Changes to Transaction Reporting Requirements Effective November 5, 2012
As previously announced, the MSRB is planning changes to transaction reporting requirements that would, among other changes, require brokers, dealers and municipal securities dealers (collectively “dealers”) to report for inter-dealer transactions – in addition to the information currently reported – the contractual dollar price at which the transaction was executed.[1] All dealers that report inter-dealer transactions to the MSRB Real-Time Transaction Reporting System (“RTRS”) will need to make system and/or procedural changes to prepare for this change. The MSRB has set November 5, 2012 as the effective date for these changes.
BACKGROUND
MSRB Rule G-14 requires dealers to report information about each purchase and sale transaction effected in municipal securities to RTRS. Inter-dealer transaction reporting is accomplished by both the purchasing and selling dealers submitting information about the transaction to the Depository Trust and Clearing Corporation’s Real-Time Trade Matching System (RTTM). Information submitted to RTTM is forwarded to RTRS for trade reporting. For most inter-dealer transactions, dealers report final money, par amount and accrued interest to RTTM – as opposed to a dollar price and yield[2] as is done for customer trades – and RTRS computes a dollar price from these values for inter-dealer transaction price dissemination.
The information reported for inter-dealer transactions also is used by DTCC for purposes of clearance and settlement, and DTCC procedures require dealers to report par value as an expression of the number of bonds traded as opposed to the actual par amount traded. If the par value of a security is no longer a $1,000 multiple because, for example, the issuer has prepaid a portion of the principal on a security on a pro rata basis, dealers continue to report for inter-dealer transactions par value expressed as the number of bonds (i.e. ten bonds would be reported as $10,000 par value). Transactions between dealers in this security would result in erroneous RTRS-calculated dollar prices since the final money reported by the dealers would be based on a transaction in a security for which each bond costs less than $1,000.[3]
Since MSRB transaction reporting for inter-dealer transactions began in 1994, a very small portion of inter-dealer transactions have been in securities with a non-standard $1,000 par multiple.[4] However, primarily since many Build America Bonds issued in recent years included partial call features with a pro-rata redemption provision, there is a likelihood that many more securities may contain par values that are no longer $1,000 multiples. In addition, there have been press reports that more securities may be issued in nontraditional denominations, such as securities issued in $25 par amounts similar to preferred stock and other “mini bonds” with sub-$1,000 principal values.
To ensure that the dollar price disseminated by RTRS for inter-dealer transactions remains accurate and to minimize the impact on dealer operations as well as the clearance and settlement use of the data submitted by DTCC, dealers will be required to report – in addition to the information currently reported for inter-dealer transactions – the contractual dollar price at which the transaction was executed.[5]
TECHNICAL SPECIFICATIONS
MSRB and DTCC have coordinated system changes to RTRS and RTTM to add the contractual dollar price as a new reporting data field on inter-dealer transactions. In January 23, 2012, DTCC published technical specifications detailing the new data field that will be used by dealers to report the contractual dollar price, named the “Regulatory Dollar Price” field, on inter-dealer transactions.[6] An updated RTRS technical specifications document that repeats the information published by DTCC as well as describes the associated error feedback and transaction reporting procedures that would be returned by RTRS is provided below and also is available on the trade data page of the Market Disclosures and Data section of the MSRB website. In addition to this change, MSRB also plans to add a new error code to alert dealers to trade reports in securities that are classified as corporate or government securities by the CUSIP Service Bureau. Please see the revision history of the specifications document linked below for the complete list of changes planned for November 5, 2012.
SYSTEM TESTING
On June 20, 2012, MSRB and DTCC made a test environment available to dealers and their agents for making test submissions of inter-dealer trades to RTRS. MSRB and DTCC also have drafted suggested test cases accessible from the link below that can be used to gauge dealer readiness for the November 5, 2012 changes.
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Questions about testing RTRS should be directed to MSRB Support at 703-797-6668. Other questions about this notice may be directed to Justin R. Pica, Director, Product Management - Market Transparency at 703-797-6716.
August 10, 2012
[1] A complete description of this change, including additional changes planned that will not require dealers to make system and/or procedural changes, can be found in MSRB Notices 2012-15 (March 21, 2012) and 2012-30 (June 4, 2012).
[2] Dollar price and yield on customer transactions are required to be computed in the same manner as required under MSRB Rule G-15(a), on customer confirmations. Accordingly, from the transaction dollar price, dealers report yield calculated to the lower of an in-whole call feature or maturity.
[3] For example, if an issuer has prepaid 50% of the principal on a $1,000 denominated security, each bond would cost $500 so a transaction of 10 bonds at “par” would be reported with a par value of $10,000 and final money of $5000 resulting in an RTRS-computed dollar price of $50. This anomaly only occurs on inter-dealer transactions since customer transactions are reported with a dollar price and yield. In this example, the dollar price on a customer transaction in this security would be reported as $100, or 100% of the principal amount.
[4] Historically, this problem primarily has been limited to transactions in certain municipal collateralized mortgage obligations.
[5] For data quality purposes, RTRS will compare the buy and sell-side contractual dollar prices and return errors to dealers in the event of a material difference between the two reported dollar prices and continue to calculate a dollar price from the reported final money, par value and accrued interest. Since the new dealer reported dollar price will not be used for clearance or settlement at DTCC, this data field will be able to be modified in RTRS by dealers to correct errors, even after trade matching had occurred. In the event that the dollar prices disagree between dealers, RTRS will disseminate the RTRS-calculated dollar price and if the dealer reported dollar prices agree yet differ from the RTRS-calculated dollar price (which would occur if the security par value is no longer a $1,000 multiple) RTRS will disseminate the dealer reported dollar price.
[6] See, DTCC Important Notice A#7362 / P&S# 6932 on www.dtcc.com.
