(Volume 17, Number 1) January 1997
Route To: Manager, Muni Department Trading Sales Operations Compliance
On November 29, 1996, the Securities and Exchange Commission approved an amendment to rule G-14 (the "amendment") that will add retail and institutional customer transaction information to the inter-dealer transactions currently included in the Board's Transaction Reporting Program (the "Program").1 Under the rule as amended, the Board will disseminate aggregate data about inter-dealer and customer market activity and certain volume and price information about all transactions in frequently traded securities. The objectives of the Program are to promote investor confidence in the market and its pricing mechanisms and to increase transparency in the market. The trade information will be provided in the Program's daily report summarizing prices and volumes in the municipal securities market during the previous day (the "Daily Report").2 In addition, the information on all transactions reported will be made available to regulatory agencies responsible for enforcement of Board rules, as a means to assist in market surveillance.
The amendment requires that each dealer: (1) obtain an executing broker symbol, if one has not already been assigned, from the National Association of Securities Dealers (NASD); (2) provide the Board with the name and telephone number of a person responsible for testing the dealer's capabilities to report customer transaction information; (3) test its capabilities to report such information; and (4) report to the Board each day its municipal securities transactions with customers.
Dealer reporting requirements will become effective according to the following proposed schedule:
- Obtain executing broker symbol By December 29, 1996
- Provide contact information July 1, 1997
- Test the reporting capabilities July through December 1997, on a schedule to be announced by the Board.
- Effective date for customer January 1, 1998 transaction reporting
The Board has developed the Transaction Reporting Program to accomplish two objectives. The first is to increase the amount of information available about the market value of individual municipal securities. The concept of disseminating information to the public about transactions is now generally referred to by the Board as bringing "transparency" to the market. The second, but equally important, purpose of the Program is to provide a centralized audit trail of municipal securities transactions by making available to the NASD, the Commission, and other enforcement agencies a computer database reflecting all municipal securities transactions reported to the Board. This "surveillance database" helps meet the requirements of those organizations for an audit trail of transaction data, in connection with their surveillance of the market and inspection for compliance with Board rules and securities laws.
Currently, under Board rule G-14, dealers report their inter-dealer transactions to the MSRB each night through the automated comparison system operated by National Securities Clearing Corporation (NSCC). This reporting mechanism is convenient for dealers, since most of the trade data that must be reported to the Board has to be reported to NSCC in any event, for clearance and settlement purposes. The Board accomplishes the transparency function by making summary price and volume information available about these transactions on the "Daily Report." If the inter-dealer trade data received by the Board indicates that there were four or more trades in an issue during a day, the next morning's Daily Report includes the high, low and average prices, and the total par traded, for that issue.3 Prices and volumes for approximately 100 municipal securities issues are reported daily.
Under the rule as amended, each dealer that effects transactions with customers will generate a file of certain required information about its customer transactions, in a specified format, and transmit the file electronically to the MSRB by midnight of each trading day. The Board expects that most dealers will modify existing internal processing systems to generate the file. This approach will be less costly to dealers than if the Board were to mandate the use of an independent transaction reporting system with stand-alone terminals that would have to be acquired by dealers and operated by dealer staff.
Dealers may use any available method to transmit the specified file to the Board's system. Most dealers are expected to use existing telecommunications links with NSCC for this purpose, but, alternatively, dealers with low volumes of customer trades may dial-in to the Board's system and upload the file by modem.
The Board is building a subsystem of the Transaction Reporting System for accepting customer transaction information. The resulting Customer Transaction Reporting Subsystem (CTRS) will encompass the system originally planned for retail transactions, but will process institutional customer transaction data as well. Therefore, dealers will have consistent operational requirements for reporting both retail and institutional customer transactions.
Trade Information to be Reported Dealers will report approximately a dozen data items about each customer trade. These items, and their purpose in the customer transaction reporting subsystem, are as follows:
CUSIP Number. The number assigned by the CUSIP Service Bureau to identify the security. Identification numbers assigned by users or others will be considered errors. This item is needed for transparency and surveillance purposes.4 Format: 9 alphanumeric characters.
Trade Date. The date the trade was executed. This item is needed for transparency and surveillance purposes and to determine compliance with the Board's rule G-14 requirement that the trade be reported on trade date. Format: 8 digits, CCYYMMDD.
Time of Trade Execution. The time of day, stated as Eastern time to the nearest minute, at which the trade was executed. This item is needed for surveillance purposes. Format: 4 digits, HHMM, Military format, Eastern time.
Dealer Identifier. The executing broker symbol, assigned by the NASD, that identifies the executing dealer. The dealer identity is needed for surveillance purposes.5 Format: 4 letters, e.g., ABCD.
Buy/Sell Indicator. The dealer's capacity as buyer or seller in the transaction. This item should indicate whether the dealer is the buyer or seller, e.g., when the dealer sells securities to a customer, this indicator should be set to "S". This item is needed for surveillance purposes. Format: "S" or "B".
Par Value Traded. The par value, in dollars, of the securities in the transaction. The maturity value of zero coupon securities will be reported if it differs from the par value. Par value is needed for transparency and surveillance purposes. Format: 9 digit integer.
Dollar Price. The price of the security, in dollars per hundred dollars par value. Dollar price will be reported to the Subsystem exclusive of any commission; the CTRS will include the commission (a separate item, described below) in dollar prices as shown in the Daily Reports. If the dollar price cannot be computed precisely because the settlement date of a "when-issued" transaction is unknown, the CTRS will estimate it from the reported yield and an estimated settlement date (see below). Dollar price is needed for transparency and surveillance purposes. Format: 9 digits plus explicit decimal point, e.g., 100.123456 or 098.765432. The decimal point may "float," e.g., both 00099.5000 and 99.5000000 are valid.
Yield. The yield of the transaction, in per cent, as reported on the confirmation. Yield will not be required on transactions in municipal variable-rate or collateralized mortgage obligations. Yield will be used to validate dollar price. Format: 8 digits plus explicit decimal point. Units are per cent, e.g., 03.500000 denotes 3.5 %.
Dealer's Capacity and, if Agent, Commission Charged. The dealer's capacity indicates whether the dealer acted as agent or principal toward the customer. It is needed for surveillance purposes. Commission, if any, will be stated as dollars per hundred dollars par value, and is needed for computing the net price including commission. Format - Capacity: "A" or "P". Commission: 7 digits plus explicit decimal, e.g., 00.05000.
Settlement Date. The date the transaction is due to settle. The dealer must provide the settlement date if it is known. If the settlement date for an issue in "when-issued" status is not known at the time the trade information is reported, the CTRS will estimate it as 20 business days after the first trade in the issue, until the actual settlement date for the issue is determined. This item will be used to validate the consistency of dollar price and yield as reported. Format: 8 digits, CCYYMMDD.
Dealer's Control Number for Transaction. An identifier, assigned by the executing dealer, sufficient to identify the securities transaction from among the dealer's other transactions. Dealers may use any coding method, provided that no two transactions done by a dealer within a three-year period have the same control number. This item is needed for surveillance purposes (so that submissions can be associated with entries in the dealer's record-keeping system) and for data management (so that a dealer may identify a transaction to be revised after it is first reported to the CTRS). Format: 20 alphanumeric characters.
Cancel/Amend Code and Previous Record Reference. An indicator of whether the dealer is reporting an update to data previously reported about a transaction, and, if necessary, the dealer's control number for the transaction whose data is to be updated. Cancel/Amend code format: "F": First report of this transaction to the MSRB; "C": Cancel the record of the trade identified by the dealer's control number. "A": Amend the record of the trade identified by the dealer's control number. "V": Verification that a record of a transaction that contains possible errors is correct.
Use of Intermediaries An important feature of the Program is a provision for dealers to submit customer transaction data to the Board through an intermediary that could handle the technical details of preparing files in the specified format and/or the function of transmitting correctly formatted files to the CTRS. For example, clearing dealers (dealers that submit transactions for clearance and settlement on behalf of other dealers) could report transactions on behalf of the dealers for whom they clear. Clearing dealers themselves may use service bureaus (firms offering confirmation or other processing services) to collect, format and transmit data to the Board. By using the same telecommunication links for CTRS data as for clearing data, the expense to dealers of customer transaction reporting would be minimized.
The Submission Process Dealers or intermediaries will perform two steps in submitting customer trade data to the Board. First, they will prepare a file containing the necessary information in the physical format specified by the Board. Second, they will transmit the file to the CTRS.
The dealer may extract the necessary information from its record-keeping or automated confirmation systems. Some lower-volume dealers may wish to key in the data to a program designed specifically to create a file in the correct format. For dealers who wish to key in data on a personal computer, data entry and editing software will be made available by the Board. It is expected that only dealers with low volumes of trades will use this method, since higher-volume dealers already store most of the required trade data in existing computer systems and are expected to adapt those systems for reporting purposes rather than manually re-enter the data into another system.
As noted above, the Board expects that existing links between dealers and NSCC will be used to transmit most files of customer transaction data. NSCC will provide transmission services to dealers and will provide file layout specifications to its participants early in 1997. However, if a dealer does not wish to use an intermediary to transmit files to the Board, the dealer will be able to upload files directly to the CTRS from a personal computer.
Specifications for submitting files directly to the CTRS have previously been published.6 Before the test period begins in July 1997, the Board will distribute a user's manual to dealers containing additional details on file formats and submission procedures.
Errors and Corrections The Subsystem will send facsimile (fax) messages to dealers acknowledging receipt of a day's file and identifying records that appear to be in error or questionable. The system also will make available an electronic copy of the receipt and error message file, which the dealer may optionally download to its computer if it prefers. Dealers will submit corrections using a method similar to that for reporting trades. A dealer may also "cancel" a trade, that is, inform the system that a trade previously reported did not occur or was cancelled by the parties. Dealers will report only changes relevant to the Board's transaction reporting purposes, for example, a change in the price or par value of a trade.
The rule as amended will require dealers to report their customer transactions to the Board by midnight of trade date. Dealers also will be required to report corrections and cancellations as soon as the need for such change is known. Dealers will be able to make changes to data previously reported for two months after the trade date.
Executing Broker Symbol The Subsystem will use the NASD four-letter executing broker symbol (e.g., "ABCD") to identify the dealer that effected the transaction. Dealers reporting inter-dealer trades to the Board through NSCC currently are required by rule G-14 to identify the executing brokers (as well as the clearing brokers), but the specific symbol to be used has not previously been specified in rule G-14 procedures. As amended, the rule requires dealers to obtain and use the NASD executing broker symbol, both for reporting inter-dealer trades currently and for reporting customer trades in the future. Use of the executing broker symbol will enable users of the surveillance database to determine the executing dealer unambiguously in all cases. The NASD assigns such symbols, on request, to all dealer firms, including bank dealers. A dealer not already assigned such a symbol should obtain one from the NASD (see footnote 5 above). (Executing broker symbols are already widely used by many dealers.) Since identification symbols are already needed for the audit trail of inter-dealer transactions and the uniform identifier will improve the functions of the surveillance database, this provision of the amendment becomes effective 30 days after Commission approval, i.e., on December 29, 1996.
The requirement to report customer trades will become fully effective January 1, 1998, with a testing requirement, discussed below, effective beginning July 1997.
Mandatory Testing Dealers will need to test their own trade processing systems to ensure they can produce files containing the required information in the proper format. Such testing will clarify system input specifications with dealers and ensure that dealers' systems are able to correct erroneous input. Mandatory testing by dealers is the only way to ensure that dealers' systems are ready to submit customer trade data before the reporting requirement becomes effective.
To begin system operations by January 1, 1998, testing with dealers will be conducted between July and December 1997. The rule, as amended, requires dealers by July 1, 1997 to provide the Board with the name of a dealer staff person responsible for testing, and to participate in the testing program. Each dealer will be required to report all its customer trades, on a test basis, to the Board for a specified time. None of the test submissions will be publicly reported or provided to the enforcement agencies. The Board will inform the dealers of any problems found, and the dealer will re-test its system and reporting procedures within two months of the initial run. The Board plans to test first with larger submitters, giving consideration to the test readiness of individual firms.
All transactions in municipal securities will be recorded in the surveillance database. The Daily Report, however, will not include price data on every transaction, since it reports on those issues that were traded most frequently during the previous day. As noted above, currently the Daily Report includes summary information on those securities which were traded four or more times the previous business day. Including customer trades will substantially increase the number of issues trading above this "reporting threshold." It is impossible at this time, however, to predict quantitatively the effect on the Daily Report of including retail customer trades, since there is no existing source of comprehensive retail transaction information in the industry. The Board is requesting and has begun receiving samples of customer trade data from certain dealers, on a voluntary basis, and has begun to measure the frequency with which issues are traded, trade sizes, and other factors needed to structure the Daily Report to include customer transaction data. The Board plans to determine the reporting threshold and other formatting aspects of the Daily Report by mid-1997 and will describe the revised report in an additional proposed rule change.7 When the actual customer transaction volume is known, the Board also will consider whether the transaction fee, currently based solely on inter-dealer transactions, should be broadened to include customer transactions as well.
Rule G-14. Reports of Sales or Purchases (a) *General* No change. (b) *Transaction Reporting Requirements.* *(I)* Each broker, dealer or municipal securities dealer shall report to the Board or its designee information about its transactions in municipal securities {with other brokers, dealers or municipal securities dealers} using the formats and within the time frames specified in Rule G-14 Transaction Reporting Procedures. Transaction information collected by the Board under this rule will be used to make public reports of market activity and prices and to assess transaction fees. The transaction information will be made available by the Board to the Commission, securities associations registered under Section 15A of the Act and other appropriate regulatory agencies defined in Section 3(a)(34)(A) of the Act to assist in the inspection for compliance with and the enforcement of Board rules. *(ii) The information specified in the Transaction Reporting Procedures is critical to public reporting of prices for transparency purposes and to the compilation of an audit trail for regulatory purposes. All brokers, dealers and municipal securities dealers have an ongoing obligation to report this information promptly, accurately and completely. The broker, dealer or municipal securities dealer may employ an agent for the purpose of submitting customer transaction information; however, the primary responsibility for timely and accurate submission remains with the broker, dealer or municipal securities dealer that effected the transaction. (iii) To identify its transactions for reporting purposes, each broker, dealer and municipal securities dealer shall obtain a unique executing broker symbol from the National Association of Securities Dealers, Inc.*
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. *(b) Customer Transactions. (i) Each broker, dealer and municipal securities dealer shall report to the Board all transactions with customers effected after January 1, 1998, except as described in paragraph (iii) of this section (b). A broker, dealer or municipal securities dealer shall report a transaction by submitting or causing to be submitted to the Board, by midnight of trade date, the customer transaction information specified in paragraph (ii) of this section (b) in such format and manner specified in the current User's Manual for Customer Transaction Reporting.[8] The broker, dealer or municipal securities dealer shall promptly report cancellation of the trade or corrections to any required data items. (ii) The information submitted in accordance with this procedure shall include: the CUSIP number of the security; the trade date; the time of trade execution; the executing broker symbol identifying the broker, dealer or municipal securities dealer that effected the transaction; a symbol indicating the dealer's capacity as buyer or seller in the transaction; the par value traded; the dollar price of the transaction, exclusive of any commission; the yield of the transaction; a symbol indicating the dealer's capacity as agent for the customer or principal in the transaction; the commission, if any; the settlement date, if known to the broker, dealer or municipal securities dealer; a control number, determined by the broker, dealer or municipal securities dealer, identifying the transaction; and a symbol indicating whether the trade has previously been reported to the Board, and, if so, the dealer's control number used for the previous report. (iii) A transaction in a security that is ineligible for assignment of a CUSIP number by the Board or its designee shall not be required to be reported under this section (b). (iv) Each broker, dealer and municipal securities dealer effecting customer transactions in municipal securities, including introducing and clearing brokers, shall provide to the Board the name and telephone number of a person responsible for testing that firm's capabilities to report customer transaction information. Each broker, dealer and municipal securities dealer shall test such capabilities in a manner and according to the requirements specified in the current User's Manual for Customer Transaction Reporting. This paragraph (iv) shall take effect July 1, 1997.*
December 16, 1996
1 See Securities Exchange Act Release No. 37998 (November 29, 1996).
2 The Board expects in 1997 to file and obtain Commission approval of an additional proposed rule change specifying revisions to the Daily Report format to accommodate customer trade information. The proposed rule change will also specify the fee for subscriptions to the Daily Report.
3 All trades reported publicly must have been successfully "compared" on trade date in the automated clearance and settlement system, i.e., there must have been agreement by the parties to the trade on trade details such as par value, price, and yield. Average prices are reported only for those transactions with par value between $100,000 and $1 million. See "Reporting Inter-Dealer Transactions to the Board: Rule G-14," MSRB Reports, Vol. 14, No. 5 (December 1994) at 3-6, for a description of these and other aspects of the Program.
4 Items needed for transparency purposes will appear on the public Daily Report. Items needed for surveillance purposes will be stored in the Board's surveillance database and used by the enforcement agencies for audit trail construction and other enforcement purposes.
5 Dealers - including bank dealers - may obtain executing broker symbols from the NASD by calling NASDAQ Subscriber Services at (800) 777-5606. If difficulties are encountered, contact Mr. Joe Radzicki at (203) 385-6306.
6 See "Specifications for Reporting Customer Transactions to the MSRB," MSRB Reports, Vol. 16, No. 3 (September 1996) at 10-16.
7 The additional proposed rule change will also specify the fee for subscriptions to the Daily Report, along with any Program modifications found to be necessary.
8 A Notice to be published in the next issue of MSRB Reports will include specifications of the format and manner of submissions that will appear in the User's Manual for Customer Transaction Reporting.
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