(Volume 15, Number 3) October 1995
ROUTE TO: Manager, Muni Department Trading Sales Operations Compliance
The draft amendments would require transactions executed after 5 p.m. to be treated as next-day transactions for purposes of confirmation, clearance and settlement and other processing required by Board rules.
Questions about this notice may be directed to Harold L. Johnson, Deputy General Counsel.
In April 1995, the Board published for comment draft amendments to rules G-12(b) and G-15(b) to define the "trade date" for municipal securities transactions as ending at 5 p.m. Eastern Time. The draft amendments would require transactions executed after 5 p.m. to be treated as next-day transactions for purposes of confirmation, clearance and settlement and other processing required by Board rules. After reviewing comments received on the draft amendments at its July 1995 meeting, the Board decided to table its consideration of the draft amendments, pending further improvement in the comparison rate for municipal securities.
A number of Board rules - including those addressing confirmation, clearance, settlement, recordkeeping and trade reporting - set requirements that are tied directly to the trade date of a transaction. Board rules, however, do not currently provide a definition of "trade date" and the trade date for a municipal securities transaction therefore is considered to be simply the calendar date on which the transaction is executed. The concept of "trade date" is particularly important with respect to rules G-12(f) and G-14, which require inter-dealer transactions to be submitted to the automated comparison system, for purposes of clearing and transaction reporting, on trade date. Transactions executed late in the day are subject to this requirement, even though such trades may be executed after exchange-listed and other securities markets have closed for the day.
The draft amendments would define "trade date" for municipal securities transactions to end at 5 p.m. Eastern Time, with the next "trade date" beginning immediately after 5 p.m. Under this procedure, transactions executed after the 5 p.m. cut-off time would be considered as next-day transactions for purposes of Board rules. For example, an inter-dealer transaction executed at 6 p.m. Eastern Time on Tuesday would be included in Wednesday's trade data submitted to the automated comparison system and would carry a Wednesday trade date. To provide consistency in recordkeeping, inventory tracking and other internal functions, the definition of "trade date" set forth in the draft amendments would apply equally to all inter-dealer, institutional customer and retail customer transactions in municipal securities.
The draft amendments were proposed as a means to improve the efficiency of municipal securities clearance and settlement by allowing operations personnel to concentrate on completing the day's necessary processing of transactions - particularly the submission of trade data to automated clearance facilities - immediately after 5 p.m. Eastern Time. In proposing the draft amendments, the Board expressed special concern over the relatively low comparison rate for inter-dealer transactions and asked whether the proposed cut-off time might improve the percentage of trades submitted and compared in the initial overnight processing cycle, particularly for those dealers located on the West Coast.
Thirteen dealers, the Public Securities Association (PSA) and the Regional Municipal Securities Association (RMOA) commented on the draft amendments. Six dealers, the PSA and the RMOA opposed the concept of a trade date cut-off time. Four dealers expressed support for a trade date cut-off time. Three dealers essentially were neutral on the need for a trade date cut-off time, but urged that, if the concept were adopted by the Board, a time other than 5 p.m. be chosen.
The commentators opposing the draft amendments argued that the draft amendments would not assist in the efficient and timely processing of municipal securities. Most of these commentators believed that the cut-off time, in practical effect, would be counter-productive to this goal. Several stated that having a "trade date" different than the calendar date of a transaction would confuse customers and, in inter-dealer transactions, would foster disagreement between the parties as to whether specific transactions were executed before or after a certain time. One commentator, having surveyed its broker's broker operation, concluded that trades executed late in the day accounted for only a small fraction of the transactions that were not successfully compared in the initial comparison cycle. This commentator suggested that many other factors, such as the input procedures employed by individual firms, were more important in explaining why transactions were not being properly submitted to clearing corporations on trade date.
A number of commentators expressed concern that using the next business day as the "trade date" for some transactions would extend the settlement cycle by one day for those transactions. They argued that this would be contrary to the general direction of the securities industry, which is to compress the settlement cycle as a risk-reduction measure. Several commentators also argued that the draft amendments would send the wrong message to dealers by diminishing the importance of submitting a transaction to internal trade processing systems as quickly as possible after the transaction occurs.
A number of the commentators opposing the draft amendments suggested that the draft amendments would impose substantial burdens on dealers who have fully automated their in-house transaction processing. They noted that these internal systems have been designed to process trades using the calendar date of a transaction and that these systems would have to be reprogrammed to segregate those transactions executed after 5 p.m.
The three commentators supporting the draft amendments indicated that a trade date cut-off time would be helpful in their trade processing. One of these commentators qualified its support, however, by stating that retail transactions should not be included in the draft amendments. This commentator noted that it would confuse retail customers if the trade date on the confirmation differed from the calendar date of the transaction.
A number of commentators disagreed with the choice of 5 p.m. as a cut-off time for trade date. Three of these commentators were neutral on whether the draft amendments should or should not be adopted. One commentator suggested that the cut-off time be changed to 4 p.m. to coincide more closely with the end of the trading day in exchange markets. Several commentators suggested that any trade date cut-off time adopted should be later than 5 p.m. so that it would occur after the time at which trading in their respective offices generally ceases. Three commentators suggested 6 p.m. and two suggested 7 p.m. as appropriate times for this purpose.
The Board notes that the comparison rate for inter-dealer transactions has improved substantially since the draft amendments were proposed. Statistics for July 1995 show that approximately 92.7 percent of all inter-dealer transactions are being submitted in a timely and accurate manner to the automated comparison system by dealers, resulting in an 85.9 percent trade date comparison rate for July. This contrasts with an 89 percent submission rate and an 81 percent comparison rate in January, 1995.
In light of the improvement of the comparison rate, the Board is suspending its consideration of the draft amendments. The Board believes that the comparison rate is improving due to increased dealer attention to this processing function and, at this time, the Board is not ready to conclude that the draft amendments are necessary to facilitate the goal of continued improvements. In reaching this decision, the Board also took note of the several commentators who expressed concern over the amendments, including those who stated that 5 p.m. Eastern Time was too early in the day for a cut-off time for "trade date."
The Board expects that dealers will continue to devote attention to the timely and accurate submission of trade data for purposes of automated clearance and for transaction reporting under rule G-14. Although the Board has suspended consideration of the draft amendments at this time, the Board is cognizant that a number of dealers continue to have problems in submitting all of their inter-dealer transactions for processing in the automated comparison system on trade date. Trades that are not submitted in a timely and accurate manner are a concern not only for purposes of efficient clearance in the new three-day settlement cycle, but also for purposes of the Board's Transaction Reporting Program and the transparency that this program is providing to the market. The Board urges dealers having difficulties in this area to evaluate whether additional focus on internal procedures is necessary and whether alternative internal systems or clearing arrangements may be necessary to accomplish same-day reporting of transactions. In this regard, dealers may wish to explore the issue with their clearing agents and/or the registered clearing agencies being used for clearance of municipal securities transactions to determine any available alternatives.
The Board will continue to monitor the progress of accurate same-day submission of trade information to automated clearance systems and will consider adoption of the draft amendments in the future if this appears necessary, based upon whether late-day trades are being submitted to these systems in a timely manner.
August 15, 1995
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