Agency transaction: pricing. Your letter of August 3, 1979 has been referred to me for response. In your letter you inquire as to the relationship between the requirements to show on customers confirmations the "yield at which transaction is effected" and the "resulting dollar price," particularly in the context of agency transactions where the professional receives a concession or other dealer reallowance as its remuneration.

Under rule G-15, the dollar price disclosed to a customer must be calculated on the basis of the yield at which the transaction was effected. This calculation is made without reference to any possible concession or other allowance which a municipal securities dealer may receive from another municipal securities professional. Accordingly, the dollar price shown on a customer confirmation will always be derived directly from the yield price.

For example, a municipal securities dealer seeking to purchase $100,000 fifteen-year bonds with a 5% coupon as agent for a customer would commonly purchase the securities from another professional at a yield price less a concession (e.g., "5.60½"), and confirm to the customer at the net yield price ("5.60"), retaining the concession as its remuneration. In our example, the customer confirmation would be required to disclose the "yield at which transaction is effected" ("5.60"), the "resulting dollar price" ("93.96"), and the fact that the dealer received $500 as its remuneration in the form of a dealer concession. The dollar price is computed directly from the yield price, and is not net of the concession received.

The confusion may arise from comparing the confirmation sent to a customer to the confirmation sent to the professional on the other side of a transaction. On the inter-dealer confirmation, the "yield at which transaction is effected" will be shown, as well as the amount of the concession, but the unit dollar price may be expressed net of the concession (in our example, "93.46," being the gross dollar price of "93.96" less the ½ point reallowance). This may give the appearance of a difference in price between the purchase and sale confirmations, but in fact both transactions are being effected at the same yield price (in our example, "5.60"), and the dollar price disclosed to the customer is the result of this yield. MSRB interpretation of September 20, 1979.

NOTE: The above letter refers to the text of rule G-15 as in effect prior to amendments effective on January 16, 1992.

Callable securities: pricing to call. Your letter, dated January 25, 1979 has been referred to me for response. In your letter, you raise a question regarding pricing of callable securities under rules G-12 and G-15. Specifically, you inquire as to how the dollar price should be calculated for transactions in a particular issue of [Name of bond deleted] bonds. The terms of the issue provide in pertinent part that the securities are subject to redemption prior to maturity on or after October 1, 1984, at declining premiums, from the proceeds of prepayments of mortgage loans (the "1984 call feature").

As you know, Board rules G-12 and G-15 require that

... where a transaction is effected on a yield basis, the dollar price shall be calculated to the lowest of price to premium call, price to par option, or price to maturity...

As an interpretive matter, the Board has adopted the position that the calculation of dollar price to a premium call or par option date should be to that date at which the issuer may exercise an option to call the whole of a particular issue or, in the case of serial bonds, a particular maturity, and not to the date of a call in part.

With respect to your question, the Board is of the view that the dollar price for transactions involving the securities in question should not be calculated to the 1984 call feature. The Board bases its conclusion on (1) the fact that it is extremely unlikely as a practical matter that the call would be exercised as to all or even a significant part of the issue (that is, it is much more likely to operate in practice as an "in part" call) and (2) the exercise of the 1984 call feature would depend on events which are not subject to the control of the issuer. I note that the Board cited this as the reason for not utilizing "catastrophe call" features for purposes of price calculation. MSRB interpretation of March 9, 1979.

Callable securities: pricing to call. Your letter dated May 1, 1978 concerning the pricing to call provisions of rules G-12 and G-15 has been referred to me for response. In your letter, you request clarification of the application of such provisions to a situation in which securities have been prerefunded and the escrow fund is to be held to the maturity date of the securities. We understand that the securities in question are part of a term issue, sold on a yield basis, and are subject to a mandatory sinking fund call beginning two years prior to maturity.

Under rules G-12 and G-15, the dollar price of a transaction effected on a yield basis must be calculated to the lowest of price to premium call price to par option or price to maturity. The calculation of dollar price to a premium call or par option date should be to that date at which the issuer may exercise an option to call the whole of a particular issue or, in the case of serial bonds, a particular maturity, and not to the date of a call in part.

Accordingly, the calculation of the dollar price of a transaction in the securities in your example should be made to the maturity date. The existence of the sinking fund call should, however, be disclosed on the confirmation by an indication that the securities are "callable." The fact that the securities are prerefunded should also be noted on the confirmation. MSRB interpretation of June 8, 1978.

Delivery requirements: coupons and coupon checks. This letter is to confirm the substance of conversations you had with the Board’s staff concerning the application of certain provisions of rule G-12, the uniform practice rule, to deliveries of securities bearing past-due coupons. You inquire whether, in the case where a transaction is effected for a settlement date prior to the coupon payment date, a delivery of securities with this past-due coupon attached constitutes "good delivery" for purposes of the rule.

Rule G-12(e)(vii)(C) provides that a seller may, but is not required to, deliver a check in lieu of coupons if delivery is made within thirty calendar days prior to an interest payment date. Thus, in the circumstances you set forth, the seller would have the option to detach the coupons and provide a check, but is under no obligation to do so. A delivery with these coupons still attached would constitute "good delivery," and a rejection of the delivery for this reason would be an improper rejection. MSRB interpretation of March 9, 1978.

Delivery requirements: partials. I am writing to confirm the substance of our telephone conversation concerning the provision of rule G-12(e)(iv) on partial deliveries. In our discussion, you posed a specific example of a single purchase of securities in which half are of one maturity and half of another maturity and inquired whether or not delivery of only one of the maturities would constitute a "partial" under the terms of the rule.

As I stated to you, if the transaction is effected on an "all or none" basis, and your confirmation is marked "all or none" or "AON," this would suffice to indicate that the purchase of both maturities constitutes a single transaction, and that both maturities must be delivered to effect good delivery. MSRB interpretation of February 23, 1978.

This notice addresses several questions that have arisen concerning Board rules G-12 and G-15. Board rule G-12 establishes uniform industry procedures for the processing, clearance, and settlement of transactions in municipal securities... Board rule G-15 requires municipal securities professionals to send written confirmations of transactions to customers, and specifies the information required to be set forth on the confirmation.

Settlement Dates

In order to establish uniform settlement dates for "regular way" transactions in municipal securities, rule G-12(b)(i)(B) defines the term "business day" as "a day recognized by the National Association of Securities Dealers, Inc. [the "NASD"] as a day on which securities transactions may be settled." The practice of the NASD has been to exclude from the category of "business day," any day widely designated as a legal bank holiday, and to notify the NASD membership accordingly. Such notices set forth the NASD’s trade and settlement date schedules for periods which include a legal holiday.

"Catastrophe" Call Features

Rules G-12 and G-15 require that confirmations of transactions set forth a "description of the securities, including at a minimum… if the securities are subject to redemption prior to maturity (callable)… an indication to such effect…" (paragraphs G-12(c)(v)(E) and G-15(a)(v)[*]). Both rules also require that in transactions in callable securities effected on a yield basis, dollar price must be shown and "the calculation of dollar price shall be to the lower of price to call or price to maturity" (paragraphs G-12(c)(v)(I) and G-15(a)(viii)[†]).

The references to "callable" securities and pricing to call in rules G-12 and G-15 do not refer to "catastrophe" call features, such as those relating to acts of God or eminent domain, which are beyond the control of the issuer of the securities.

[*] [Currently codified at rule G-15(a)(i)(C)(2)(a)]

[†] [Currently codified at rule G-15(a)(i)(A)(5)]

Callable securities: "catastrophe" calls. This will acknowledge receipt of your letter dated October 20, 1977 which has been referred to me for reply. In your letter you request an interpretation of the provisions in rules G-12 and G-15 requiring that the dollar price for transactions in callable securities effected on a yield basis be priced to the lower of price to call or price to maturity. (See rules G-12(c)(v)(I) and G-15(a)(viii))[*].

At its meeting held October 25-26, 1977, the Board confirmed that the requirements in rules G-12 and G-15 relating to pricing to call do not include "catastrophe" calls, that is, calls which occur as a result of events specified in the bond indenture which are beyond the control of the issuer. MSRB interpretation of November 7, 1977.

[*] [Currently codified at rule G-15(a)(i)(A)(5)]