(Volume 16, Number 1) JANUARY 1996
Route To: Manager, Muni Department Trading Sales Operations Compliance
The proposed amendment would require dealers to include the time of trade execution when submitting information on inter-dealer transactions to the Board.
Questions about the proposed amendment may be directed to Larry M. Lawrence, Policy and Technology Advisor.
On December 15, 1995, the Board filed with the Securities and Exchange Commission a proposed amendment to rule G-14 that would require dealers to include the time of trade execution when submitting information on inter-dealer transactions to the Board. [1] Such information would be made available, through the Board's automated transaction reporting system, to the Commission and to organizations charged with inspection for compliance with, and enforcement of, Board rules. The Board has requested that the proposed amendment become effective on July 1, 1996.
The goals of the Board's transaction reporting program are to help provide market participants and the public with more information about the value of securities, and to help enforcement agencies identify transaction patterns as they carry out dealer inspections and conduct market surveillance.[2] Phase I of the program has been operational since January 23, 1995. Each day, the Phase I automated system has produced a report of price and volume of inter-dealer transactions in municipal securities that were executed the previous business day. In addition to the transparency component which produces these daily reports, the system has a second component, a surveillance database of detailed records about every inter-dealer transaction that has been successfully compared by the automated comparison system. The surveillance database includes, among other things, the price and volume of each compared[3] transaction, the trade date, identification of the security traded, and identification of all parties to the transaction.[4] This information is intended to enable the enforcement agencies to construct audit trails of inter-dealer transactions. The Board has provided on-line access to the surveillance database to the National Association of Securities Dealers, Inc. (NASD) and is making information from the surveillance database available to all the agencies responsible for enforcing Board rules.
The input stream for inter-dealer transaction reporting is information reported by dealers, pursuant to rule G-14, to the Board through the automated comparison system. The Board has designated National Securities Clearing Corporation (NSCC), the central facilities provider of the automated comparison system, as its agent for receiving inter-dealer transaction information.
The SEC has noted the need to make an "integrated audit trail" of transaction information available to the enforcement agencies. The SEC has expressed its belief that an audit trail will "provide valuable information for market surveillance and inspection purposes to the MSRB, the Commission, the NASD, and the relevant banking agencies." [5]
The proposed amendment will help to ensure that the audit trail information in the surveillance database includes the time of execution of each compared inter-dealer municipal securities transaction. Enforcement agencies are expected to utilize the time-of-trade information when examining a series of transactions in a given municipal security. The information currently available from the surveillance database enables regulatory personnel to determine the date on which a trade or group of trades was executed; the addition of time-of-trade will help reconstruct the sequence of trades during the day. Among other things, this will help enforcement agencies interpret changing price patterns as a security is traded during the day.
The proposed amendment would require each dealer reporting inter-dealer transactions to the Board to include the time of execution with each transaction submitted to the automated comparison system.[6] The time, accurate to the nearest minute, [7] would be reported as Eastern time.[8] The time-of-trade would be reported by both the buyer and seller, to ensure that time-of-trade is available for all transactions, even when one "side" does not report the trade on the night of trade date.[9]
Changes in the automated comparison system are underway to enable that system to incorporate time-of-trade information collected as part of the trade data submitted by dealers.[10] Dealers and providers of system services must make corresponding changes in dealer systems that provide input to the automated comparison systems, and some time will be needed to allow these changes to be made. Accordingly, the Board has requested that the Commission make the proposed amendment effective on July 1, 1996, to provide market participants with sufficient time to make the necessary internal system changes.
The Board published a notice in February 1995, which, among other things, described the proposed amendment and requested comment from market participants.[11] In response, commentators noted that cost and effort would be associated with implementing changes to dealers' trading systems to accommodate time-of-trade reporting, and suggested that this requirement should be deferred so that dealers and clearing agencies could make the needed changes in conjunction with more extensive changes foreseen for the later phases of the transaction reporting program.
The Board believes that the proposed amendment is essential to facilitating effective surveillance and enforcement activities regarding inter-dealer transactions and should not be delayed until later phases of the program. The Board does not believe that incorporating time-of-trade data into current trade reporting systems represents a major system change. The proposed amendment would merely add one item of information to an existing reporting requirement. That information item already is required, for record-keeping purposes, to be recorded by the dealer. The Board is proposing more than six months' lead time to allow dealers sufficient time to schedule the necessary system changes. In many cases, it would be expected that this change could be made in connection with other minor system adjustments that must be implemented in the ordinary course of business.
December 15, 1995
Rule G-14. Reports of Sales or Purchases (a)-(b) No change.
Rule G-14 Transaction Reporting Procedures (a) Inter-Dealer Transactions. (i) Except as described in paragraph (ii) of this section (a), each broker, dealer and municipal securities dealer shall report all transactions with other brokers, dealers or municipal securities dealers to the Board's designee for receiving such transaction information. The Board has designated National Securities Clearing Corporation (NSCC) for this purpose. A broker, dealer or municipal securities dealer shall report a transaction by submitting or causing to be submitted to NSCC information in such format and within such time frame as required by NSCC to produce a compared trade for the transaction in the initial comparison cycle on the night of trade date in the automated comparison system operated by NSCC. Such transaction information may be submitted to NSCC directly or to another registered clearing agency linked for the purpose of automated comparison with NSCC. The broker, dealer or municipal securities dealer may employ an agent that is a member of NSCC or a registered clearing agency for the purpose of submitting transaction information; however, the primary responsibility for timely and accurate submission continues to rest with the broker, dealer or municipal securities dealer that executed the transaction.
The information submitted in accordance with this procedure shall include the *time of trade execution* and the identity of the brokers, dealers or municipal securities dealers that execute the transaction in addition to the identity of the entities that clear the transaction. If clearing/introducing broker arrangements are used for a transaction, the introducing brokers shall be identified as the "executing brokers." If the settlement date of a transaction is known by the broker, dealer or municipal securities dealer, the report made to NSCC also shall include a value for accrued interest in the format prescribed by NSCC. (ii) No change.
[1] File No. SR-MSRB-95-17. Comments on the proposed amendment may be sent to the Commission and should refer to this file number.
[2] For a description of the program, see "Reporting Inter-Dealer Transactions to the Board: Rule G-14," MSRB Reports, Vol. 14, No. 5 (December 1994), at 3-6.
[3] In general, a "compared" transaction is one for which salient information items, provided by both parties to a trade, are matched and found to agree by the automated comparison system.
[4] Effective July 24, 1995, dealers submitting transaction information to the Board have been required to identify both executing dealers that are party to the transaction. See "Reporting Executing Dealer Transactions to the Board: Rule G-14," MSRB Reports, Vol. 15, No. 3 (October 1995), at 35-37.
[5] Securities Exchange Act Release No. 34955 (November 9, 1994) at 19.
[6] Rule G-14 Transaction Reporting Procedures stipulate that the broker, dealer or municipal securities dealer may employ an agent that is a member of NSCC or a registered clearing agency for the purpose of submitting transaction information; however, the primary responsibility for timely and accurate submission continues to rest with the broker, dealer, or municipal securities dealer that executed the transaction.
[7] The Board has noted that there may be "extraordinary circumstances when it is impossible to determine the exact time of execution." (MSRB Interpretation of July 29, 1977 regarding rules G-8(a)(vi) and (vii), MSRB Manual (CCH), para. 3536). In such cases, the dealer may report an approximation of the time of execution with transaction reporting information. In any case, the time-of-trade would not be used to match submissions during the comparison process nor would it be made public in the daily reports.
[8] A previous release erroneously stated that local time would be used. This has been changed to Eastern time.
[9] Requiring both the buyer and seller to report time-of-trade will ensure its presence in the surveillance database for those transactions where advisories are "stamped" in the automated comparison system. In "stamping" an advisory of a transaction to achieve comparison, one party indicates agreement with the transaction information submitted by the other party. If time-of-trade information were to be required of the party on only one side of the trade, transactions "stamped" by that party would not include any time-of-trade information for reporting purposes. In certain limited cases, involving syndicate transations, however, NSCC comparison procedures require a submission only from one dealer: the syndicate manager. Accordingly, only the syndicate manager is required in such a case to report to the Board, and only that dealer would report the time-of-trade under the proposed amendment.
[10] The Board understands from conversations with NSCC representatives that the necessary changes to the automated comparison system will be complete and tested during the second quarter of 1996.
[11] See "Transaction Reporting Program for Municipal Securities: Phase II," MSRB Reports, Vol. 15, No. 1 (April 1995), at 11-15.
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