Proposed Rule Change Concerning T+1 Public Reporting of Transactions in Municipal Securities

On April 7, 2003, the Municipal Securities Rulemaking Board (the “MSRB”) filed with the Securities and Exchange Commission (“Commission” or “SEC”) a proposed rule change regarding its Transaction Reporting Program.[1]  In the filing, the MSRB proposes to change its Daily Transaction Report Service (the “T+1 Daily Report” or “Service”) to provide a greater amount of price information to the public.  The proposed rule change would not become effective until approval by the SEC.

     Currently, the Service provides a daily public report by 7:00 am on the morning of the day after trade date (“T+1”).  The report shows details of each transaction in a municipal security that was reported on the previous day as having traded two or more times.  Under the proposed rule change, all trade prices reported by dealers on trade date would be made public on T+1.  The proposed rule change also would change the display of trade size in the report.  Currently, the exact par value is given for all trades.  In moving to complete price dissemination on T+1, the report would be changed to display exact par value for trades with a par value of one million dollars and under, and to display “$1MM+” for those transactions that have a par value greater than one million dollars.

Background

     Since the implementation of the inter-dealer trade reporting system in 1995, the MSRB has been increasing price transparency in the municipal securities market in measured steps.[2]  The first price transparency report was a T+1 report that summarized high, low and average inter-dealer prices for issues that met a trading threshold of four or more trades in the inter-dealer market.  In 1998, the MSRB implemented the customer transaction reporting system and customer transaction data was added to the T+1 summary report. The trading threshold of four trades was retained, but since it applied regardless of whether the trades were inter-dealer or customer, many more issues met the trading threshold and were subject to price reporting.  In January 2000, the MSRB further enhanced the T+1 report by publishing individual transaction data (rather than high, low and average prices) for each issue contained in the report. 

     In October 2000 the MSRB began offering a comprehensive transaction report, which lists all municipal securities transactions (regardless of frequency of trading) and includes late-reported trades, inter-dealer trades compared after trade date, and transaction data corrected by dealers after trade date.  The Comprehensive Report began with a minimum one-month delay in trade publication.  That delay has gradually been reduced such that the report currently is disseminated on a daily basis one week after trade date.  To make more trade data available on a T+1 basis, in 2002, the MSRB began the process of lowering the trading threshold in the T+1 Daily Report.  In May 2002, the MSRB changed the trading threshold to three trades.[3]  In November 2002, the trading threshold was lowered to two trades.[4] 

     The T+1 Daily Report and the Comprehensive Report have been well received by market professionals seeking information on market price levels and trading activity for individual securities.[5]  The reports have garnered greater and greater use over time, both with market professionals and through free, customer-oriented outlets such as “InvestingInBonds.com” operated by The Bond Market Association.  At this time, in preparation for the move to real-time price transparency in mid-2004, the MSRB believes that the trading threshold in the T+1 Daily Reports should be eliminated to further increase the price transparency that is available on T+1. 

Proposed Changes in the T+1 Daily Report

     The MSRB has noted since the outset of its transparency initiative that, as the market obtains experience with price transparency, price reports eventually would need to occur on a more contemporaneous and comprehensive basis, culminating with real-time transaction reporting.[6]  The proposal to change the T+1 Daily Report at this time is part of the MSRB’s longstanding plan to introduce transparency in measured steps, allowing the market time to adjust to new situations presented by each new level of price transparency.  As an example, when price reports were first introduced in 1995, the MSRB was concerned that an observer might be misled if he or she considered an isolated transaction or pair of transactions as providing the same indicator of “market price” as a stock exchange quotation.  The MSRB believes that, considering the unique nature of the municipal securities market, the market has adapted very well to price transparency. The MSRB is not aware of any problems occurring similar to the concerns expressed in 1995.  The reception of the Comprehensive Report and the previous lowering of trading thresholds on the T+1 Daily Report has been positive and the use of the data in those reports by market professionals and pricing services has increased the efficiency and accuracy with which issues are priced in the secondary market.

     The proposed rule change would increase substantially the number of trades and issues appearing each day on the T+1 Daily Report.  On a typical trading day, dealers report approximately 26,000 transactions in 10,000 issues, with a total par value traded of about $9.5 billion. [7]  The present T+1 Daily Report, with a trading threshold of two or more trades per day, includes an average of 19,760 trades in 5,600 issues, with a total par value of about $7.7 billion.  Currently, only about 76% of transactions reported on trade date are shown on the report.  Under the proposed rule change, all trades reported by dealers on trade date would be made visible on T+1.

     Although the MSRB believes it is appropriate to increase T+1 transparency at this time, and to move forward with its plans for real-time trade reporting in mid-2004, the MSRB also is mindful of concerns expressed by dealers that further increases in transparency on a more contemporaneous basis could have an effect on liquidity.  One concern sometimes noted is that because of the nature of the municipal securities market, including the prevalence of thinly traded issues, it sometimes is possible to identify institutional investors and dealers by the exact par value given on trade reports.  For example, it might be common market knowledge that a $4.25 million position in an issue initially was purchased in the primary market by a specific institution.  Trade reports in the secondary market showing this exact par value later being sold then could reveal the identity of that party as well as the price received.  Where the market for a specific security is thin and only one or two dealers are active, revealing the exact par amount also may convey information about a dealer’s inventory (i.e., size of position and acquisition cost).  Other dealers may use this information to trade against the dealer’s position, reducing the incentive for a dealer to take large positions in these circumstances.

     In response to these concerns, the MSRB proposes to take a step similar to that used by the NASD’s “TRACE” system in the corporate bond market and to display par value of large trades with a large trade indicator rather than the exact par value.[8]  While this will result in less information being made visible on T+1 about par value traded, the MSRB believes that it will help to preserve the anonymity of trading parties and will not detract in a substantial way from the benefits of the price transparency it provides.

     The enhanced Daily Report with the frequently traded threshold removed would replace the current T+1 Daily Report and would be made available each day to subscribers via the Internet.  Subscribers to the current Service receive the report free of charge, and their subscriptions would continue.  New subscriptions would continue to be available free to parties who sign a subscription agreement.  In addition, recent reports would continue to be available for examination, also free of charge, at the MSRB’s Public Access Facility in Alexandria, VA.

     The MSRB will continue to produce its Comprehensive Report on a one-week delay basis with details about all transactions traded one-week prior.  The Comprehensive Report will continue to provide information on the size of each transaction including the exact par amount reported to the MSRB on transactions in amounts greater than one million dollars.  The Comprehensive Report also will continue to be useful since it will include details of transactions reported to the MSRB late, inter-dealer trades compared after trade date, and any transaction data corrected by dealers after trade date. 

Implementation Schedule

     The enhanced report would 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 would not exceed four weeks.

April 7, 2003