner for the dealer to update its securities master file, 
process the transaction, and then report the transaction in real-
time.\10\ Therefore, the proposed rule change provides that when a 
dealer has not traded an issue within the past year, a three-hour trade 
reporting requirement will apply rather than a 15-minute reporting 
requirement.
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    \9\ See TBMA Letter, at 2 and 3.
    \10\ See supra note 3, at 38937.
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    The proposed rule change also states that on the first day of 
trading in a new issue, the three-hour exception will be available to 
most dealers because they will be trading the issue for the first 
time.\11\ However, by the terms of the three-hour exception, it is not 
available to dealers in the underwriting group (i.e., the syndicate 
manager and syndicate members).\12\ TBMA disagrees with this decision 
and states ``we feel the exception is not adequate because it does not 
cover trades by a syndicate manager or syndicate member and sunsets 
after one year.''\13\ In the Notice, the MSRB stated that they 
intentionally made the three-hour exception temporary to help ensure 
that dealers, trade associations and information vendors will use the 
one-year period to respond to the need for more automated and timely 
updating of indicative data and that industry practice will evolve so 
that the purposes of real-time price transparency can be more fully 
realized for trades on the first day of trading in a new issue.\14\ 
Furthermore, the MSRB noted that the three-hour exception should not be 
necessary for the syndicate manager and syndicate members because they 
do have, or should have, timely access to information on a new issue 
that they are underwriting.\15\
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    \11\ Id.
    \12\ Id.
    \13\ See TBMA Letter, at 2.
    \14\ See supra note 3, at 38937.
    \15\ Although the three-hour exception is not available to 
dealers in the underwriting group, the proposed rule change provides 
another exception from the real-time reporting requirement for list-
price transactions by syndicate and selling group members. Such 
trades are likely to be voluminous and all executed in a short 
period of time, so that a 15-minute reporting deadline could present 
substantial operational challenges. Because of the operational 
difficulties and because the price information (the list price of 
the issue) is generally already available in the market at the time 
of trade execution, the proposed rule change allows these 
transactions to be reported at end-of-day. Trades that are not at 
list price, however, do not qualify for this exception and will have 
to be reported within 15 minutes unless another exception is 
available. See supra note 3, at 38937.
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    TBMA also noted that on ``the first day trades are executed for a 
new issue, which is the day of formal award for a new issue, there will 
likely be trades reflecting that day's market environment, in addition 
to trades reflecting the booking of tickets at the prices agreed to by 
the original buyers days before.'' \16\ TBMA argues that by mixing the 
two types of trade reports together, the prices would ``not be any more 
or less informative if all trades in new issue were subject to end-of-
day reporting.'' \17\ With respect to the specific issue of ``mixing'' 
prices, the MSRB notes that syndicate and selling group trades done at 
the list price will be marked as such when they are disseminated.\18\ 
Consequently, there should be no confusion about what these prices 
represent. In addition, the MSRB has stated that it is reviewing 
general market practices with respect to new issue offerings, including 
issues related to pre-award orders and the use of conditional trading 
commitments made before the time of formal award trade. As part of this 
process, the MSRB recently published a ``Notice Requesting Comment on 
Draft Amendments to Rule G-34 to Facilitate Real-Time Transaction 
Reporting and Explaining Time of Trade for Reporting New Issue 
Trades.'' \19\
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    \16\ See TBMA Letter, at 3.
    \17\ Id.
    \18\ See supra note 3, at 38937.
    \19\ See MSRB Notice 2004-18 (June 18, 2004), available at 
http://www.msrb.org.
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B. Liquidity Concerns

    Finally, TBMA states ``we continue to express liquidity concerns 
for immediate dissemination of trades of bonds rated ``BBB'' or below 
in sizes over $1 million.'' \20\ TBMA suggests further study of this 
market segment to assess effects on liquidity before disseminating 
trade prices in real-time.\21\ The MSRB noted in its filing that 
comment on this particular issue was mixed and that some investors 
expressed strong support for full transparency, specifically to include 
the

[[Page 54172]]

market segment identified by TBMA.\22\ In light of these comments, the 
MSRB has weighed the potential for liquidity problems against the 
potential for transparency benefits and has concluded that any 
liquidity problems that may occur with respect to the issues in 
question are likely to be temporary and will resolve over time as 
market participants make adjustments in response to the more 
transparent environment.\23\ The MSRB also believes that the potential 
for transparency benefits, such as more accurate pricing, lower 
transaction costs for investors and increased investor confidence, 
outweighs the potential for short-term liquidity problems.\24\
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    \20\ See TBMA Letter, at 4.
    \21\ See TBMA Letter, at 3 and 4.
    \22\ See supra note 3, at 38939.
    \23\ Id.
    \24\ Id.
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III. Discussion and Commission Findings

    The Commission has carefully reviewed the proposed rule change and 
comment letter, and finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to the MSRB \25\ and, in particular, the 
requirements of Section 15B(b)(2)(C) of the Act and the rules and 
regulations thereunder.\26\ Section 15B(b)(2)(C) of the Act requires, 
among other things, that the MSRB'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, clearing, settling, processing 
information with respect to, and facilitating 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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    \25\ 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).
    \26\ 15 U.S.C. 78o-4(b)(2)(C).
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    In particular, the Commission finds that the proposed rule change 
will provide the market with more efficient pricing information, 
enhance the surveillance database and audit trail of transaction data 
used by enforcement agencies, and enhance investor confidence in the 
market. The Commission believes that real-time price transparency will 
enhance investor confidence by providing, for the first time, a 
comprehensive and contemporaneous view of the municipal securities 
market to any interested party. The Commission also believes that the 
open availability of market prices should instill greater confidence 
that pricing mechanisms in the municipal securities market are fair, 
open, and efficient.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-MSRB-2004-02) be, and hereby 
is, approved.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2076 Filed 9-3-04; 8:45 am]
BILLING CODE 8010-01-P