MSRB Seeks Comment on the Reporting of Proprietary Desk Transactions under Rule G-14, on Reports of Sales or Purchases

The Municipal Securities Rulemaking Board (the “MSRB” or “Board”) Real-Time Transaction Reporting System (“RTRS”) serves the dual role of providing real-time transaction price transparency to the marketplace, as well as supporting market surveillance by the enforcement agencies.  To assist that effort, the MSRB is seeking comment on whether a broker, dealer or municipal securities dealer’s (“dealer”) proprietary desk transactions should be reported to RTRS as customer transactions under MSRB Rule G-14.[1]  Comments should be submitted no later than May 30, 2008 and may be directed to Catherine A. Courtney, Assistant General Counsel.

REPORTING OF PROPRIETARY DESK TRANSACTIONS UNDER MSRB RULE G-14

Under Rule G-14, each dealer is required to report information about each purchase and sale transaction effected in municipal securities to RTRS.[2]  Currently, internal movements of securities within a dealer organization are not considered to be reportable under Rule G-14.  This is because the dealer is not effecting a purchase or sale transaction with or for any external entity and there is no transfer of ownership.  Therefore, a transaction between a dealer’s proprietary desk and another desk within the same firm (e.g., between the proprietary desk and the syndicate desk) is an internal movement of securities within the firm and is not a reportable transaction under Rule G-14.[3]  In certain dealer firms, a proprietary desk may look and function like any other institutional customer from the viewpoint of the syndicate or trading desk.  However, because it operates from within a dealer organization, it is currently considered to be part of that dealer for trade reporting purposes.  When a proprietary desk transacts directly with another dealer, such a transaction with an external entity is currently required to be reported to the MSRB as an inter-dealer transaction.[4] 

REQUEST FOR COMMENT

The MSRB is soliciting comments on whether Rule G-14 should be amended to require all transactions with proprietary desks, both internal and external, to be reported pursuant to Rule G-14 as customer transactions.[5]  Commentators are asked to discuss the following: 

• Do dealer proprietary desks generally function separately from underwriting/trading desks?  Are transactions between the trading and proprietary desks generally subject to informational or other barriers?  Are there ever situations in which the two desks do (or could) act in a concerted manner (either explicitly or implicitly)?  For example, is it possible that a trading or syndicate desk could, in effect, use the firm’s proprietary desk for an inventory function? 

• Are there reasons to believe that trades between proprietary desks and trading desks ever represent something other than an arms-length negotiated price?  Are there ever situations in which the sale price (or purchase price) in an “internal” transaction differs from the price that might have been received from an external customer?  How should an “internal” customer be defined?

• Does the description of a proprietary desk transaction as a “customer trade” reflect the actual character of the trade from the viewpoint of a syndicate or trading desk that services a related proprietary desk account?

• Are proprietary desk transactions categorized separately from other municipal securities transactions in a dealer’s books and records?

• MSRB guidance under Rule G-17, on fair dealing, specifies that customer orders must have priority over similar dealer orders or certain dealer-related account orders to the extent that it is feasible and consistent with the orderly distribution of new issue securities.  Are proprietary desk transactions treated as related portfolio trades? If proprietary desk transactions are treated as customer trades, how should they be separately identifiable from “external” customer trades in order not to run afoul of the G-17 interpretation giving such customers priority allocations? 

• Are there any potential operational difficulties created by the reporting of proprietary desk transactions as customer trades? 

April 11, 2008