Request for Comment on More Contemporaneous Trade Price Information Through a New Central Transparency Platform

The Municipal Securities Rulemaking Board (“MSRB”) is seeking comment on the first in a series of concept proposals relating to the planned development of a new central transparency platform (“CTP”) as a successor to the MSRB’s Real-time Transaction Reporting System (“RTRS”), as contemplated under the MSRB’s Long-Range Plan for Market Transparency Products (the “Long-Range Plan”).[1]  This concept proposal seeks public input on the appropriate standard for “real-time” reporting and public dissemination of municipal securities transaction price and related information upon implementation of the CTP.  Currently, brokers, dealers and municipal securities dealers (collectively, “dealers”) are required to report to RTRS certain information regarding their purchase and sales transactions with customers and with other dealers within fifteen minutes of the time of trade, with certain limited exceptions.  The Long-Range Plan notes that enhanced information provided through the CTP could include, among other things, more contemporaneous real-time trade price information, as described below.

This concept proposal is intended to elicit input from all interested parties on the potential benefits and burdens of providing for more contemporaneous dissemination of trade price information to the public, as well as on potential alternatives to achieving the purposes enunciated below.  This concept proposal also seeks input on baseline technology, processing and data protocol matters to assist the MSRB in pursuing a CTP architecture that can support a broad array of data types in a manner that is most efficient for the MSRB as well as for market participants that may have a role in the submission or dissemination of such data.  This input should assist the MSRB in designing the internal CTP infrastructure, understanding current and likely future industry participant systems capabilities and limitations, and planning any potential rulemaking necessary to implement the CTP using trade data that reflects, on a forward-looking basis, the real-time needs of an evolving municipal securities market.

Comments should be submitted no later than March 15, 2013 and may be submitted in electronic or paper form. Comments may be submitted electronically by clicking here.  Comments submitted in paper form should be sent to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, VA 22314.  All comments will be available for public inspection on the MSRB’s website.[2]

BACKGROUND

MSRB Rule G-14 currently requires dealers to report all transactions in municipal securities to RTRS within fifteen minutes of the time of trade, with limited exceptions.  Since the implementation of RTRS in 2005, the MSRB has made transaction data available to the public through subscription services designed to achieve the widest possible dissemination of transaction information with the goal of ensuring the fairest and most accurate pricing of municipal securities transactions.  

In addition to subscription services, the MSRB makes publicly available for free transaction data on the Electronic Municipal Market Access (EMMA^®) website.[3]  Since the launch of EMMA as a pilot in 2008, MSRB has incorporated into the display of market-wide and security specific information all transaction data disseminated from RTRS so that transaction information would be available on the EMMA website simultaneously with the availability of information to subscribers to the RTRS subscription service.

CURRENT TIMING AND PROCESS FOR TRADE REPORTING

Fifteen-Minute Reporting Requirement.  Rule G-14(b)(i) currently requires each dealer to report to RTRS information about each purchase and sale transaction effected in municipal securities in the manner prescribed by the Rule G-14 RTRS Procedures and the RTRS Users Manual.  Subsection (a)(ii) of the Rule G-14 RTRS Procedures establishes the general requirement that transactions effected with a Time of Trade (that is, the time at which a contract is formed for a sale or purchase of municipal securities at a set quantity and set price) during the hours of the RTRS Business Day (being 7:30 a.m. to 6:30 p.m., Eastern Time, Monday through Friday)[4] must be reported within fifteen minutes of Time of Trade to an RTRS Portal, as described below.

End-of-Day Reporting Exceptions.  The Rule G-14 RTRS Procedures provide limited circumstances in which dealers may report trades by the end of the day of trade execution rather than under the standard 15-minute reporting requirement:

• List Offering Price Transactions, consisting of primary market sale transactions to customers executed on the first day of trading of a new issue by a sole underwriter, syndicate manager, syndicate member or selling group member at the published list offering price[5] for the security
• RTRS Takedown Transactions, consisting of primary market sale transactions executed on the first day of trading of a new issue by a sole underwriter or syndicate manager to a syndicate member or selling group member at a discount from the published list offering price for the security
• trades in short-term instruments maturing in nine months or less (“Short-Term Notes”), variable rate instruments that may be tendered for purchase at least as frequently as every nine months (“VRDOs”), auction rate products for which auctions are scheduled to occur at least as frequently as every nine months (“ARS”), and commercial paper maturing or rolling-over in nine months or less (“Commercial Paper”);[6] provided that any inter-dealer trades in VRDOs ineligible on trade date for processing through the Real-Time Trade Matching (“RTTM”) system operated by National Securities Clearing Corporation (“NSCC”) must be reported by the end of the day on which such VRDOs become eligible for automated comparison[7]
• “away from market” trades, consisting of trades at prices that differ substantially from the market price and trades arising from specific scenarios where the trade executed is not a typical arms-length transaction negotiated in the secondary market, including customer repurchase agreement transactions (“Customer Repurchase Agreement Transactions”), transactions from an accumulation account to a unit investment trust unit (“UIT-Related Transactions”), and trades into and out of derivative trusts for tender option bond programs (“TOB-Related Transactions”)[8]

The MSRB seeks comment on whether it should eliminate any of these end-of-day exceptions, or reduce the period of lag in reporting of trades currently subject to such exceptions, upon transitioning to the CTP.  The MSRB also seeks comment on any costs or burdens associated with eliminating any of these exceptions or reducing the period of lag in reporting such trades.  

Trade Reporting Process.  Currently, dealers may report trade information through one of three RTRS Portals:

• the message-based trade input RTRS Portal (the "Message Portal") operated by NSCC, through which reports of inter-dealer trades and trades with customers may be submitted in an automated manner
• the RTRS Web-based trade input method (the "RTRS Web Portal") operated by the MSRB, through which reports of trades with customers may be submitted manually and all transactions, regardless of method of submission, may be reviewed for compliance purposes
• the RTTM Web-based trade input method (the "RTTM Web Portal") operated by NSCC, through which reports of inter-dealer trades may be reported manually

The Message Portal and RTTM Web Portal were established as the primary methods of dealer reporting of trade data to RTRS to reduce burdens to dealers by leveraging existing data-flows through NSCC for clearance and settlement purposes.  A primary reason for pursuing this “straight-through process” was to improve dealer compliance and overall data quality by maximizing the extent to which data used to execute transactions was also used for reporting purposes without further re-keying of such data.

The MSRB seeks comment on whether its initial decision to adopt a straight-through processing approach with regard to trade reporting and marketplace clearance and settlement functions should continue to drive the trade reporting process for the CTP.  To the extent that there continue to be outlier transactions that cannot be processed through the marketplace’s clearance and settlement infrastructure, should a web-based manual input process continue to be the primary alternate method of reporting, or are there existing or emerging dealer back-office systems designed to handle internal processing of these and other transactions that could be leveraged to automate trade reporting of these outlier transactions?  More broadly, are there newly emerging technologies, processes or protocols that the MSRB should be considering for handling trade reporting processes for the CTP that can be scaled across all types of dealers in the marketplace to reduce dealer back-office burdens and to enhance consistency of data received from all reporting dealers?

Timeliness of Trade Reporting.  Over the past three years, the MSRB has observed that the vast majority of trades required to be reported by dealers to RTRS within the 15-minute threshold have in fact been reported in a timely manner.[9]  For the MSRB fiscal year ended September 30, 2012, approximately 99.2% of all reported trades required to be reported to RTRS within 15 minutes of the time of trade (including both inter-dealer and customer trades) were in fact submitted in time, with approximately 98.7% reported within 10 minutes and 95.4% reported within 5 minutes.  These figures have remained stable over the past three fiscal years, and reporting compliance rates do not differ substantially between inter-dealer and customer trades.

The MSRB has observed, however, that trades with smaller par values have tended to be reported more quickly than trades with larger par values. For purposes of this review, the MSRB divided reported trades into three categories: small (par value traded up to $100,000), medium (par value traded greater than $100,000 up to $1 million) and large (par value greater than $1 million).  For the MSRB fiscal year ended September 30, 2012, 99.3% of small trades were reported within the 15-minute threshold, whereas 98.5% of medium trades and 97.6% of large trades were so reported, resulting in a “timeliness spread” of 1.7 points between small and large trades.  This timeliness spread grew to 3.5 points for trades reported within 10 minutes of the time of trade (98.9% small, 97.5% medium, 95.4% large), and to 10.6 points for trades reported within 5 minutes of the time of trade (96.3% small, 91.3% medium, 85.6% large).  Even within just one minute after the time of trade, 77.5% of small trades had already been reported to RTRS, but the timeliness spread had widened to 36.6 points, with only 40.9% of large trades reported within that first minute.

A minute-by-minute table of reporting of trades (showing the cumulative percentage of all trades reported by the end of the minute shown), and of the timeliness spread, for trades reported in the MSRB fiscal year ended September 30, 2012, is included below, together with a graphical chart of the data:

As noted above, these same patterns emerged with little change over the past three fiscal years, and the timing of reporting does not differ substantially between inter-dealer and customer trades.

The MSRB seeks comment on the factors that may have resulted in the more rapid trade reporting of small trades as compared to large trades, focusing particularly on existing barriers to having large trade reporting statistics match those of small trades.  In particular, are there characteristics unique to or more common with smaller trades that make them easier to report more quickly, and are there characteristics unique to or more common with larger trades that make them harder to report more quickly?  To what extent might the differences in reporting patterns arise from technological, processing, business practice or other differences among the types of entities most typically reporting trades within the three size categories?  What changes would dealers need to make in order to move from a 15 minute reporting timeframe to a shorter timeframe, such as 10 minutes or 5 minutes?  What are the costs and burdens associated with a shorter timeframe and do such costs and burdens change in relation to the change in timeframe?  If so, please specify, and where possible quantify, those costs and burdens and how they are impacted by the timeframe.  If the timeframe for reporting were shortened, are there specific categories of transactions that would need to be excepted (i.e., retaining the current 15 minute timeframe or some other alternative reporting schedule) in order to avoid undue burden to market participants?

GAO Report.  In January 2012, the Government Accountability Office (“GAO”) published a report on municipal securities market structure, pricing, and regulation, as required by Section 977 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.[10]  In this report the GAO concluded, among other things, that individual investors generally have less information about transaction prices than institutional investors.  GAO staff, which had interviewed a broad range of market participants, observed that “some large institutional investors told us that broker-dealers typically let them know about large or otherwise meaningful trades that they believed might affect prices of similar securities before these trades appeared on RTRS (postings must occur within 15 minutes of the trade).”

A foundational principle of RTRS and the MSRB’s other market transparency products is that all market participants would have equal access to transaction information, with trade data reported to the MSRB becoming immediately available to the public on the EMMA website and through the RTRS subscription services. The GAO observation that certain market participants are able to obtain, on a preferential basis, information regarding transactions that might affect prices before such information is reported by dealers to RTRS, if true, serves to undermine this foundational principle.  If in fact such information may affect prices, this loss of equality of access to transaction information between such favored institutional customers and the rest of the marketplace that must await the dealer’s RTRS reporting is highly concerning to the MSRB.

The Financial Industry Regulatory Authority (“FINRA”) has previously addressed concerns regarding the withholding of market information for competitive purposes in over-the-counter trading in equities when it reduced the timeframe for such reporting from 90 seconds to 30 seconds in 2010.[11]  FINRA stated that “members must report trades as soon as practicable and cannot withhold trade reports, e.g., by programming their systems to delay reporting until the last permissible second.”  FINRA further noted that if trade information is not reported or disseminated until the end of the permitted reporting period, market prices may change between the time of execution and public dissemination of the pricing information, and stated that its rule change “will ensure that members do not withhold important market information from investors and other market participants for competitive or other improper reasons.”[12]

The MSRB seeks comment from market participants on the prevalence of the practices observed by the GAO.  Are the longer timeframes for reporting of large trades observed in the trade data for the MSRB fiscal year ended September 30, 2012, and in prior years, in any way related to the GAO’s finding or the concerns expressed by FINRA in its 2010 rulemaking?  Would shortening the timeframe for reporting of municipal securities trades help to reduce the potential for improper selective disclosure of trade price information prior to its full dissemination through the upcoming CTP?

Long-Range Plan and Central Transparency Platform.  As noted above, the MSRB’s Long-Range Plan anticipates that enhanced information provided through the CTP could include, among other things, “more contemporaneous real-time trade price/yield information for all municipal securities trades.”  The Long-Range Plan envisions the CTP as the core of “an enhanced EMMA website platform – referred to as ‘EMMA 2.0’ – that would serve as the central public dissemination hub built upon an enhanced document and data collection process and an enhanced and diversified commercial dissemination and customized query functionality.” Specifically, the Long-Range Plan describes the CTP as follows:

New real-time central transparency platform (CTP) – EMMA 2.0 would incorporate a re-engineered real-time trade price system, representing the next generation of the MSRB’s existing Real-time Transaction Reporting System (RTRS), to become a central transparency platform (CTP) to provide a comprehensive, interactive and real-time display of a suite of pricing-related market data. While maintaining all execution activity in the hands of private-sector market participants through their own platforms (e.g., voice brokerage, on-line or other electronic platforms, or other processes developed by market participants in the future, collectively referred to as “market participant facilities”), the CTP would, over time, evolve to become a centralized venue providing universal public access to pre-, concurrent/real-time (“live”) and post-trade pricing information across the municipal market accumulated from primary market pricing and secondary market trade submission information required to be submitted under MSRB rules as well as live and historical bid-offer and related pre-trade information provided voluntarily by private sector CTP participants. The CTP would integrate this pricing information with security-specific disclosure and other information drawn from the full library of EMMA disclosure documents and information. The CTP also would provide a central directory of links and other contact information to all registered dealers in municipal securities, allowing navigation directly to market participant facilities of CTP participants, where such CTP participants could provide additional executable or informational bid-offer and related pre-trade information and could choose to allow live execution against posted bids and offers or to otherwise engage in execution or other marketplace activities with the public.

Many of the elements described as potential features of the CTP, as well as other potential enhancements to the MSRB’s market transparency products described in the Long-Range Plan, are represented in the SEC’s July 2012 Report on the Municipal Securities Market (the “SEC Report”).[13]  As described above and in the SEC Report, the CTP could include data elements and data types (e.g., bid/offer information, yield spreads, etc.) not currently included in data required to be reported to RTRS.  The decision to proceed with any such expansion of data requirements under MSRB rules and market transparency systems would be subject to the MSRB’s normal comment and rulemaking process at a later date.

For purposes of this concept release, the MSRB seeks input on certain baseline technology, processes and protocols relating to some of these potential new data elements or data types to assist the MSRB in pursuing a CTP architecture that can support a broad array of data types in a manner that is most efficient for the MSRB as well as for market participants who may have a role in the submission or dissemination of such data.  In particular, in connection with the potential collection of bid/offer information, what are the most effective methods currently used to disseminate such information among market participants, and would such methods be appropriate for the purposes of the CTP?  Would it be appropriate to merge the infrastructure for reporting of transaction data with the infrastructure for submission of bid/offer information, or are there differences either in the nature of the data or the nature of the parties likely to be supplying such information that would suggest maintaining separate processes?  

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Questions about this notice may be directed to Ernesto A. Lanza, Deputy Executive Director, Justin R. Pica, Director, Product Management - Market Transparency, or Karen Du Brul, Associate General Counsel, at 703-797-6600.

January 17, 2013

[1]  Municipal Securities Rulemaking Board, Long-Range Plan for Market Transparency Products, January 27, 2012, available at https://www.msrb.org/msrb1/pdfs/Long-Range-Plan.pdf.