Proposed Rule Change Concerning Public Reporting of Transactions in Frequently-Traded Municipal Securities: Rule G-14
On September 24, 2002, the Municipal Securities Rulemaking Board (the “Board” or “MSRB”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) a proposed rule change regarding its Transaction Reporting Program.[1] In its filing, the Board proposes to change its Daily Transaction Report Service (the “Service”) in order to provide a greater amount of information to the public and thereby increase transparency in the market. The proposed rule change will not be effective until approved by the SEC.
Currently the Service provides a daily public report with details of each transaction in any municipal security that was traded three or more times on the previous day. Under the proposed rule change, the threshold for reporting a municipal security would change from three to two trades per day and, as a result, the number of trades reported each day would increase substantially.
Background
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. 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.[2]
One product of the Board’s Transaction Reporting Program is its Daily Transaction Report. The report is made available to subscribers each morning by 7:00 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 lowered the definition of “frequently traded” to securities that were traded three or more times on a given day.[3]
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.[4]
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.[5]
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, 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 SEC approval of the proposed rule change. It is estimated that the period between approval and implementation will not exceed two weeks.
Summary of Comments
Written comments on the proposed rule change were not solicited, but the Board had earlier received a comment letter from The Bond Market Association (“TBMA”) 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.[6] 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.”[7]
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.[8]
Consistent with the Board’s previous decisions,[9] the transaction reporting system will continue to treat two transactions that constitute “matched” or “crossed” transactions like any 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.
September 24, 2002
[1] File No. SR-MSRB-2002-10. Comments on the proposed rule change may be made to the Commission and should refer to this file number.
[2] 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 Securities Exchange Act Release No. 46380 (August 19, 2002), 67 FR 54831-54832 (August 26, 2002).
[3] See Securities Exchange Act Release No. 45861 (May 1, 2002). 67 FR 30989-30990.
[4] 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 Securities Exchange Act Release No. 34955 (November 9, 1994), 59 FR 59810 (November 18, 1994).
[5] These data are based upon market activity from April 1, 2001 through July 31, 2001.
[6] 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.
[7] Ibid., at 2.
[8] Ibid.
[9] In 1994, a similar suggestion was made by a commentator with reference to the Board’s filing which 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.
