Route To: Manager,Muni Department Trading Sales Operations Compliance
Amendment Approved The amendment provides that, when reporting transactions under the Board's Transaction Reporting Program, the brokers, dealers and municipal securities dealers who execute transactions must be identified along with the dealers clearing the transactions.
Questions about the amendment may be directed to Larry M. Lawrence, Policy and Technology Advisor.
On July 18, 1995, the Securities and Exchange Commission (Commission) approved an amendment to rule G-14, on reports of sales or purchases, and associated transaction reporting procedures.[1] The amendment provides that, when reporting transactions under the Board's Transaction Reporting Program, the brokers, dealers and municipal securities dealers (dealers) who execute transactions must be identified along with the dealers clearing the transactions. This information will improve the support provided by the Transaction Reporting Program for market surveillance and enforcement of Board rules. The amendment became effective July 24, 1995.
Since November 1994, rule G-14 has required each inter-dealer transaction that is eligible for automated comparison to be reported to the Board by the buy and sell sides of the transaction through National Securities Clearing Corporation (NSCC).[2] The transaction data is used by the Board to disseminate a daily public report and to maintain a surveillance database for surveillance purposes and generally to assist in the enforcement of Board rules.[3] The present amendment will help to ensure that the surveillance database contains the identity of all dealers involved in inter-dealer municipal securities transactions.
The identity of the dealers executing a transaction is necessary to ensure that the surveillance database contains an accurate record of the parties to each transaction. However, under NSCC procedures for automated comparison, dealers that submit transactions for comparison are not required to identify the dealers that executed the transaction, though they may optionally do so. Since the Transaction Reporting program became operational in January 1995, the Board has noted that a substantial number of transactions submitted under rule G-14 do not indicate whether the trade is actually effected by the dealer submitting the transaction or on behalf of another dealer that may have executed the transaction and cleared it through a "clearing broker."[4] Under the amended rule, dealers reporting inter-dealer transactions to the Board will continue to identify the clearing brokers on each side of the trade. The amendment requires the dealer that reports transactions also to identify the dealers that actually executed the transactions. When a dealer that clears transactions for other dealers submits a trade, the submission must include the identifying symbol of the dealer on whose behalf the trade was submitted. In addition, the executing dealer on the contra-side of the transaction must also be identified.[5] If a dealer submits trade information on its own behalf, it must identify itself as the party that executed the transaction, in addition to identifying the executing dealer on the other side.[6]
Under the amended rule, clearing brokers must ensure the presence of the executing broker identification for both the "buy side" and the "sell side" for every transaction submitted to the automated comparison system. In addition, any dealer that has not yet been assigned an executing broker identifier and that executes inter-dealer transactions in municipal securities will have to request assignment of an identifier.[7]
The tables below illustrate the requirement to identify all dealers in a transaction. The tables describe a situation in which:
-Introducing firm A has a standing arrangement to clear its transactions through clearing firm 123,
-Introducing firm B has a standing arrangement to clear its transactions through clearing firm 789, and
-On September 1, firm A purchases municipal securities from firm B.
To report the transaction in compliance with the proposed amendment, the clearing firms must report the information shown in Table One on September 1 to the automated comparison system at NSCC.
REPORTING INFORMATION TO BE REPORTED PARTY ________________________________________________________________
Clearing Clearing Executing Executing Firm Firm Firm Firm (Buy Side) (Sell Side) (Buyer) (Seller) ________________________________________________________________
123 123 789 A B ________________________________________________________________
789 123 789 A B ________________________________________________________________
If the information reported by the two clearing firms agrees in the details of the transaction (CUSIP number, par, price, etc.), NSCC successfully compares the trade and forwards the transaction information to MSRB, which stores the information in the surveillance database. NSCC does not require that the details match with respect to the executing firm identities, and will not require it under the amended rule.
Had either clearing firm been trading for its own account, it would have named itself as the "executing firm." In the above example, if clearing firm 123 had traded for its own account, the information would have been reported as shown in Table Two.
REPORTING INFORMATION TO BE REPORTED PARTY ________________________________________________________________
Clearing Clearing Executing Executing Firm Firm Firm Firm
(Buy Side) (Sell Side) (Buyer) (Seller) ________________________________________________________________
123 123 789 123 B ________________________________________________________________
789 123 789 123 B ________________________________________________________________
TABLE TWO
August 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 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 transactions, 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] See Securities and Exchange Act Release No. 34-35988 (July 18,1995). [2] NSCC is the Board's designee for transaction reporting and is the central facility provider for the automated comparison system for inter-dealer transactions. [3] The surveillance database contains a record of every inter-dealer transaction submitted to NSCC for comparison pursuant to rule G-12(f). Each transaction record includes details such as the CUSIP number of the security, par value, comparison date, if compared, or reason for failure to compare, settlement date, and dealer identities. This information is used by the Board to produce daily public reports, and is made available to the Commission and the agencies charged with enforcement of Board rules: the National Association of Security Dealers (NASD), the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve System. [4] A firm that submits, or "clears," a transaction through NSCC is called the "clearing broker." The clearing broker is an NSCC member that reports transactions for itself and, under certain arrangements, for other dealers. For an explanation of clearing and introducing brikers and how they are identified to the automated comparison system, see "Reporting Inter-Dealer Transactions to the Board:Rule G-14," MSRB Reports, Vol. 15, No. 2 (July 1995) at 15. [5] The executing dealer identities submitted by clearing brokers will not need to match in order for the trade to be sucessfully compared in the automated comparison system. [6] A clearing broker that uses an "omnibus" account to handle introducing brokers' trades therefore may have to change its practices to identify the introducing broker in each case, rather than using its own clearing broker symbol. [7] The NASD assigns executing broker symbols to brokers, dealers, and municipal securities dealers. A self-clearing dealer may use an NASD-assigned symbol to identify itself in its role as executing dealer, or it may use its NSCC-assigned dealer number for this purpose.
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