Notice2024-01394
Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change To Amend MSRB Rule G-14 To Shorten the Timeframe for Reporting Trades in Municipal Securities to the MSRB
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 26, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 89 Issue 18 (Friday, January 26, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 18 (Friday, January 26, 2024)]
[Notices]
[Pages 5384-5415]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-01394]
[[Page 5383]]
Vol. 89
Friday,
No. 18
January 26, 2024
Part III
Securities and Exchange Commission
-----------------------------------------------------------------------
Self-Regulatory Organizations; Municipal Securities Rulemaking Board;
Notice of Filing of a Proposed Rule Change To Amend MSRB Rule G-14 To
Shorten the Timeframe for Reporting Trades in Municipal Securities to
the MSRB; Notice
Federal Register / Vol. 89 , No. 18 / Friday, January 26, 2024 /
Notices
[[Page 5384]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99402; File No. SR-MSRB-2024-01]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed Rule Change To Amend MSRB Rule G-
14 To Shorten the Timeframe for Reporting Trades in Municipal
Securities to the MSRB
January 19, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on January 12, 2024, the Municipal Securities
Rulemaking Board (``MSRB'' or ``Board'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the MSRB. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB filed with the Commission a proposed rule change to (i)
amend Rule G-14 RTRS Procedures under MSRB Rule G-14, on reports of
sales or purchases (``Rule G-14''), to shorten the amount of time
within which brokers, dealers and municipal securities dealers
(individually and collectively, ``dealers'') must report most
transactions to the MSRB, require dealers to report certain
transactions with a new trade indicator, and make certain clarifying
amendments, and (ii) make conforming amendments to MSRB Rule G-12, on
uniform practice (``Rule G-12''), and the MSRB's Real-Time Transaction
Reporting System (``RTRS'') Information Facility (``IF-1'') to reflect
the shortened reporting timeframe (collectively, the ``proposed rule
change'').
If the Commission approves the proposed rule change, the MSRB will
announce the effective date of the proposed rule change in a regulatory
notice to be published on the MSRB website.
The text of the proposed rule change is available on the MSRB's
website at <a href="https://msrb.org/2024-SEC-Filings">https://msrb.org/2024-SEC-Filings</a>, at the MSRB's principal
office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The MSRB has prepared summaries, set forth in Sections
A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
Since 2005, the MSRB has collected and disseminated information
from dealers about their municipal securities purchase and sale
transactions.\3\ Dealers currently are required to report their
transactions to RTRS within 15 minutes of the Time of Trade,\4\ absent
an exception,\5\ in accordance with Rule G-14, the Rule G-14 RTRS
Procedures, and the RTRS Users Manual.\6\
---------------------------------------------------------------------------
\3\ See Exchange Act Release No. 50605 (Oct. 29, 2004), 69 FR
64346 (Nov. 4, 2004), File No. SR-MSRB-2004-06; see also MSRB Notice
2004-29 (Approval by the SEC of Real-Time Transaction Reporting and
Price Dissemination: Rules G-12(f) and G-14) (September 2, 2004).
\4\ Rule G-14 RTRS Procedures Section (d)(iii) defines ``Time of
Trade'' as the time at which a contract is formed for a sale or
purchase of municipal securities at a set quantity and set price.
\5\ Transactions in securities without CUSIP numbers,
transactions in municipal fund securities, and certain inter-dealer
securities movements not eligible for comparison through a clearing
agency are currently exempt from the reporting requirements under
Rule G-14(b)(v).
\6\ The RTRS Users Manual is available at <a href="https://www.msrb.org/RTRS-Users-Manual">https://www.msrb.org/RTRS-Users-Manual</a>. Prior to the creation of RTRS in 2005, the MSRB
collected trade data on an end-of-day basis for next day
dissemination and surveillance purposes through a predecessor
transaction reporting system.
---------------------------------------------------------------------------
The transaction information collected by the MSRB in accordance
with Rule G-14 serves the dual primary purposes of market transparency
and market surveillance.\7\ To advance the goal of market transparency,
the MSRB disseminates trade reporting information from RTRS to paid
subscribers through certain data subscription feeds. These data
subscription feeds serve as the core source of price-related
information used by market participants, industry utilities and vendors
that, among other things, operate pricing-related tools and services
used throughout the municipal market to support execution of trades at
fair and reasonable prices that reflect current market values. To
further advance the goal of market transparency and to make such price-
related information available to individual investors and other market
participants contemporaneously with data flowing to market
professionals through the RTRS subscription feeds, the MSRB
disseminates trade reporting information free of charge to the general
public through the MSRB's centralized Electronic Municipal Market
Access (``EMMA[supreg]'') website.\8\
---------------------------------------------------------------------------
\7\ See Rule G-14(b)(i). Transaction information collected by
RTRS is also used in connection with assessments under MSRB Rule A-
13(d).
\8\ See MSRB Notice 2009-22 (MSRB Receives Approval to Launch
Primary Market Disclosure Service of MSRB's Electronic Municipal
Market Access System (EMMA) for Electronic Dissemination of Official
Statements) (May 22, 2009).
---------------------------------------------------------------------------
To advance the goal of market surveillance, the MSRB maintains a
comprehensive database of transaction information, which is made
available to the examining authorities, including the Commission, the
Financial Industry Regulatory Authority (``FINRA''), and other
appropriate regulatory agencies. The availability of trade reporting
data strengthens market transparency, promotes investor protection and
reduces information asymmetry between institutional and retail
investors.
Fixed income markets have changed dramatically since the current
15-minute requirement went into effect in 2005, including a significant
increase in the use of electronic trading platforms or other electronic
communication protocols to facilitate the execution of transactions.
The MSRB has continued to explore ways to modernize the rule and
provide for more timely, granular and informative data to further
enhance the value of disseminated transaction data. In doing so, the
MSRB has taken a measured and data-driven approach, using available
trade reporting data and the public comment process to help inform its
policy objectives and actions. The MSRB has utilized a series of
concept releases, requests for comments and extensive outreach to
solicit input from market participants and stakeholders.\9\ As a result
of these efforts
[[Page 5385]]
and of RTRS re-engineering to ensure its on-going effectiveness as
demands on the system were expected to rise over time, the MSRB has
implemented various refinements to RTRS, RTRS Information Facility (IF-
1), and the content and quality of trade-related information made
available to investors and the public.\10\
---------------------------------------------------------------------------
\9\ See MSRB Notice 2013-02 (Request for Comment on More
Contemporaneous Trade Price Information Through a New Central
Transparency Platform) (Jan. 17, 2013); MSRB Notice 2013-14 (Concept
Release on Pre-Trade and Post-Trade Pricing Data Dissemination
through a New Central Transparency Platform) (July 31, 2013); MSRB
Notice 2014-14 (Request for Comment on Enhancements to Post-Trade
Transaction Data Disseminated Through a New Central Transparency
Platform) (Aug. 13, 2014); MSRB Notice 2022-07 (Request for Comment
on Transaction Reporting Obligations under MSRB Rule G-14) (Aug. 2,
2022) (the ``2022 Request for Comment'').
\10\ See, e.g., Exchange Act Release No. 75039 (May 22, 2015),
80 FR 31084 (June 1, 2015), File No. SR-MSRB-2015-02, and Exchange
Act Release No. 77366 (Mar. 14, 2016), 81 FR 14919 (Mar. 18, 2016),
File No. SR-MSRB-2016-05 (expanding and adding trade indicators);
Exchange Act Release No. 83038 (Apr. 12, 2018), 83 FR 17200 (Apr.
18, 2018), File No. SR-MSRB-2018-02 (modernizing RTRS Information
Facility (IF-1)).
---------------------------------------------------------------------------
The MSRB has found that, in 2022, approximately 73.7 percent of the
trades in the municipal securities market that are currently subject to
the 15-minute reporting timeframe were reported within one minute of
execution, and approximately 97 percent of trades in the municipal
securities market that are currently subject to the 15-minute reporting
timeframe were reported within five minutes of execution.\11\ In light
of the technological advances and evolving market practices in the
intervening 19 years since the MSRB first adopted the 15-minute
reporting requirement, including the increase in electronic trading,
and consistent with the MSRB's longstanding goals of increasing
transparency and improving access to timely transaction data, the MSRB
is proposing updates to modernize the reporting timeframes and provide
timelier transparency. In this effort, the MSRB would continue to
assess its RTRS reporting requirements in light of market developments,
including reporting timeframes, and consider whether any further
modifications are warranted.
---------------------------------------------------------------------------
\11\ See infra ``Self-Regulatory Organization's Statement on
Burden on Competition--Trade Reporting Analysis'' in Section 4(a)
Table 1. Trade Report Time by Trade Size--Cumulative Percentages.
January to December 2022.
---------------------------------------------------------------------------
Proposed Rule Change
The proposed rule change is intended to bring about greater market
transparency through more timely disclosure and dissemination of
information to market participants and market-supporting vendors so
that the information better reflects current market conditions on a
real-time basis, while carefully balancing the considerations raised by
commenters throughout the rulemaking process.
The proposed amendments to Rule G-14 RTRS Procedures under Rule G-
14 would:
<bullet> Establish a baseline one-minute trade reporting
requirement;
<bullet> Establish a requirement that, with limited exceptions,
trades be reported as soon as practicable and that dealers adopt
policies and procedures in connection with this requirement;
<bullet> Create two new exceptions to the new one-minute reporting
requirement, consisting of (1) a 15-minute exception for dealers with
``limited trading activity,'' and (2) a phased-in approach for
implementation from 15 minutes to an eventual five-minute reporting
requirement for ``trades with a manual component'';
<bullet> Maintain and clarify all existing exceptions to the
current 15-minute reporting requirement, as well as the 15-minute from
start of next day reporting requirement for trades conducted outside
the trading day, so that they would continue to apply under the new
one-minute reporting requirement;
<bullet> Require that dealers reporting any trade with a manual
component use a new special condition indicator when the trade is
reported to the MSRB;
<bullet> Specify that dealers may not purposely delay the execution
or reporting of a transaction, introduce any manual steps following the
Time of Trade, or otherwise modify any steps to execute or report the
trade for the purpose of utilizing the manual trade exception;
<bullet> Provide that a rule violation would be found where there
is a ``pattern or practice'' of late trade reporting without
``reasonable justification or exceptional circumstances''; and
<bullet> Clarify within Rule G-14 RTRS Procedures the usage of all
existing and new special condition indicators.
The proposed rule change would also make certain conforming
technical changes to Rule G-12(f)(i) and IF-1. A more detailed
description of the proposed rule change follows.
If the proposed rule change is approved, the MSRB would review the
available trade reporting information and data arising from
implementation of the changes to trade reporting introduced by the
proposed rule change, including but not limited to the two exceptions
to the one-minute reporting requirement. Such monitoring would inform
any further potential changes by the MSRB, through future rulemaking,
to the trade reporting requirements due to increasing marketplace and
technology efficiencies, process improvements, continuing or new
barriers to accelerated reporting, unanticipated market impacts, or
other factors.
New Baseline Reporting Requirement: One Minute After the Time of Trade
Proposed amendments to Rule G-14 RTRS Procedures Section (a)(ii)
generally would provide that transactions effected with a Time of Trade
during the hours of an RTRS Business Day \12\ must be reported to an
RTRS Portal \13\ ``as soon as practicable, but no later than one
minute'' (rather than within the current 15-minute standard) after the
Time of Trade, subject to several existing reporting exceptions, which
would be retained in the amended rule,\14\ and two new intra-day
reporting exceptions relating to dealers with limited trading activity
and trades with a manual component that would be added by the proposed
rule change, as described below.\15\ Except for those trades that would
qualify for a reporting exception, all trades currently required to be
reported within 15 minutes after the Time of Trade would, under the
proposed rule change, be required to be reported no later than one
minute after the Time of Trade.
---------------------------------------------------------------------------
\12\ Rule G-14 RTRS Procedures Section (d)(ii) defines ``RTRS
Business Day'' as 7:30 a.m. to 6:30 p.m., Eastern Time, Monday
through Friday, unless otherwise announced by the MSRB.
\13\ RTRS has three ``Portals'' for submission of transaction
data, and aspects of RTRS are designed to function in coordination
with the Real-Time Trade Matching (``RTTM'') system of the
Depository Trust & Clearing Corporation (``DTCC'') in conjunction
with its subsidiary National Securities Clearing Corporation. Rule
G-14 RTRS Procedures Section (a)(i) describes the three RTRS
Portals: Message Portal used for trade submission and trade
modification as described in Section (A) thereof; RTRS Web Portal
used for low-volume transaction submission and modification as
described in Section (B) thereof; and RTTM Web Portal used only for
inter-dealer transactions eligible for automated comparison as
described in Section (C) thereof.
\14\ Three of these existing exceptions, consisting of List
Offering Price/Takedown Transactions, trades in certain short-term
or variable rate instruments, and away from market trades, require
that trades be reported by the end of the day on which they are
executed and do not rely on the Time of Trade. These three end-of-
trade-date reporting exceptions would be retained without change and
would be redesignated as Rule G-14 RTRS Procedures Section
(a)(ii)(A)(1), (2) and (3), respectively. Two other existing
exceptions for certain special circumstances would also be retained
without change, consisting of dealers reporting inter-dealer ``VRDO
ineligible on trade date'' transactions, which must be reported by
the end of the day on which the trade becomes eligible for automated
comparison, and of dealers reporting inter-dealer ``resubmission of
an RTTM cancel,'' which must be reported by the end of the next RTRS
Business Day following cancellation of the original trade. These two
exceptions would be redesignated as Rule G-14 RTRS Procedures
Sections (a)(ii)(B)(1) and (2), respectively.
\15\ The two new intra-day reporting exceptions, consisting of
trades by dealers with limited trading activity and trades with a
manual component, would be designated as Rule G-14 RTRS Procedures
Sections (a)(ii)(C)(1) and (2), respectively.
---------------------------------------------------------------------------
[[Page 5386]]
New Requirement To Report Trades ``as Soon as Practicable''
The proposed amendment to Rule G-14 RTRS Procedures Section (a)(ii)
adds a new requirement that, absent an exception, trades must be
reported as soon as practicable (but no later than one minute after the
Time of Trade). In addition, this same ``as soon as practicable''
requirement would apply to trades subject to longer trade reporting
deadlines under the two new exceptions for dealers with limited trading
activity pursuant to Rule G-14 RTRS Procedures Section (a)(ii)(C)(1)
and Supplementary Material .01,\16\ or trades with a manual component
pursuant to Rule G-14 RTRS Procedures Section (a)(ii)(C)(2) and
Supplementary Material .02,\17\ as described below.
---------------------------------------------------------------------------
\16\ See infra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement--Exception for Dealers with
Limited Trading Activity.''
\17\ See infra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement--Exception for Trades with a
Manual Component.''
---------------------------------------------------------------------------
The new ``as soon as practicable'' language, which does not
currently appear in Rule G-14 RTRS Procedures, would harmonize this
element of RTRS trade reporting requirements for municipal securities
with FINRA's trade reporting requirement for its Trade Reporting and
Compliance Engine (``TRACE'') for TRACE-eligible securities.\18\ Thus,
while Rule G-14 RTRS Procedures do not currently explicitly prohibit a
dealer from waiting until the existing 15-minute deadline to report a
trade notwithstanding the fact that the dealer could reasonably have
reported such trade more rapidly, under the proposed rule change a
dealer could not simply await the deadline to report a trade if it were
practicable to report such trade more rapidly.
---------------------------------------------------------------------------
\18\ See e.g., FINRA Rule 6730(a).
---------------------------------------------------------------------------
In connection with the new ``as soon as practicable'' requirement,
the proposed rule change includes new Supplementary Material .03
relating to policies and procedures for complying with the ``as soon as
practicable'' reporting requirement. Under proposed Supplementary
Material .03(a), consistent with Supplementary Material .03(a) of FINRA
Rule 6730, dealers would be required to adopt policies and procedures
reasonably designed to comply with the ``as soon as practicable''
standard and would be required to implement systems that commence the
trade reporting process without delay upon execution. Where a dealer
has reasonably designed policies, procedures and systems in place, the
dealer generally would not be viewed as violating the ``as soon as
practicable'' requirement because of delays in trade reporting due to
extrinsic factors that are not reasonably predictable and where the
dealer does not intend to delay the reporting of the trade (for
example, due to a systems outage). Dealers must not purposely withhold
trade reports, for example, by programming their systems to delay
reporting until the last permissible minute or by otherwise delaying
reports to a time just before the deadline if it would have been
practicable to report such trades more rapidly.
For trades with a manual component, and consistent with
Supplementary Material .03(b) of FINRA Rule 6730, the MSRB recognizes
that the trade reporting process may not be completed as quickly as,
for example, where an automated trade reporting system is used. In
these cases, the MSRB expects that the regulatory authorities that
examine dealers and enforce compliance with this requirement would take
into consideration the manual nature of the dealer's trade reporting
process in determining whether the dealer's policies and procedures are
reasonably designed to report the trade ``as soon as practicable''
after execution.\19\
---------------------------------------------------------------------------
\19\ See Supplementary Material .03(b) of FINRA Rule 6730. See
also infra ``Purpose--Proposed Rule Change--Exceptions to the
Baseline Reporting Requirement--Exception for Trades with a Manual
Component'' for a discussion of the new exception for trades with a
manual component.
---------------------------------------------------------------------------
Time of Trade Discussion
The ``Time of Trade'' is the time at which a contract is formed for
a sale or purchase of municipal securities at a set quantity and set
price.\20\ While the definition of Time of Trade would not be changed,
the precision with which the establishment of the Time of Trade for a
particular transaction would become more critical in the context of the
proposed shorter, one-minute reporting requirement compared to the
current 15-minute reporting requirement because, absent an exception,
dealers would have less time to report the trade. The time taken to
report the trade is measured by comparing the Time of Trade reported by
the dealer with the timestamp assigned when the initial trade report is
received by an RTRS Portal.\21\ For transaction reporting purposes,
Time of Trade is considered to be the same as the time that a trade is
``executed'' and, generally, is consistent with the ``time of
execution'' for recordkeeping purposes.\22\ Importantly, the time that
the trade is executed is not necessarily the time that the trade
information is entered into the dealer's processing system. For
example, if a trade is executed on a trading desk but not entered for
processing until later, the time of execution (not the time of entering
the record into the processing system) is required to be reported as
the ``Time of Trade.'' \23\
---------------------------------------------------------------------------
\20\ See current Rule G-14 RTRS Procedures Section (d)(iii).
\21\ See Exchange Act Release No. 49902 (June 22, 2004), 69 FR
38925 (June 29, 2004), File No. SR-MSRB-2004-02; see also MSRB
Notice 2004-13 (Real-Time Transaction Reporting: Notice of Filing of
Proposed Rule Change to Rules G-14 and G-12(f)) (June 1, 2004); IF-
1.
\22\ See Rule G-8(a)(vi) and (vii); see also RTRS G-14
Transaction Reporting Procedures (FAQs regarding Time of Trade
Reporting) at question 8 (Aug. 1, 1996); MSRB Notice 2016-19 (MSRB
Provides Guidance on MSRB Rule G-14, on Reports of Sales or
Purchases of Municipal Securities) at question 1 (Aug. 9, 2016) (the
``2016 RTRS FAQs''). Pursuant to Rule G-15(a)(vi)(A), the time of
execution reflected on customer confirmations is required to be the
same as the time of execution reflected in the dealer's records and
thus should generally be consistent with the time of trade reported
by the dealer.
\23\ See RTRS Users Manual (Questions and Answers on Reporting
Trades), at question 1 (Aug. 09, 2016), available at <a href="https://www.msrb.org/Questions-and-Answers-Notice-Concerning-Real-Time-Reporting-Municipal-Securities-Transactions">https://www.msrb.org/Questions-and-Answers-Notice-Concerning-Real-Time-Reporting-Municipal-Securities-Transactions</a>. Similarly, transactions
effected outside of the hours of an RTRS Business Day are required
to be reported within 15 minutes after the start of the next RTRS
Business Day. The time the trade was executed (rather than the time
that the trade report is made) is the ``Time of Trade'' required to
be reported.
---------------------------------------------------------------------------
While the principles of contract law are mostly governed by state
statutory and common law, generally, in order to form a valid contract,
there must be at least an offer and acceptance of that offer. As a
result, dealers should consider the point in time at which an offer to
buy or sell municipal securities was met with an acceptance of that
offer. This offer and acceptance, or a ``meeting of the minds,'' \24\
cannot occur before the final material terms, such as the exact
security, price and quantity, have been agreed to and such terms are
known by the parties to the transaction.\25\ Further, dealers should be
[[Page 5387]]
clear in their communications regarding the final material terms of the
trade and how such terms would be conveyed between the parties to
ensure that such a valid trade contract has been formed.\26\
---------------------------------------------------------------------------
\24\ See FINRA Regulatory Notice 16-30 (Trade Reporting and
Compliance Engine (TRACE): FINRA Reminds Firms of their Obligation
to Report Accurately the Time of Execution for Transactions in
TRACE-eligible Securities) (Aug. 2016) (describing this meeting of
the minds that substantively parallels the guidance provided by the
MSRB in the 2016 RTRS FAQs at questions 1 and 2).
\25\ See MSRB Notice 2004-18 (Notice Requesting Comment on Draft
Amendments to Rule G-34 to Facilitate Real-Time Transaction
Reporting and Explaining Time of Trade for Reporting New Issue
Trades) (June 18, 2004) (``Transaction reporting procedures define
the `time of trade' as the time when a contract is formed for a sale
or purchase of municipal securities at a set price and set quantity.
For purposes of transaction reporting, this is considered to be the
same as the time that a trade is `executed.''') (internal citations
omitted); see also 2016 RTRS FAQs at question 1.
\26\ See FINRA Regulatory Notice 16-30 (Trade Reporting and
Compliance Engine (TRACE): FINRA Reminds Firms of their Obligation
to Report Accurately the Time of Execution for Transactions in
TRACE-eligible Securities) (Aug. 2016).
---------------------------------------------------------------------------
In the context of new issue securities, the MSRB has previously
stated that a transaction effected on a ``when, as and if issued''
basis cannot be executed, confirmed and reported until the municipal
security has been formally awarded by the issuer.\27\ Thus, while
dealers may take orders for securities and make conditional trading
commitments prior to the award, dealers cannot execute transactions,
send confirmations or make a trade report prior to the time of formal
award. The MSRB has previously characterized pre-sale orders as
expressions of the purchasers' firm intent to buy the new issue
securities in accordance with the stated terms, which order may only be
executed upon the award of the issue or the execution of a bond
purchase agreement.\28\ Importantly, such expressions of an intent to
purchase municipal securities are subject to material conditions that
negate execution of an agreed upon offer and acceptance until the
issuer has committed to the issuance of the securities.
---------------------------------------------------------------------------
\27\ 2016 RTRS FAQs at question 2.
\28\ See MSRB Interpretive Guidance, Rule G-12 (Confirmation:
Mailing of WAII Confirmation) (Apr. 30, 1982). In the same vein,
retail orders submitted during a retail order period under MSRB Rule
G-11 are viewed as conditional commitments. See MSRB Rule G-
11(a)(vii) (defining the term ``retail order period''). See also,
e.g., MSRB Notice 2014-14 (Request for Comment on Enhancements to
Post-Trade Transaction Data Disseminated Through a New Central
Transparency Platform) (Aug. 13, 2014) (describing the conditional
nature of conditional trading commitments).
---------------------------------------------------------------------------
The MSRB believes that this same rationale applies to secondary
market transactions where the commitment of the parties is subject to
material conditions. When a sales representative of a dealer takes a
customer order, but is unable to execute that order until their trader
performs supervisory or other firm-mandated reviews or approvals of
such order--for example, to determine that the customer order does not
exceed internally-set risk and compliance parameters or to complete
best-execution, suitability/best interest or fair pricing protocols
that may result in a changed price or quantity to the customer or in
not completing execution of the trade--the dealer reasonably may
determine that the ``meeting of the minds'' has not yet occurred until
such processes, procedures or protocols have been completed and the
dealer has affirmatively ``accepted'' the order. In such circumstances,
the dealer should be clear in its communications with its counterparty
regarding the final terms of the trade and how such terms would be
conveyed between the parties to ensure that such a valid trade contract
has been formed, such as clearly communicating to the customer that the
order should not be viewed as accepted until such processes, procedures
or protocols are completed and the trade is finally executed. Such
processes, procedures or protocols should be appropriately reflected in
a dealer's written policies and procedures. Because the Time of Trade
is tied to the contractual agreement (that is, offer and acceptance,
whether oral or written) between the parties to a transaction, a dealer
and its counterparty may come to an express agreement as to the Time of
Trade for a given transaction, as appropriate, that is consistent with
the time at which the agreement becomes binding upon the parties under
contract law.
Exceptions to the Baseline Reporting Requirement
Proposed amendments to Rule G-14 RTRS Procedures Section (a)(ii)
add two new exceptions to the proposed one-minute reporting
requirement. New Section (C)(1) provides an exception for a dealer with
``limited trading activity'' and new Section (C)(2) provides an
exception for a dealer reporting a ``trade with a manual component.''
These two new exceptions would have the narrowly-tailored purpose of
addressing the timing of trade reporting for the dealers and
transactions qualifying for one of the exceptions (either retaining the
current 15-minute timeframe or taking a more stepwise approach to
shortening the reporting timeframe). As with the existing exceptions,
these two new exceptions would not alter or diminish any of the
investor protections afforded by other MSRB rules or federal securities
laws or regulations applicable to pricing, best execution, disclosure,
suitability/best interest, and other aspects of the trades being
reported.
Exception for Dealers With Limited Trading Activity
A dealer with ``limited trading activity'' would be excepted from
the one-minute reporting requirement pursuant to new Section
(a)(ii)(C)(1) and would instead be required to report its trades as
soon as practicable, but no later than 15 minutes after the Time of
Trade for so long as the dealer remains qualified for the limited
trading activity exception, as further specified in new Supplementary
Material .01.\29\
---------------------------------------------------------------------------
\29\ Transactions effected by such a dealer with a Time of Trade
outside the hours of an RTRS Business Day would be permitted to be
reported no later than 15 minutes after the beginning of the next
RTRS Business Day pursuant to Rule G-14 RTRS Procedures Section
(a)(iii). As is the case today, transactions for which an end-of-
trade-day or post-trade-day reporting exception is available under
redesignated Sections (A) and (B) would continue to have that
exception available.
---------------------------------------------------------------------------
Proposed Section (d)(xi) of Rule G-14 RTRS Procedures defines a
dealer with limited trading activity as a dealer that, during at least
one of the prior two consecutive calendar years, reported to an RTRS
Portal fewer than 1,800 transactions, excluding transactions exempted
under Rule G-14(b)(v) and transactions specified in Rule G-14 RTRS
Procedures Sections (a)(ii)(A) and (B) (i.e., transactions having an
end-of-trade-day reporting exception).\30\ A dealer relying on this
exception to report trades within the 15-minute timeframe, rather than
the new standard one-minute timeframe, must confirm that it meets the
criteria for a dealer with limited trading activity for each year
during which it continues to rely on the exception (e.g., the dealer
could confirm its eligibility based on its internal trade records and
by checking MSRB compliance tools, as described below, which would
indicate a dealer's transaction volume for a given year).\31\ If a
dealer does not meet the criteria for a given calendar year (that is,
has 1,800 or more transactions not having an end-of-trade-day or post-
trade-day reporting exception in both preceding calendar years), such
dealer would not be eligible for the exception, after a three-month
grace period at the beginning of such calendar year, for transactions
reported on and after April 1 of such calendar year. Therefore, the
dealer would be required to report transactions to RTRS no later than
one minute after the Time of Trade for the remainder of that calendar
year, unless another exception under the rule applies. A dealer that
meets the criteria for a given calendar
[[Page 5388]]
year may utilize the exception on or after January 1 of such calendar
year.\32\
---------------------------------------------------------------------------
\30\ This number of transactions is expected to capture
approximately 1.5 percent of the trades in the municipal securities
markets in a given calendar year, based on transaction data from
calendar year 2022, and generally aligns with FINRA's proposal to
similarly shorten trade reporting requirements for TRACE-eligible
securities, in which FINRA would except dealers with similarly
limited trading activity for the respective markets of TRACE-
eligible securities. See File No. SR-FINRA-2024-004 (Jan. 11, 2024)
(the ``2024 FINRA Proposed Rule Change'').
\31\ See infra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement--Exception for Dealers with
Limited Trading Activity.''
\32\ A previously active dealer that newly becomes eligible for
the exception for dealers with limited trading activity following
the first year of the implementation of the proposed rule change may
continue to see their trades marked as late on RTRS report cards and
related RTRS feedback based on the one-minute deadline for a short
period of time at the beginning of a new calendar year until the
MSRB is able to systematically update the dealer's status in the
RTRS system. Any such late indicator would not, for examination or
enforcement purposes, be viewed as a violation by a dealer that
otherwise was qualified as a dealer with limited trading activity at
the time of the report.
---------------------------------------------------------------------------
For example, assume the following hypothetical trade counts for
Dealer X for a given calendar year: \33\
---------------------------------------------------------------------------
\33\ While the first two years of data shown in the chart
represent trades occurring in years prior to the likely effective
date of the proposed rule change, such data would be used to
determine whether a dealer would be eligible for the limited trading
activity exception in the first years after the effective date. The
chart assumes that the first calendar year in which the new
reporting timeframes under the proposed rule change, including the
exception for a dealer with limited trading activity, would be
effective is calendar year 2026.
------------------------------------------------------------------------
Trade count Eligible for exception during
Calendar year \34\ calendar year?
------------------------------------------------------------------------
2024..................... 1,900 N/A.
2025..................... 1,700 N/A.
2026..................... 2,000 Yes, based on 2025 trade
count below the 1,800
threshold.
2027..................... 1,900 Yes, based on 2025 trade
count below the 1,800
threshold.
2028..................... 1,700 No, based on 2026 and 2027
trade counts above the 1,800
threshold in both years
(must transition reporting
to one minute on and after
April 1, 2028).
2029..................... 2,000 Yes, based on 2028 trade
count below the 1,800
threshold (may resume
reporting in 15 minutes on
January 1, 2029).
------------------------------------------------------------------------
Based on the hypothetical data presented in the table above, Dealer
X would be eligible for the exception as a dealer with limited trading
activity for the calendar years 2026 and 2027 effective January 1 of
each such year,\35\ based on trade count for the year 2025. However,
Dealer X would no longer qualify for such an exception for the calendar
year 2028. As a result, for 2028, beginning on and after April 1, 2028,
after the three-month grace period, Dealer X must begin reporting all
of its trades (other than those subject to another exception) no later
than one minute after the Time of Trade. However, Dealer X would again
qualify for calendar year 2029 as a dealer with limited trading
activity based upon its 2028 trade count and may resume reporting its
trades no later than 15 minutes after the Time of Trade on January 1,
2029.
---------------------------------------------------------------------------
\34\ The trade count is intended to reflect the number of
transactions not subject to a reporting exception under proposed
Section (a)(ii) of Rule G-14 RTRS Procedures. For purposes of
illustration, the hypotheticals include manual trades subject to an
intra-day exception as proposed.
\35\ See supra n.32.
---------------------------------------------------------------------------
As shown above, this approach may cause some dealers' eligibility
for the exception to change from year to year. However, based on
substantial historical trade reporting data, the majority of dealers
that are eligible for the exception are expected to stay within the
exception. Similarly, the majority of dealers that are not eligible for
the exception are expected to remain ineligible for the exception in
subsequent years.\36\
---------------------------------------------------------------------------
\36\ Approximately 30 out of 647 dealers reporting trades, or
less than five percent of such dealers, were within a 20 percent
deviation of 1,800 trades in 2022.
---------------------------------------------------------------------------
Notwithstanding the foregoing, dealers with limited trading
activity are reminded of the new overarching obligation to report
trades as soon as practicable, as described above.\37\
---------------------------------------------------------------------------
\37\ See infra ``Purpose--Proposed Rule Change--New Requirement
to Report Trades `as Soon as Practicable.' ''
---------------------------------------------------------------------------
Exception for Trades With a Manual Component
A ``trade with a manual component'' as defined in new Section
(d)(xii) of Rule G-14 RTRS Procedures would be excepted from the one-
minute reporting requirement pursuant to Rule G-14 RTRS Procedures
Section (a)(ii)(C)(2). Instead, dealers with such trades would be
required to report such trades as soon as practicable and within the
time periods specified in new Supplementary Material .02, unless
another exception from the one-minute reporting requirement applies
under proposed Rule G-14 RTRS Procedures Sections (a)(ii)(A) and (B)
(i.e., transactions having an end-of-trade-day or post-trade-day
reporting exception) or (a)(ii)(C)(1) (i.e., transactions by dealers
with limited trading activity).\38\
---------------------------------------------------------------------------
\38\ Transactions effected with a Time of Trade outside the
hours of an RTRS Business Day would be permitted to be reported no
later than 15 minutes after the beginning of the next RTRS Business
Day pursuant to Rule G-14 RTRS Procedures Section (a)(iii).
---------------------------------------------------------------------------
Trades Having a Manual Component
As proposed, Section (d)(xii) of Rule G-14 RTRS Procedures would
define a ``trade with a manual component'' as a transaction that is
manually executed or where the dealer must manually enter any of the
trade details or information necessary for reporting the trade directly
into an RTRS Portal (for example, by manually entering trade data into
the RTRS Web Portal) or into a system that facilitates trade reporting
(for example, by transmitting the information manually entered into a
dealer's in-house or third-party system) to an RTRS Portal. As
described below, a dealer reporting to the MSRB a trade meeting the
definition for a ``trade with a manual component'' would be required to
append a new trade indicator so that the MSRB can identify manual
trades.\39\
---------------------------------------------------------------------------
\39\ See infra ``Purpose--Proposed Rule Change--Manual Trade
Indicator.'' As described therein, such new indicator would be
required for any trade with a manual component, whether the dealer
reports such trade within the new one-minute timeframe or the dealer
seeks to take advantage of the longer timeframes permitted for
trades with a manual component.
---------------------------------------------------------------------------
This ``manual'' exception would apply narrowly, and would normally
encompass any human participation, approval or other intervention
necessary to complete the initial execution and reporting of trade
information after execution, regardless of whether undertaken by
electronic means (e.g., keyboard entry), physical signature or other
physical action. To qualify as a trade with a manual component, the
manual aspect(s) of the trade generally would occur after the relevant
Time of Trade (i.e., the time at which a contract is formed for the
transaction). Any manual aspects that precede the time of trade (e.g.,
phone calls to locate bonds to be sold to a customer before the dealer
agrees to sell such bonds to a purchasing customer) would normally not
be relevant for purposes of the exception unless they have a direct
impact on the activities that must be
[[Page 5389]]
undertaken post-execution to enter information necessary to report the
trade.\40\
---------------------------------------------------------------------------
\40\ This manual exception applies to the reporting of a trade
upon the trade being executed. If a report has been made and the
dealer detects a mistake that requires cancellation or correction,
any modification of an already submitted trade report must be
performed as soon as possible pursuant to Rule G-14 RTRS Procedures
Section (a)(iv). See MSRB Interpretive Guidance (Reminder Regarding
Modification and Cancellation of Transaction Reports: Rule G-14)
(Mar. 2, 2005), available at <a href="https://www.msrb.org/Reminder-Regarding-Modification-and-Cancellation-Transaction-Reports-Rule-G-14">https://www.msrb.org/Reminder-Regarding-Modification-and-Cancellation-Transaction-Reports-Rule-G-14</a>. While a trade modification to a previously reported automated
trade may be manual in nature (for example, the trade is corrected
through the RTRS Web Portal or is corrected through a dealer's
system and not using a cancel and replace process), that manual
modification process would not, by itself, result in the initial
trade qualifying as a trade with a manual component. Where the trade
correction is made through a cancel and replace process, the time of
trade must reflect the time of execution of the initial trade report
and not the time when the modification was reported to RTRS. While
RTRS will continue to provide dealers with the option to either
modify the trade or cancel and replace the trade, the MSRB has
stated that modification is preferred when changes are necessary
because a modification is counted as a single change to a trade
report, whereas cancellation and resubmission are counted as a
change and (unless the resubmission is done within the original
deadline for reporting the trade) also as a late report of a trade.
Id.; see also infra n.50.
---------------------------------------------------------------------------
In that regard, while an exhaustive list cannot be provided here,
the MSRB contemplates that the exception would often be appropriately
applicable to the following situations, depending on the specific facts
and circumstances, due to the manual nature of components of the trade
execution or reporting process that would make reporting a transaction
within one minute of the Time of Trade unfeasible, even where the
dealer makes reasonable efforts to report the trade as soon as
practicable after execution (as required):
<bullet> where a dealer executes a trade by manual or hybrid means,
such as voice or negotiated trading by telephone, email, or through a
chat/messaging function, and subsequently must manually enter into a
system that facilitates trade reporting all or some of the information
required to book the trade and report it to RTRS;
<bullet> where a dealer executes a trade (typically a larger-sized
trade) that requires additional steps to negotiate and confirm details
of the trade with a client and manually enters the trade into risk and
reporting systems;
<bullet> where a dually-registered broker-dealer/investment adviser
executes a block transaction that requires allocations of portions of
the block trade to the individual accounts of the firm's advisory
clients that must be manually inputted in connection with a trade;
<bullet> where an electronically or manually executed trade is
subject to manual review by a second reviewer for risk management
(e.g., transactions above a certain dollar or par amount or other
transactions meriting heightened risk review) and, as part of or
following the review, the trade must be manually approved, amended or
released before the trade is reported to RTRS;
<bullet> where a dealer's trade execution processes may entail
further diligence following the Time of Trade involving a manual step
(e.g., manually checking another market to confirm that a better price
is not available to the customer); \41\
---------------------------------------------------------------------------
\41\ Dealers experiencing significant levels of post-Time of
Trade price adjustments due to such post-trade best execution
processes should consider whether these processes are well suited to
the dealer's obligations under MSRB Rule G-18 and whether the dealer
is appropriately evaluating when a contract has in fact been formed
with its customer.
---------------------------------------------------------------------------
<bullet> where a dealer trades a municipal security, whether for
the first time or under other circumstances where the security master
information may not already be populated (e.g., information has been
removed or archived due to a long lapse in trading the security), and
additional manual steps are necessary to set up the security and
populate the associated indicative data in the dealer's systems prior
to executing and reporting the trade;
<bullet> where a dealer receives a large order or a trade list
resulting in a portfolio of trades with potentially numerous unique
securities involving rapid execution and frequent communications on
multiple transactions with multiple counterparties, and the dealer must
then book and report those transactions manually, one by one; \42\
---------------------------------------------------------------------------
\42\ In instances where a dealer trades a basket of securities
at a single price for the full basket, rather than individual prices
for each security based on its then-current market price, such price
likely would be away from the market, requiring inclusion of the
``away from market'' special condition indicator and qualifying for
an end-of-trade-day reporting exception under proposed Rule G-14
RTRS Procedures Section (a)(ii)(A)(3).
---------------------------------------------------------------------------
<bullet> where a broker's broker engages in mediated transactions
that involve multiple transactions with multiple counterparties; and
<bullet> where a dealer reports a trade manually through the RTRS
Web Portal.
Dealers should review their trade flow and processes and consider
which of their trades would be deemed a ``trade with a manual
component'' under the proposed rule change.\43\
---------------------------------------------------------------------------
\43\ Dealers should undertake this review regardless of whether
they intend to take advantage of the longer timeframes permitted for
trades with a manual component since all reports of trades meeting
the definition of a trade with a manual component would be required
to append the new manual trade indicator, as described infra
``Purpose--Proposed Rule Change--Manual Trade Indicator.''
---------------------------------------------------------------------------
The appropriateness of treating any step in the trade execution and
reporting process as being manual must be assessed in light of the
anti-circumvention provision included in the proposed rule change with
regard to the delay in execution or insertion of manual tasks for the
purpose of meeting this new exception.\44\ New Supplementary Material
.02(a) would require all trades with a manual component to be reported
as soon as practicable and would specify that in no event may a dealer
purposely delay the execution of an order, introduce any manual steps
following the Time of Trade, or otherwise modify any steps prior to
executing or reporting a trade for the purpose of utilizing the
exception for manual trades.\45\ New Supplementary Material .03 would
require that dealers adopt policies and procedures for complying with
the as soon as practicable reporting requirement, including by
implementing systems that commence the trade reporting process without
delay upon execution and provides for additional guidance for
regulatory authorities that enforce and examine dealers for compliance
with this requirement to take into consideration the manual nature of
the dealer's trade reporting process.\46\
---------------------------------------------------------------------------
\44\ See infra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement--Exception for Trades with a
Manual Component--Prohibition on Purposeful Insertion of Manual
Steps in Trade Reporting Process.''
\45\ Id.
\46\ See infra ``Purpose--Proposed Rule Change--New Requirement
to Report Trades `as Soon as Practicable.' ''
---------------------------------------------------------------------------
In light of the overarching obligation to report trades as soon as
practicable, dealers should consider the types of transactions in which
they regularly engage and whether they can reasonably reduce the time
between a transaction's Time of Trade and its reporting, and more
generally should make a good faith effort to report their trades as
soon as practicable.\47\ Each dealer seeking to comply with the
proposed rule change--including the one-minute
[[Page 5390]]
reporting requirement and new or existing exceptions from such
requirement--should consider the extent to which it can automate its
trade reporting and related execution processes, consistent with its
client's needs and the dealer's best execution and other regulatory
obligations. Where automation is not feasible at a reasonable cost in
light of the specific facts and circumstances with respect to the
dealer's trading activity and overall business (e.g., the level, nature
and economic viability of its activity in municipal securities),
dealers should be implementing more efficient trade entry processes to
meet the applicable reporting requirement, including the new
requirement to report trades as soon as practicable, particularly with
a view to the phased-in reduction in the reporting timeframe for trades
with a manual component under the proposed rule change where a process
that may provide sufficient time to report timely during the first year
may not be sufficiently efficient to meet the further shortened
timeframe in a subsequent year. The MSRB expects that dealers would
periodically assess their systems and processes to ensure that they
have implemented sufficiently efficient policies and procedures for
timely trade reporting.
---------------------------------------------------------------------------
\47\ See infra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement--Exception for Trades with a
Manual Component.'' For trades with a manual component, the MSRB
recognizes that the trade reporting process may not be completed as
quickly as, for example, where an automated trade reporting system
is used. In these cases, the MSRB expects that the regulatory
authorities that examine dealers and enforce compliance with this
requirement would take into consideration the manual nature of the
dealer's trade reporting process in determining whether the dealer's
policies and procedures are reasonably designed to report the trade
``as soon as practicable'' after execution.
---------------------------------------------------------------------------
The MSRB currently collects and analyzes data regarding dealers'
historic reporting of transactions to RTRS under various scenarios and
such data will continue to be available to the regulators for analysis
under the proposed one-minute standard. Subject to the Commission
approval of the proposed rule change, the MSRB would be reviewing the
use of the manual exception and would share with the examining
authorities any analyses resulting from such reviews.
Phase-In Period for Trades With a Manual Component
New Supplementary Material .02(b) would subject trades with a
manual component to a phase-in period for timely reporting over three
years (``phase-in period''). Specifically, during the first year of
effectiveness of the exception, trades meeting this definition would be
required to be reported as soon as practicable, but no later than 15
minutes after the Time of Trade.\48\ During the second year, such
trades would be required to be reported as soon as practicable, but no
later than 10 minutes after the Time of Trade. After the second year
and thereafter, such trades would be required to be reported as soon as
practicable, but no later than five minutes after the Time of Trade.
---------------------------------------------------------------------------
\48\ While the deadline for reporting during this first year
would remain the same as the current 15-minute timeframe, such trade
reports would also be subject to the new requirement that they be
reported as soon as practicable. See supra ``Purpose--Proposed Rule
Change--New Requirement to Report Trades `as Soon as Practicable.'
''
---------------------------------------------------------------------------
In establishing the phase-in period, the MSRB intends to provide
sufficient time for dealers to implement programming and/or other
policy and process changes necessary to meet an eventual five-minute
reporting requirement, as well as to provide regulators an opportunity
to assess any potential market impact from the gradual reduction in
reporting timeframe. However, dealers are also reminded that the ``as
soon as practicable'' reporting obligation as described above may,
depending on the facts and circumstances, require quicker reporting
than the applicable outer reporting obligation during and after the
phase-in period. For example, while dealers must report their trades
with a manual component no later than 15 minutes from the Time of Trade
during the first year that the rule is operational, dealers should be
reviewing their policies, procedures and practices and considering
whether they can report such trades more quickly. In general, the MSRB
would expect a dealer's trade reporting statistics to show overall
improvements in trade reporting speed without compromising data
quality, due to the new ``as soon as practicable'' obligation and the
two new intra-day exceptions.
If the proposed rule change is approved, the MSRB would be
reviewing the available trade reporting information and data arising
from implementation of the changes to trade reporting introduced by the
proposed rule change, including but not limited to the two exceptions
to the one-minute reporting requirement, as well as marketplace
developments, feedback from market participants, and examination or
enforcement findings from the Commission, FINRA and the other
appropriate regulatory agencies. Such monitoring would inform any
further potential changes by the MSRB to the trade reporting
requirements.
Prohibition on Purposeful Insertion of Manual Steps in Trade Reporting
Process
As noted above, new Supplementary Material .02(a) would
specifically prohibit dealers from purposely delaying the execution of
an order, introducing any manual steps following the Time of Trade, or
otherwise purposefully modifying any steps to execute or report a trade
to utilize the exception for manual trades. This would not prohibit
reasonable manual steps that are taken for legitimate purposes (such as
a manual review of trades that exceed certain risk thresholds or that
meet certain criteria for regulatory purposes). Further, this
prohibition would not apply to any steps that are taken prior to the
time of trade that do not have the effect of delaying the subsequent
reporting of such trade.
It is important to note that a manual step added to the trade
execution or reporting process that may have only a nominal or
pretextual purpose other than qualifying a trade for the exception for
manual trades, particularly where such purpose can be effectively
fulfilled in an alternative manner that does not introduce such manual
step into the trade execution or reporting process, may be viewed as
being made for the purpose of qualifying for this exception within the
meaning of proposed Supplementary Material .02(a), depending on the
facts and circumstances. This express prohibition is intended to
facilitate movement in the direction of more timely reporting and
increased transparency in circumstances where there is no reasonable
justification for the delay in trade execution and related subsequent
trade reporting or for insertion of manual steps after the Time of
Trade.
Manual Trade Indicator
Proposed amendments to Rule G-14 RTRS Procedures Section (b)(iv)
would require the report of a trade meeting the MSRB's definition for a
``trade with a manual component,'' as defined in proposed Section
(d)(xii) of Rule G-14 RTRS Procedures,\49\ to append a new trade
indicator to such a trade report. This indicator would be mandatory for
every trade that meets the standard to append the indicator,\50\
regardless of whether the trade is actually reported within one minute
after the Time of Trade, is reported within the applicable timeframe
under the manual trade exception or is otherwise subject to another
reporting exception.
---------------------------------------------------------------------------
\49\ See supra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement--Exception for Trades with a
Manual Component--Trades Having a Manual Component.''
\50\ Rule G-14 RTRS Procedures Section (a)(iv) currently
requires that transaction data that is not submitted in a timely and
accurate manner must be submitted or corrected as soon as possible.
See also supra n.40. The manual trade indicator is not intended to
be used to reflect the manual nature of any correction to a prior
trade report; rather the use of the indicator is driven solely by
whether or not the initial trade had a manual component.
---------------------------------------------------------------------------
In addition to serving as a critical component of the manual trade
exception, this trade indicator would
[[Page 5391]]
allow the MSRB to collect additional data to help it better understand
the extent to which the municipal securities market continues to
operate manually.\51\ Such understanding would assist the MSRB in
engaging with market participants regarding impediments to greater use
of automation, and help determine the effectiveness and potential
impediments to full compliance with the proposed phase-in period to
determine whether adjustments should be made or other next steps should
be taken.
---------------------------------------------------------------------------
\51\ The manual trade indicator would be used for regulatory
purposes only and would not, under the proposed rule change, be
included in the trade data disseminated to the public through the
EMMA website and subscription feeds. This information would help
inform the MSRB regarding broader trends in the marketplace beyond
the specific provisions of the proposed rule change. For example,
the use of the manual trade indicator would help identify changes in
the prevalence of manual trades as market conditions change or in
light of other events or trends having an impact on the municipal
securities market.
---------------------------------------------------------------------------
Pattern or Practice of Late Trade Reporting
Rule G-14 RTRS Procedures Section (a)(iv) currently requires that
transaction data that is not submitted in a timely and accurate manner
must be submitted or corrected as soon as possible--even when a dealer
is late in reporting a trade, the dealer remains obligated to report
such trade as soon as possible. Proposed amendments to this section
would further provide that any transaction that is not reported within
the applicable time period shall be designated as ``late.'' \52\ A
pattern or practice of late reporting without exceptional circumstances
or reasonable justification may be considered a violation of Rule G-14.
---------------------------------------------------------------------------
\52\ Late trade designations are currently, and would continue
to be, available to regulators and, through the MSRB compliance tool
described below in ``Purpose--Proposed Rule Change--Compliance
Tools,'' to the dealer submitting the late trade. See Section 2.9 of
the Specifications for Real-Time Reporting of Municipal Securities
Transactions in connection with error codes currently generated by
RTRS with respect to late trade reports. The trade data disseminated
to the public through the EMMA website and subscription feeds does
not currently and would not have appended to it a late report
indicator nor an indicator of which deadline was applicable (other
than the indicators currently published).
---------------------------------------------------------------------------
The determination of whether exceptional circumstances or
reasonable justifications exist for late trade reporting is dependent
on the particular facts and circumstances and whether such
circumstances are addressed in the dealer's systems and procedures. For
example, failures or latencies of MSRB, third-party or internal systems
used to submit trade information generally would constitute exceptional
circumstances or reasonable justifications, particularly where such
incident is outside of the reasonable control of the dealer and could
not be resolved by the dealer within the applicable reporting
timeframe. However, dealers must have sufficiently robust systems with
adequate capability and capacity to enable them to report in accordance
with Rule G-14; thus, recurring systems issues in a dealer's or a
vendor's systems would not be considered reasonable justification or
exceptional circumstances to excuse a pattern or practice of late trade
reporting. As another example, unusual market conditions, such as
extreme volatility in a security or in the market as a whole, can
constitute exceptional circumstances. In addition, a dealer may have
reasonable justification for late trade reporting where it is executing
a bid list that includes a large number of distinct securities that
cannot reasonably be reported within the applicable timeframe. These
three examples do not represent the only potential situations that
could constitute exceptional circumstances or reasonable justification.
Dealers would bear the burden of proof related to such exceptional
circumstances or reasonable justification.
The pattern or practice approach to determining rule violations
would take into consideration factors such as the complexity of the
trade, differences in market segments, differences in the execution of
trades of varying types of municipal securities products, impediments
to use of straight through processing and electronic trading venues,
the nature and purpose of any manual steps involved in the execution
and reporting of transactions with a manual component, the existence of
systems and procedures that provide for reporting timeliness and any
other relevant factors to determine if a rule violation has occurred.
While this approach recognizes that there may be legitimate situations
involving exceptional circumstances or reasonable justification in
which trades may not be reported within the required time limit,
dealers are reminded of the overarching obligation to report trades as
soon as practicable in light of the effects of such circumstances or
justification. As a result, all dealers should consider the types of
transactions in which they regularly engage and whether they can
reasonably reduce the time between a transaction's Time of Trade and
its reporting, and more generally should make a good faith effort to
report their trades as soon as practicable.
The MSRB expects that the regulatory authorities that examine
dealers and enforce compliance with the reporting timeframes
established under Rule G-14 RTRS Procedures would focus their
examination for and enforcement of the rule's timing requirements on
the consistency of timely reporting and the existence of effective
controls to limit late reporting to exceptional circumstances or where
reasonable justifications exist for a late trade report, rather than on
individual late trade report outliers. Notwithstanding such
expectation, where facts and circumstances indicate that an individual
late report was intentional or otherwise egregious, or could reasonably
be viewed as potentially giving rise to an associated fair practice,
fair pricing, best execution or other material regulatory concern under
MSRB or Commission rules with respect to that or a related transaction,
the regulatory authorities could reasonably determine to take action
with respect to such late trade in the examination or enforcement
context.
Compliance Tools
The MSRB would continue to provide various compliance tools to
assist dealers with compliance and for examining authorities to monitor
for compliance. For example, currently, if a trade is reported late, an
error message indicating this fact is sent in real-time to the
submitter through the Message Portal, through the RTRS Web Portal, and
by means of electronic mail. Such error messages are designed to
promote dealer awareness of the late report and provide an opportunity
to evaluate the reason for lateness and make appropriate adjustments as
needed. In addition, on a monthly basis, RTRS produces statistics on
dealer performance related to the timely submission of transactions and
correction of errors and provides these statistics to dealers as well
as to regulators. The MSRB expects to create additional compliance
tools in the form of new or modified reports for dealers and examining/
enforcement authorities, allowing them to more easily monitor
compliance.\53\ Such tools would be
[[Page 5392]]
expected to provide data that would permit a dealer to monitor
compliance patterns as well as provide support for the dealer to
determine and confirm its relevant trade count for the current and
preceding calendar years, including for the purpose, among other
things, of assisting dealers to determine whether the exception for
dealers with limited trading activity is available.\54\ Similarly,
through a late trade indicator, data would be available for regulators
to determine the applicable trade reporting obligation for each trade
and analyze the data to assist in identifying a pattern or practice of
late trade reporting, based on the specific facts and circumstances
relevant to the particular trade reports.
---------------------------------------------------------------------------
\53\ For example, the MSRB currently produces a series of
reports for dealers submitting trades to RTRS, including a Dealer
Data Quality Report (commonly referred to as a ``report card''). See
MSRB Real-Time Transaction Reporting System (RTRS) Manual (Nov.
2022), available at <a href="https://www.msrb.org/sites/default/files/RTRSWeb-Users-Manual.pdf">https://www.msrb.org/sites/default/files/RTRSWeb-Users-Manual.pdf</a>. This report describes a dealer's
transaction reporting data with regard to status, match rate,
timeliness of reporting, and the number of changes or corrections to
reported trade data. For most statistics, the industry rate is also
provided for comparison. The Lateness Breakout portion of the report
has a category for each type of reporting deadline, showing how many
trades were reported timely and late relative to the applicable
deadline. Such reports are available in both single-month and
twelve-month formats.
\54\ See proposed Supplementary Material .01(a), which would
require a dealer relying on the exception for dealers with limited
trading activity to confirm on an annual basis that it meets the
criteria for a dealer with limited trading activity. Where a dealer
resubmits an RTTM cancel under proposed redesignated Rule G-14 RTRS
Procedures Sections (a)(ii)(B)(2), for purposes of avoiding double
counting, only the original trade, if not otherwise excepted, would
count for purposes of this exception and not the resubmitted trade.
---------------------------------------------------------------------------
Technical Amendments
Non-Substantive Amendments
Non-substantive amendments to Rule G-14 RTRS Procedures Section
(a)(ii) regroup and renumber its current Sections (A) through (C) to
new Sections (A)(1) through (A)(3), renumber current Sections (D) and
(E) to new Sections (B)(1) and B(2), and correct a cross-reference in
Section (b)(iv) to certain of these Sections to be consistent with such
renumbering. In addition, a technical amendment to Rule G-14 RTRS
Procedures Section (a)(ii) changes the word ``of'' to ``after'' and
omits the word ``within'' in the phrase ``within 15 minutes of Time of
Trade'' for clarity and consistency of usage throughout the Rule G-14
RTRS Procedures as amended.
Clarifying Amendments--Special Condition Indicators and Trades on an
Invalid RTTM Trade Date
The proposed rule change would make certain clarifying amendments
to Rule G-14 RTRS Procedures Section (b)(iv) relating to transactions
with special conditions. That Section currently specifically sets forth
information regarding certain existing special condition indicators
while also referencing the existence of other special condition
indicators in Section 4.3.2 of the Specifications for Real-Time
Reporting of Municipal Securities Transactions. The proposed clarifying
amendments to Section (b)(iv) of Rule G-14 RTRS Procedures would
incorporate into the language thereof reference to all applicable
special condition indicators, including the new trade with a manual
component indicator and existing special condition indicators
previously adopted by the MSRB but that are currently only documented
explicitly in the Specifications for Real-Time Reporting of Municipal
Securities Transactions.\55\ Other than the addition of the new trade
with a manual component indicator, the proposed clarifying amendments
to this provision would not make any changes to the types or usage of
existing special condition indicators.
---------------------------------------------------------------------------
\55\ Each of these special condition indicators were formally
adopted through MSRB rulemaking and also appear in various
interpretive or other regulatory materials. See generally Section
4.3.2 and Appendix B.2 of the Specifications for Real-Time Reporting
of Municipal Securities Transactions. See also Exchange Act Release
No. 49902 (June 22, 2004), 69 FR 38925 (June 29, 2004), File No. SR-
MSRB-2004-02; Exchange Act Release No. 55957 (June 26, 2007), 72 FR
36532 (July 3, 2007), File No. SR-MSRB-2007-01; Exchange Act Release
No. 74564 (Mar. 23, 2015), 80 FR 16466 (Mar. 27, 2015), File No. SR-
MSRB-2015-02.
---------------------------------------------------------------------------
In addition, Rule G-14 RTRS Procedures Section (a)(iii) would be
amended to reflect that, in addition to trades effected outside the
hours of the RTRS Business Day, inter-dealer trades may be executed on
certain holidays (other than those recognized as non-RTRS Business
Days) that are not valid RTTM trade dates (``invalid RTTM trade
date''), and in either case such trades are to be reported no later
than within 15 minutes after the beginning of the next RTRS Business
Day. Such invalid RTTM trade date transactions are already subject to
this same next RTRS Business Day reporting requirement.\56\ The
proposed clarifying amendment to this provision would not make any
changes to the circumstances or timing of reporting of such trades.
---------------------------------------------------------------------------
\56\ See Section 4.3.2 of the Specifications for Real-Time
Reporting of Municipal Securities Transactions; Exchange Act Release
No. 55957 (June 26, 2007), 72 FR 36532 (July 3, 2007), File No. SR-
MSRB-2007-01.
---------------------------------------------------------------------------
Proposed Conforming Amendments to Rule G-12 and RTRS Information
Facility
Proposed amendments to Rule G-12, on uniform practice, would make
conforming changes to Section (f)(i) thereof to require that each
transaction effected during the RTRS Business Day shall be submitted
for comparison as soon as practicable, but no later than one minute
after the Time of Trade unless an exception applies. The proposed rule
change would also modify the IF-1 to clarify lateness checking against
the applicable reporting deadline(s) provided for in proposed
amendments to Rule G-14 RTRS Procedures, as opposed to the current 15-
minute requirement.
Effective Date and Implementation
The MSRB intends to provide time for dealers and the MSRB to
undertake the programming, process changes and/or vendor arrangements
needed to implement the proposed rule change, as well as to provide an
adequate testing period for dealers and subscribers that interface with
RTRS or third parties involved in the submission and/or subscription
process (including but not limited to DTCC, its RTTM system, other
dealers, or other key utilities or vendors). Thus, if the proposed rule
change is approved by the Commission, the MSRB would announce an
effective date (for example, approximately within 18 months from such
Commission approval) in a notice published on the MSRB website. Such
effective date would be intended to maintain implementation of the
proposed rule change on substantially the same implementation timeframe
as the 2024 FINRA Proposed Rule Change.
2. Statutory Basis
Section 15B(b)(2) of the Exchange Act \57\ provides that the MSRB
shall propose and adopt rules to effect the purposes of the Exchange
Act with respect to, among other matters, transactions in municipal
securities effected by dealers. Section 15B(b)(2)(C) of the Exchange
Act \58\ further provides that the MSRB's rules shall be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in municipal securities and municipal financial products, to remove
impediments to and perfect the mechanism of a free and open market in
municipal securities and municipal financial products and, in general,
to protect investors, municipal entities, obligated persons and the
public interest.
---------------------------------------------------------------------------
\57\ 15 U.S.C. 78o-4(b)(2).
\58\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
The MSRB believes the proposed rule change, consisting of proposed
amendments to Rule G-14 RTRS Procedures under Rule G-14 as well as
conforming proposed amendments to Rule G-12(f)(i) and IF-1, is
consistent with Section 15B(b)(2)(C) of the
[[Page 5393]]
Exchange Act \59\ because it would promote just and equitable
principles of trade, foster cooperation and coordination with personnel
engaged in regulating and facilitating transactions in municipal
securities, remove impediments to a free and open market in municipal
securities and generally protect investors and the public interest. The
proposed rule change would promote just and equitable principles of
trade because it would reduce information asymmetry between market
professionals (such as dealers and institutional investors) and retail
investors by ensuring increased access to more timely information about
executed municipal securities transactions for all investors.
Currently, market professionals may in some circumstances have better
or more rapid access to information about trade prices through market
venues to which retail investors do not have access, and the reduction
in the timeframe for trade reporting would shorten or eliminate the
period during which any such asymmetry in access to such information
may exist.
---------------------------------------------------------------------------
\59\ Id.
---------------------------------------------------------------------------
The proposed rule change would foster cooperation and coordination
with persons engaged in regulating and processing information,
facilitating a consistent standard for trade reporting across many
fixed income products, including municipal securities. As noted above,
the proposed rule change was developed in close coordination with
FINRA, which is proposing a similar shortened trade reporting
requirement for many TRACE-eligible securities. Fostering a consistent
standard across classes of securities would facilitate greater and more
efficient compliance among MSRB-registered dealers, the majority of
which also transact in other fixed income securities that are subject
to FINRA's regulatory authority. Consistent trade reporting
requirements reduce the risk of potential confusion and may reduce
compliance burdens resulting from inconsistent obligations and
standards for different classes of securities. A shortened trade
reporting time, as facilitated by the proposed rule change, would
promote regulatory consistency, reducing potential errors caused by
market participants' imperfect application of differing standards when
executing and reporting transactions in municipal securities.
The proposed rule change would remove impediments to a free and
open market in municipal securities by making publicly available more
timely information about the market for and the price at which
municipal transactions are executed, which is central to fairly priced
municipal securities and a dealer's ability to make informed
quotations. The MSRB believes that the proposed rule change would
promote investor protection and the public interest through increased
market transparency by reducing the timeframe for trade reporting,
providing the market with more efficient pricing information, which
would enhance investor confidence in the market. At the same time, the
exceptions balance potential burdens for dealers with limited trading
activity in municipal securities by permitting such dealers to report
trades as soon as practicable but not later than the currently
applicable 15-minute reporting requirement. The proposed rule change
also addresses potential burdens faced by dealers engaged in complex
transactions, including voice/electronically negotiated transactions
involving a manual post-transaction component, by permitting a phase-in
period for a gradual implementation. This approach would enable market
participants to achieve compliance with the shortened reporting target
over a period of time while not adversely affecting their ability to
execute such transactions consistent with applicable MSRB or Commission
rules.
B. Self-Regulatory Organization's Statement on Burden on Competition
Section 15B(b)(2)(C) of the Exchange Act \60\ requires that MSRB
rules not be designed to impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Exchange Act. The
MSRB does not believe the proposed rule change to amend Rule G-14 RTRS
Procedures under Rule G-14, Rule G-12(f)(i) and IF-1would result in any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act. The proposed rule
change would apply the new one-minute reporting timeframe to all
transactions in municipal securities currently subject to the 15-minute
reporting requirement and would provide two new exceptions designed to
balance the benefits of timelier reporting with the potential costs of
disrupting markets from transactions most likely to realize a negative
impact by the shortening of the timeframe and disproportionally
impacting less active and smaller dealers.\61\
---------------------------------------------------------------------------
\60\ Id.
\61\ See supra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement'' for a discussion of the
proposed two new exceptions.
---------------------------------------------------------------------------
The proposed rule change is intended to provide more immediate
post-trade transparency in the municipal securities market and is
consistent with the purposes of RTRS. In the past, the municipal
securities market has sometimes been associated with information
opacity and low trading volume for a majority of securities with
relatively few securities that trade compared to the number of
outstanding securities.\62\ Information opacity likely affects retail
investors more than institutional investors and other market
participants; for example, pre-trade quotes are not widely available in
the municipal securities market, especially for retail investors who
may not have the access and may be more reliant on trade data.
Furthermore, with far fewer trades in municipal securities when
compared to equity securities, Treasury and corporate bonds, each
additional data point from post trade reporting in municipal securities
would potentially be more valuable to investors and other market
participants than a data point from these other markets. The reduction
in this opacity resulting from the proposed rule change would make more
timely information available to all market participants and help level
the playing field among retail investors, institutional investors, and
dealers, thereby potentially promoting competition in the market for
municipal securities.
---------------------------------------------------------------------------
\62\ Based on MSRB's trade data, approximately one percent of
the outstanding municipal securities trade on a given day.
---------------------------------------------------------------------------
Therefore, the MSRB believes the proposed rule change would not
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act for the following
reasons. In making this determination, the MSRB staff was guided by the
MSRB's Policy on the Use of Economic Analysis in MSRB Rulemaking.\63\
In accordance with this policy, the MSRB evaluated the potential
impacts on competition of the proposed rule change. The proposed rule
change in trade reporting time to one minute after Time of Trade is
intended to better align with the actual time that it takes a dealer to
report most transactions and provides more immediate transparency to
the market
[[Page 5394]]
by reducing the reporting time for the remaining transactions to as
soon as practicable but no later than 15 minutes after the Time of
Trade standard for trades by dealers with limited trading activity and
to a deadline that would ultimately be shortened to five minutes after
the Time of Trade for trades with a manual component.
---------------------------------------------------------------------------
\63\ Policy on the Use of Economic Analysis in MSRB Rulemaking
is available at <a href="https://www.msrb.org/Policy-Use-Economic-Analysis-MSRB-Rulemaking">https://www.msrb.org/Policy-Use-Economic-Analysis-MSRB-Rulemaking</a>. In evaluating whether there was a burden on
competition, the MSRB was guided by its principles that require the
MSRB to consider costs and benefits of a rule change, its impact on
capital formation and the main reasonable alternative regulatory
approaches.
---------------------------------------------------------------------------
The MSRB previously shortened the trade reporting timeframe from
the end of day to 15 minutes from the Time of Trade in January 2005
with the creation of RTRS. Since the 2005 change, the MSRB's analysis
shows that most trades are indeed reported much sooner than the current
15-minute trade reporting deadline, potentially due at least in part to
the advancement in technology. Specifically, as illustrated in Table 1
below, approximately 73.7 percent of trades in 2022 were reported
within one minute after a trade execution, with another approximately
23.3 percent of trades reported between one minute and five minutes
after the Time of Trade.\64\ As presently reported, due in part to
technological advancements, most trades already satisfy a shorter than
15-minute reporting requirement. A shorter reporting timeframe is
intended to provide more immediate transparency to a market that
historically has been associated with low trading volume for a majority
of Committee on Uniform Securities Identification Procedures
(``CUSIP'') numbers, relatively few securities that trade compared to
the number of outstanding securities and sometimes has been associated
with information opacity.
---------------------------------------------------------------------------
\64\ The analysis in this rule filing only includes trades
reportable within 15 minutes and excludes trades that are exempt
from the current 15-minute reporting time including, for example,
trades flagged as being executed at the List Offering or Takedown
Transactions, trades in short-term instruments maturing in nine
months or less, Auction Rate Securities, Variable Rate Demand
Obligations, trades in commercial paper, as well as trades ``away
from market,'' among other exceptions. See also Rule G-14 RTRS
Procedures Sections (a)(ii)(A) and (B). For purposes of the analysis
in this section, if an initially reported trade was corrected later,
the later timestamp was used for calculating the trade reporting
time more conservatively. All figures are approximate.
---------------------------------------------------------------------------
Trade Reporting Analysis
Table 1 summarizes the MSRB's analysis comparing Time of Trade to
trade reporting time for all trades required to be reported within 15
minutes in 2022.\65\ Out of all reportable municipal securities trades
\66\ that are not subject to another end of day reporting exception or
a post-trade day reporting exception, approximately 73.7 percent were
reported within one minute, while 97.0 percent were reported within
five minutes and 98.9 percent were reported in 15 minutes or less.\67\
The MSRB observed a noticeable difference in the speed of trade
reporting by different trade size groups, with the reporting time
increasing with trade size. While 76.2 percent of trades with trade
size of $100,000 par value or less (approximately 84.2 percent of all
trades) were reported within one minute, only 38.4 percent of trades
with trade size between $1,000,000 and $5,000,000 par value and 23.1
percent of trades with trade size above $5,000,000 par value were
reported within one minute. A possible explanation is that larger
institutional-sized trades are more likely to be executed via non-
electronic means and may rely upon more manual processing steps.\68\
However, smaller-sized trades are more likely executed and processed
electronically, which could facilitate faster trade reporting.
---------------------------------------------------------------------------
\65\ In 2022, RTRS had the highest number of trades on record
since its implementation in 2005. The record is likely attributable
to interest rate rallying and volatility throughout the year, though
the amount of par value traded was not a record high. The heightened
level of trading persisted through 2023, with the number of trades
reported to RTRS exceeding the previous record in 2022.
\66\ See proposed Rule G-14 RTRS Procedures Sections (a)(ii)(A)
and (B) for lists of existing end of trade day reporting exceptions
and post-trade day reporting exceptions.
\67\ By comparison, in 2021, a year with much lower overall
trading volume than 2022, 76.7 percent of trades subject to the 15-
minute standard were reported within one minute, 97.3 percent of
such trades were reported within five minutes and 99.5 percent of
trades were reported within 15 minutes.
\68\ MSRB staff conducted oral interviews with dealers and data
providers in the fall of 2022 and the winter and spring of 2023 and
was informed that larger institutional-sized trades are more likely
to be executed via negotiations and involve manual processes.
[GRAPHIC] [TIFF OMITTED] TN26JA24.007
Table 2 illustrates a variation in trade reporting time in 2022
between dealers with 1,800 trades or more annually during both prior
two calendar years (``Active Dealers''), and dealers with less than
1,800 trades annually during at least one of the prior two calendar
years (``Dealers with Limited Trading
[[Page 5395]]
Activity'').\69\ A threshold of 1,800 trades a year was selected to
demonstrate that Dealers with Limited Trading Activity as a whole had a
relatively small impact on the entire market and transparency, with
approximately 98.5 percent of trades in 2022 conducted by Active
Dealers collectively and only 1.5 percent of trades conducted by all
Dealers with Limited Trading Activity. When calculating the market
share by par value traded, Active Dealers conducted 98.2 percent of par
value traded in 2022 while Dealers with Limited Trading Activity
conducted only 1.8 percent of par value traded.\70\ In 2022, out of 647
dealers conducting at least one transaction in municipal securities 474
were Dealers with Limited Trading Activity and 173 were Active
Dealers.\71\ This difference in trade reporting time was pronounced for
the one-minute trade reporting percentages where Active Dealers had
77.2 percent of trades reported within one minute while only 47.5
percent of trades conducted by Dealers with Limited Trading Activity
were reported within one minute.
---------------------------------------------------------------------------
\69\ See infra ``Self-Regulatory Organization's Statement on
Burden on Competition--Trade Reporting Analysis'' in Table 2.
\70\ The proportion of trades in municipal securities conducted
by Dealers with Limited Trading Activity is aligned with the
proportion of aggregate trades conducted by dealers with limited
trading volume in TRACE-eligible securities subject to the 2024
FINRA Proposed Rule Change when using FINRA's annual transactions
threshold. See supra n.30.
\71\ While low in terms of the trading volume, these Dealers
with Limited Trading Activity may still serve many underserved
investors, especially retail and institutional investors with a
regional focus.
[GRAPHIC] [TIFF OMITTED] TN26JA24.008
Benefits, Costs, and Effect on Competition
The MSRB considers the likely costs and benefits of a proposed rule
change when the proposal is fully implemented against the context of
the economic baselines. The baseline is the current iteration of Rule
G-14 RTRS Procedures (a)(ii) that requires transactions to be reported
within 15 minutes after the Time of Trade with limited exceptions,
while the future state would be following the conclusion of the second
calendar year from the effective date of the proposed rule change, with
the full implementation of the gradual reduction in reporting timeframe
for trades with a manual component.
In performing this economic analysis and related cost-benefit
estimates, the MSRB has made a number of assumptions based on 2022 RTRS
data as explained in more detail below. For instance, there are few
publicly available sources of information about revenue and expense
data for relevant business lines of a dealer, especially in relation to
potential spending on acquiring or upgrading technology and
infrastructure for some dealers. The effort is further hampered by the
fact that some dealers are privately-owned, who are not required to
disclose business operation data in public filings. Therefore, the MSRB
conducted interviews with select dealers and vendors who provide
electronic trade reporting services as well as dealer subscribers of
these services to gauge the likely impact from the proposed rule
change.\72\ The MSRB believes the analysis provides a useful projection
on the scale of benefits and costs relative to the current baseline
irrespective of whether an assumption changes the absolute estimated
costs and benefits.
---------------------------------------------------------------------------
\72\ See supra n.68.
---------------------------------------------------------------------------
Benefits
The primary benefit of the proposed rule change on accelerated
trade reporting would be improved transparency in the municipal
securities market. Historically, the municipal securities market has
been considered less liquid and more opaque when compared to other
securities markets, with only about 1 percent of all municipal
securities trading on a given trading day, and pre-trade quotes are not
widely available to all market participants, especially retail
investors who may not pay for vendor pricing tools and may be more
reliant on trade data.\73\ Therefore, post trade data is important
information available to all market participants, including
particularly to retail investors and the market professionals that
service retail accounts. By implementing the proposed rule change,
investors would receive greater advantages on trade pricing information
through the reporting of more contemporaneous transactions.\74\ This
emphasis on contemporaneous trades as opposed to distant trades would
help ensure that the pricing information remains vital, potentially
decreasing trading costs and increasing liquidity. In addition, since
only about 1 percent of municipal securities trade on a given trading
day,
---------------------------------------------------------------------------
\73\ See Wu, Simon Z., John Bagley and Marcelo Vieira,
``Analysis of Municipal Securities Pre-Trade Data from Alternative
Trading Systems,'' Research Paper, Municipal Securities Rulemaking
Board, October 2018; Government Accountability Office (``GAO''),
``Municipal Securities: Overview of Market Structure, Pricing, and
Regulation,'' Report to Congressional Committees, January 2012, page
6; Green, Richard C., Burton Hollifield, and Norman Sch[uuml]rhoff.
``Financial intermediation and the costs of trading in an opaque
market.'' The Review of Financial Studies 20.2 (2007): 275-314.
\74\ As an illustration, in its 2022 Request for Comment, the
MSRB's economic analysis showed that out of the universe of 251,635
``analyzed trades'' with same-CUSIP-number-matched trades in 2021,
where a matched trade was executed before the analyzed trade's
execution but was reported after the analyzed trade's execution,
approximately 27.9 percent of those analyzed trades had at least one
matched trade executed more than a minute before the analyzed
trade's execution. This suggests those analyzed trades would have
benefited from the matched trades' execution information if matched
trades were required to be reported no later than one minute after
their execution times.
---------------------------------------------------------------------------
[[Page 5396]]
information on trades in other comparable municipal securities would
also be valuable in pricing a security. Lowering the reporting time
would make more contemporaneous trades in comparable securities
transparent for other transactions.\75\ Finally, with far fewer trades
in municipal securities when compared to equity securities, Treasury
and corporate bonds, each additional data point from post trade
reporting in municipal securities would potentially be more valuable to
investors and other market participants than a data point from these
other markets. According to established economic literature, investors,
especially retail investors, benefit from transparency (more and/or
better information) by enhancing their negotiation power with dealers
as well as reducing dealer's own search and intermediation costs,
therefore reducing customer trades' transaction costs, also known as
bid-ask spread or effective spread. The MSRB believes additional data
points from more contemporaneous trades in the same and/or comparable
securities would increase an investor's negotiating power.
Specifically, regarding trade reporting time, two research papers
scrutinized the transition in 2005 from reporting trades at the end of
a trading day to 15 minutes after trade execution. Both studies
revealed a statistically significant decrease in the average effective
spreads for customer trades. When comparing the period before and the
period after January 2005, the reduction in average customer trade
effective spread ranged between 11 to 28 basis points, all else being
equal.\76\ In addition, more timely reporting has also been shown to
increase dealer market-making activities in the municipal markets,
potentially enhancing market liquidity.\77\
---------------------------------------------------------------------------
\75\ A 2012 report issued by the GAO stated ``Broker-dealers we
spoke with said that the price of a recently reported interdealer
trade for a security was a particularly good indication of its value
for that segment of the market. However, if a security has not
traded recently, they said they instead look for recent trades in
comparable securities.'' See GAO, ``Municipal Securities: Overview
of Market Structure, Pricing, and Regulation,'' Report to
Congressional Committees, January 2012, page 12.
\76\ See Sirri, Erik, ``Report on Secondary Market Trading in
the Municipal Securities Market,'' Research Paper, Municipal
Securities Rulemaking Board, July 2014, and Chalmers, John, Liu, Yu
(Steve) and Wang, Z. Jay, ``The Difference a Day Makes: Timely
Disclosure and Trading Efficiency in the Muni Market,'' Journal of
Financial Economics, 2021. Sirri (2014) estimated that following the
implementation of RTRS in January 2005, the average customer trade
spread was reduced, all other relevant factors being equal, by 11
basis points within the first six-month period and up to 20 basis
points within the one-year period. Chalmers, Wang and Liu (2021)
found that dealer markups across all trade sizes declined by 28
basis points (14 percent reduction) in a ten-month period (March
2005 through December 2005). The authors concluded that the improved
timeliness of the market resulted in large reductions in the costs
of trading municipal bonds.
\77\ As indicated by an increase in the overnight and over-the-
week dealer capital committed to inventory, an increase in the
number of dealers involved in completing a round-trip transaction,
and more round-trip transactions that involve inventory taking. See
Erik Sirri, Report on Secondary Market Trading in the Municipal
Securities Market, July 2014 (Research Paper, Municipal Securities
Rulemaking Board); John Chalmers, Yu (Steve) Liu, & Z. Jay Wang, The
Difference a Day Makes: Timely Disclosure and Trading Efficiency in
the Muni Market, 139(1) Journal of Financial Economics, 313-335
(2021).
---------------------------------------------------------------------------
Recent MSRB analyses show that effective spreads for customer
trades continued to decline in the last decade.\78\ However, while the
difference in effective spreads between smaller retail-sized customer
trades and larger institutional-sized customer trades shrank over the
past decade, the shrinkage has stopped, and the gap may have started to
widen again since early 2022.\79\ Therefore, as of September 2023,
retail-sized customer trades continue to have significantly higher
effective spreads than institutional-sized customer trades as shown in
Chart 1, about three times as large.\80\
---------------------------------------------------------------------------
\78\ See Wu, Simon Z., ``Transaction Costs for Customer Trades
in the Municipal Bond Market: What is Driving the Decline?''
Research Paper, Municipal Securities Rulemaking Board, July 2018,
Page 15; and Wu, Simon Z., and Ostroy, Nicholas J., ``What Has
Driven the Surge in Transaction Costs for Municipal Securities
Investors Since 2022?'' Research Paper, Municipal Securities
Rulemaking Board, August 2023.
\79\ Wu and Ostroy (2023). The reduction was mostly due to the
steadily declining effective spreads for retail-sized customer
trades, as institutional-sized customer trades (par value more than
$1,000,000) had a relatively stable level of effective spreads
between 2005 and 2023.
\80\ Id.
---------------------------------------------------------------------------
[[Page 5397]]
[GRAPHIC] [TIFF OMITTED] TN26JA24.009
Based on available economic literature and the MSRB's own analysis
of trade data, the MSRB believes that the proposed rule change would
further reduce customer trade effective spreads due to the benefit of
more immediate transparency, especially for retail-sized trades. The
MSRB acknowledges the difference in the potential impact, due to the
different scale of the changes, between the launch of RTRS in January
2005 with the introduction of a 15-minute reporting window in place of
end-of-day reporting, on the one hand, and the proposed shortening of
the trade reporting requirement from 15 minutes to one minute, on the
other hand. Nevertheless, while the anticipated positive effect of the
proposed one-minute trade reporting with two new exceptions may not
match the magnitude of the 2005 RTRS transition, it is expected to
yield valuable advantages for investors through the inclusion of more
contemporaneous trade data points in the same and/or comparable
securities. This holds particularly true for retail investors, who have
historically paid higher effective spreads than institutional investors
and derived greater benefits from post-trade transparency compared to
institutional investors.\81\ For illustration purposes, hypothetically
if a shortening of trade reporting time to one minute for Active
Dealers (except for manual trades) would reduce the effective spread by
an average of five basis points \82\ for customer trades with $1
million or less par value, this would result in the annual savings
(benefits) for investors of approximately $126.2 million based on the
2022 trading volume (see Hypothetical Scenario 1 in Table 3).\83\ Table
3 also shows a more conservative scenario when limiting the
hypothetical effective spread reduction to a trade size of $100,000 par
value or less only, commonly known as a proxy for retail-sized trades.
A reduction of five basis points in effective spreads from the proposed
rule change applicable to these trades would result in the annual
savings of approximately $49 million to retail investors (see
[[Page 5398]]
Hypothetical Scenario 2 in Table 3).\84\ On the other hand, while the
MSRB believes dealers would earn less from investors as a result of
narrowing effective spreads, the shortfall would be partially offset by
gains in market efficiency, potential reduction in dealer search and
intermediation costs, and potentially increased revenue from higher
customer trading activity as a result of lower transaction costs. This
is in line with the economic theory on the law of demand that a
reduction in price would generally encourage more purchasing by
consumers, all else being equal.\85\ In the case of secondary market
trading, the expectation is that a reduction in trading costs would
encourage more trading by existing investors and/or bring in new
investors to the municipal securities market over the long term. The
MSRB assumes a reduction of five basis points in the effective spreads
for the $1 million par value or lower customer trades would generate an
additional 0.2 percent in total customer trading volume for that trade
size group, while a reduction of five basis points in the effective
spreads for the $100,000 par value or lower customer trades would
generate an additional 0.2 percent in total customer trading volume for
that trade size group.\86\ The MSRB therefore estimates dealers would
gain between approximately $1 million to $3 million from projected
additional annual customer trading volume.
---------------------------------------------------------------------------
\81\ Id.
\82\ To be conservative, the MSRB uses five basis points as an
illustration, where a five-basis point reduction in price value of a
$100 par value bond is equivalent to $0.50 per bond. This estimate
is less than half of the estimated lower-bound reduction from the
2005 changeover from end-of-day trade reporting to 15 minutes from
Time of Trade reporting, and is only applicable to non-
institutional-sized customer trades (either sub-$1,000,000 par value
or $100,000 or lower par value customer trades). No change in
effective spread for other customer trades is included in the
analysis, as larger-size institutional customers are assumed to be
sophisticated and already have pricing information.
\83\ In 2022, $504.8 billion annual par value traded from all
customer purchase and sell trades with trade size below $1,000,000
par value x 0.05 percent/2 = $126.2 million. Since the five basis
points are the difference between the average customer purchase and
customer sell trades, when measuring each customer purchase or
customer sell trade, the amount is divided by two.
\84\ In 2022, $196.1 billion annual par value traded from all
customer trades with trade size at $100,000 par value or less x 0.05
percent/2 = $49 million.
\85\ Davenant, Charles, An Essay upon the Probable Methods of
Making People Gainers in the Balance of Trade (London: James
Knapton, 1699).
\86\ The 0.2 percent volume increase would be about half of the
lower-bound estimate for the 2005 change over (see Chalmers, Wang
and Liu, 2021).
[GRAPHIC] [TIFF OMITTED] TN26JA24.010
While five basis points are used as an illustration in Table 3,
even if the reduction in effective spread was only half of the amount,
or 2.5 basis points, the total annual savings would still amount to
between $24.5 million and $63.1 million approximately.
In addition to investors benefiting from more immediate market
transparency, other market participants would also benefit from the
proposed rule change, including underwriters and issuers who determine
evaluated pricing of a new issuance, dealers in the primary and
secondary markets who participate in competitive bidding activities,
and yield curve providers that rely upon market transactions to update
curves or to supply intra-day price and yield movement for the market.
Lastly, any trade that meets the definition of a manual trade would
be required to append a new trade indicator to such trade when reported
to the MSRB, regardless of when the trade is reported. This trade
indicator would help the MSRB identify the extent to which the market
still operates manually and could help determine whether the proposed
gradual reduction in timeframes proposed would be feasible to maintain
or to continue reducing in the future.
Costs
The MSRB acknowledges that dealers would likely incur additional
costs, relative to the current state, to meet the new one-minute
transaction reporting time of one minute outlined in the proposed
amendments to Rule G-14 RTRS Procedures though the compliance costs
would be mitigated by the fact that nearly 73.7 percent of all trades
were already reported within one minute of an execution in 2022. These
additional costs would likely include: (a) one time or upfront costs
(e.g., setting up and/or revising policies and procedures, education
and training and implementing the newly required manual trades flag);
(b) ongoing costs related to subscription(s) to electronic trade
reporting technologies to speed up the trade reporting process for some
Active Dealers; and (c) other ongoing costs related to ensuring
compliance with the new proposed requirements.
Upfront Costs
For the upfront costs, it is possible dealers may need to seek
appropriate advice of in-house or outside legal and compliance
professionals to revise policies and procedures in compliance with the
proposed amendments to Rule G-14 RTRS Procedures. Dealers may also
incur upfront costs related to education and/or standards of training
in preparation for the implementation of these proposed amendments, as
well as establishing the newly required manual trades flag. The MSRB
believes the upfront costs as related to updating policies and
procedures, training and education would be relatively minor, perhaps
about $6,720 for Dealers with Limited Trading Activity and up to
$11,200 for Active Dealers for a total of
[[Page 5399]]
about $5.1 million (see Table 3).\87\ In addition, there would be a
one-time upfront cost for software or compliance system upgrade to flag
manual trades and to reprogram the system to comply with the shorter
reporting timeframe, though the amount would depend on how this new
requirement is implemented by the industry. While the MSRB does not
have sufficient data and information presently to estimate the cost,
the MSRB believes the upfront cost for implementing the manual trade
flag would likely be more substantial than the other upfront cost
components.
---------------------------------------------------------------------------
\87\ The hourly rate data was gathered from the Commission's
Amendments to Exchange Act Rule 3b-16. See Exchange Act Release No.
94062 (Sep. 20, 2022), 17 CFR parts 232, 240, 242, 249 (Jan. 26,
2022) (File No. S7-02-22), p. 477 n.1102 (citing the original source
of the data from SIFMA Management & Professional Earnings in the
Securities Industry--2013. The data reflects the 2023 hourly rate
level after adjusting for the annual wage inflation between 2013 and
2023, using the Federal Reserve Bank of St. Louis Employment Cost
Index: Wages and Salaries: Private Industry Workers (available at:
<a href="https://fred.stlouisfed.org/series/ECIWAG">https://fred.stlouisfed.org/series/ECIWAG</a>). The MSRB uses a blended
hourly rate of $560 for tasks that could be performed by in-house
attorneys, outside counsel, compliance managers and chief compliance
managers, and estimates a total of 12 hours for Dealers with Limited
Trading Activity to update policies and procedures, and implement
training and education, and 20 hours for Active Dealers. As shown in
Table 4, the one-time upfront costs are estimated to be $5.1 million
($11,200 x 173 + $6,720 x 474 = $5.123 million).
---------------------------------------------------------------------------
Ongoing Costs: Annual Technology Subscription
By comparison, the annual ongoing technology subscription costs for
electronic trade reporting would likely be more significant for some
Active Dealers, as these dealers may need to obtain assistance from
outside vendors or increase in-house programming costs. It should be
noted that some dealers may be able to fulfill the new trade reporting
time requirement without any upgrade to their technology. While the
MSRB is not aware of any evidence that dealers are intentionally
delaying trade reporting, the current Rule G-14 provides a 15-minute
reporting window without the ``as soon as practicable'' requirement. As
a result, some dealers may not have reported their trades as soon as
practicable in the absence of a regulatory obligation. In addition, it
is possible that, instead of upgrading existing technologies, some
dealers, especially those with relatively few trades in municipal
securities, may augment their workforce to ensure a shorter reporting
lag after a trade execution. Finally, dealers executing voice trades
and secondary market trades in newly issued securities may not be able
to speed up the trade reporting process due to the manual nature of
these trades, even with the electronic trade reporting technology in
place.\88\
---------------------------------------------------------------------------
\88\ For example, in 2022, approximately 59 percent of the
secondary market transactions executed within the first three days
of a new issuance were reported within one minute, as compared to 77
percent of other secondary market trades. This may be largely due to
the additional time involved in setting up a new CUSIP for the
secondary market trading. The MSRB anticipates that such trades
requiring manual intervention would be subject to the phased-in
reporting requirement down to five minutes.
---------------------------------------------------------------------------
For the ongoing cost estimate, the MSRB assumes that Active Dealers
would not need to acquire electronic trade reporting technology if 90+
percent of the dealer's trades are currently reported between one and
two minutes after the Time of Trade,\89\ as those dealers are assumed
to be able to report the trades within the proposed one-minute trade
reporting requirement without resorting to an additional technology
subscription. However, if a dealer reports 90+ percent of trades by
more than two minutes, the MSRB assumes the dealer would need to
upgrade its technology to achieve the one-minute requirement. The MSRB
believes the proposed rule change would provide an incentive to adjust
internal policies and procedures or to improve reporting time without
resorting to additional technology subscription, especially with the
new one-minute trade reporting requirement for non-excepted trades as
well as the new ``as soon as practicable'' requirement that harmonizes
with the current analogous FINRA rules. As to the MSRB's usage of the
90+ percent threshold as opposed to a 100 percent threshold, the
proposed rule change provides an exception for manual trades for these
Active Dealers, meaning that a 100 percent compliance rate with the
baseline one-minute timeframe may not be required. The MSRB believes
that many of the trades that took longer than one minute to report
likely had a manual component; therefore, it may be that a threshold
lower than the 90 percent threshold would still satisfy the new
requirements in the proposed rule change, providing Active Dealers
additional time to report by using the new exception for manual trades.
However, because the MSRB does not know the actual share of manual
trades for each dealer at this time, to be aggressive (i.e.,
conservative) in estimating the costs, the MSRB includes these Active
Dealers in the ongoing technology subscription cost calculation.
---------------------------------------------------------------------------
\89\ For each dealer, the MSRB calculated the nearest minute(s)
(rounded up) to report at least 90 percent of its trades in 2022.
---------------------------------------------------------------------------
Chart 2 below illustrates the estimated technology subscription
cost of acquiring the electronic trade reporting technology for these
dealers. From the industry outreach effort, the MSRB learned it would
cost a dealer approximately up to an additional $60,000 annually, which
includes a bundle of services in addition to the electronic trade
reporting.\90\ The MSRB believes, however, this cost estimate may be on
the high side because: (1) dealers may not need to purchase the bundle
simply to speed up the trade reporting depending on their existing
subscription services; \91\ and (2) some dealers may have more than 10
percent of their trades having a manual component, and since the
proposed rule change would use a phase-in period for these trades, with
the requirement of as soon as practicable but no later than five
minutes after the Time of Trade after the second year, it may reduce
the need or the scale to pay for the technology subscription costs.
Furthermore, since the requirement for the one-minute trade reporting
would likely be applicable to other TRACE-eligible fixed-income
securities such as corporate bonds under the 2024 FINRA Proposed Rule
Change, dealers that trade both municipal securities and corporate
bonds may only need to pay the subscription cost once, or at least not
need to pay double the amount. Still, to be aggressive in the cost
estimate, the MSRB would use the $60,000 as the minimum annual cost for
dealers who would need the new technology subscription. In addition, it
is possible that some dealers, especially larger dealers, may need more
than one vendor for automated trade reporting when executing orders on
multiple
[[Page 5400]]
electronic platforms. Therefore, the MSRB estimates, among Active
Dealers who would need new technology subscription to comply with the
proposed rule change, such Active Dealers would incur approximately
$100,000 annually to adopt the electronic trade reporting to comply
with the proposed rule change,\92\ while a dealer with less than 12,000
trades annually \93\ would incur $60,000 annually.\94\
---------------------------------------------------------------------------
\90\ Some comment letters also cited Bloomberg's Trade Order
Management Solutions (``TOMS'') system, which would cost $250,000
per year. See Letter from Matthew Kamler, President, Sanderlin
Securities LLC, dated September 27, 2022, at 1. Another commenter
estimated the cost at $500,000 per year. See Letter from John Isaak,
Senior Vice President, Isaak Bond Investments, dated August 16,
2022, at 1. The MSRB understands that TOMS can be used for many
purposes, such as sales, trading, risk management, compliance and
operations, and not just for electronic trade reporting. TOMS can
also be used for many fixed-income products and not just for
municipal securities. See <a href="https://www.bloomberg.com/professional/product/trade-order-management-solutions/">https://www.bloomberg.com/professional/product/trade-order-management-solutions/</a>. Thus, the cost associated
with TOMS would generally appropriately be allocated among the
various uses that a dealer is likely to make of it.
\91\ For example, one vendor informed the MSRB that it charges
up to $1,000 per month for straight-through processing of trades, or
$12,000 annually. Some other dealers mentioned $2,000 monthly, or
about $24,000 annually to incorporate electronic trade reporting.
\92\ The MSRB assumes these dealers would need a second vendor,
but instead of doubling the amount from $60,000 to $120,000, the
MSRB estimates the amount to be approximately $100,000 assuming
there would be some efficiency gain.
\93\ A market share of between 0.01 percent and 0.1 percent
based on the 2022 data.
\94\ Of the 173 Active Dealers, 82 dealers had 12,000 trades or
more in 2022 and 91 had less than 12,000 trades. For Dealers with
Limited Trading Activity, the MSRB assumes there is no need for
technology subscription since they would be able to utilize one or
both new exceptions, and therefore the proposed new requirement is
similar to the present requirement in Rule G-14 for these dealers.
[GRAPHIC] [TIFF OMITTED] TN26JA24.011
Table 4 provides an estimated total cost of approximately $5.1
million for the one-time policies and procedures revision for all 647
dealers. As to the annual ongoing costs, MSRB staff estimated a total
of $6.6 million for the annual technology subscription for the 88
Active Dealers who would need the subscription.
[GRAPHIC] [TIFF OMITTED] TN26JA24.012
Note: There would also be upfront costs for system upgrade to flag
manual trades as well as ongoing costs for ensuring compliance. The
MSRB cannot provide an estimate for these costs presently because of
insufficient information.
Other Ongoing Compliance Costs
The MSRB anticipates ongoing costs of ensuring the compliance of
relevant trades to be reported within one minute, and manual trades to
be reported within the timeframes as proposed during and after the
phase-in period, with a new trade indictor for such trades.
Comparatively speaking, these ongoing compliance costs would be
relatively minor and may not significantly exceed the costs in the
current baseline, as all dealers should already have compliance
programs in place in relation to the current trade reporting
requirement.
[[Page 5401]]
Proposed Supplementary Material .02 would require all manual trades
from Active Dealers to be reported within five minutes eventually,
following the conclusion of the second calendar year from the effective
date. While the RTRS database currently does not flag manual trades,
assuming all trades currently reported more than one minute after the
Time of Trade are ``manual'' trades, Table 5 illustrates that 90.4
percent of all trades from Active Dealers were already reported within
five minutes in 2022. Hence, the MSRB believes a five-minute trade
reporting requirement is achievable for manual trades from Active
Dealers, with a three-year phase-in period, which provides ample time
for them to prepare and for the industry to create solutions.
[GRAPHIC] [TIFF OMITTED] TN26JA24.013
Effect on Competition, Efficiency and Capital Formation
The MSRB believes the proposed change to Rule G-14 RTRS Procedures
would improve market efficiency by providing more immediate trade
reporting transparency to the market. If indeed there would be a
reduction in customer transaction costs, as illustrated by the 2005
RTRS transition, even if on a smaller scale, the benefits to customers
would accrue over a longer period that would offset the investment in
upgrading technologies by select dealers. In addition, it is possible
that lower transaction costs may increase investor participation and
stimulate market activities by encouraging more trading by existing
investors and/or bringing in new investors to the municipal securities
market over the long term, therefore contributing to an overall
increase in capital formation. Finally, the harmonization of MSRB rule
requirements for municipal securities with FINRA requirements for other
TRACE-eligible fixed-income markets, as proposed in the 2024 FINRA
Proposed Rule Change, would create consistency for dealers who have
trading operations in all these markets, and, thus, would increase
efficiency in terms of their compliance burdens. Therefore, the MSRB
believes that the proposed rule change would facilitate capital
formation.
Some dealers may be impacted by the proposed rule change more than
other dealers to meet the new reporting time. However, the broader
impact on competition in the municipal securities market is expected to
be minor. The proposed change to Rule G-14 RTRS Procedures provides a
two-tier system (one-minute trade reporting requirement for Active
Dealers with an exception for manual trades and 15-minute trade
reporting requirement for Dealers with Limited Trading Activity) to
mitigate any potential unfavorable financial impact for Dealers with
Limited Trading Activity because of a lower revenue base. Therefore,
the MSRB does not believe the proposed change to Rule G-14 RTRS
Procedures would result in any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
Identifying and Evaluating Reasonable Alternative Regulatory Approaches
The MSRB has considered and evaluated several reasonable regulatory
alternatives. One alternative the MSRB reviewed was to introduce a
five-minute trade reporting period for Active Dealers. According to the
MSRB's estimates, as shown in Table 1 above, 23.3 percent (97-73.7
percent) of all reported trades in municipal securities would have
satisfied the five-minute reporting requirement but not the one-minute
reporting requirement in 2022. If the MSRB instituted a five-minute
trade reporting period, most of the industry would already satisfy the
obligations of a five-minute requirement and it would likely be less of
a burden for dealers to comply. In effect, MSRB rulemaking would merely
align with current market practices. However, considering that most
trades (97 percent) already took five minutes or less to be reported to
RTRS, the MSRB believes the five-minute reporting requirement, while
easier for dealers to comply with, would not have advanced the
immediacy of information transparency by a meaningful amount that would
make a difference for investors, especially retail investors, and other
market participants.
Another alternative would be for the MSRB to change the trade
reporting time by trade size. The MSRB was informed by comments
received in response to the 2022 Request for Comment described below
that large-sized trades are in many instances still negotiated
telephonically and require more dealer attention, and therefore would
be considered as trades with a manual component during the trading
reporting process.\95\ Table 1 above
[[Page 5402]]
shows a noticeable difference in the speed of trade reporting by
different trade size groups, with the reporting time increasing with
trade size. The MSRB could propose that small and medium-sized trades,
i.e., trades with par value below $1,000,000 which constitute about
97.3 percent of all trades, be reported within one minute while
proposing a longer threshold, for example, a five-minute threshold for
larger-sized trades which constitute about 2.7 percent of all trades.
However, trades with a manual component are already excepted from the
one-minute requirement under the proposed rule change, regardless of
the trade size, which would be superior to this alternative method
because the length of time to report a trade is heavily influenced by
the trade reporting process rather than the size of the trade per se.
In addition, anecdotal evidence suggests that large-sized trades do
have more of an impact on the direction of the market, as many market
participants weigh larger trades more heavily in determining market
movements and many of the existing market produced yield curves either
exclude small-sized trades from their analysis or weigh them much less
than larger-sized trades.\96\ While there may be both benefits and
costs for large-sized trades to be reported sooner where possible,\97\
adding a trade size-based reporting regime with delayed reporting by
large-sized trades on top of the manual component exception may cause
additional complication in trade reporting, potentially resulting in
increased trade reporting errors and/or trade cancellations and
corrections.
---------------------------------------------------------------------------
\95\ See Letter from Michael Decker, Senior Vice President for
Public Policy, Bond Dealers of America, dated October 3, 2022, at 2-
3 (``Trades negotiated and executed by phone, still the predominant
execution method for block-sized trades in municipals . . . require
human involvement and data entry, delaying the reporting process
easily past one minute.''); Letter from Seth A. Miller, General
Counsel, President, Advocacy and Administration, Cambridge
Investment Research, Inc., dated October 3, 2022, at 4; Letter from
Howard Meyerson, Managing Director, Financial Information Forum,
dated October 3, 2022, at 4; Letter from Edward J. Smith, General
Counsel and Chief Compliance Officer, Hartfield, Titus & Donnelly,
LLC, dated September 14, 2022, at 4; Letter from Robert D.
Bullington, Vice President, Compliance Officer, InspereX LLC, dated
October 3, 2022, at 4-5; Letter from John Isaak, Senior Vice
President, Isaak Bond Investments, dated August 16, 2022, at 1;
Letter from Robert Blum, President, Robert Blum Municipals, Inc.,
dated September 16, 2022 at 1; Letter from Christopher Ferreri,
President, RW Smith & Associates, LLC, dated September 13, 2022, at
4; Letter from Lee Maverick, Chief Compliance Officer, SAMCO Capital
Markets, Inc., dated September 30, 2022, at 2; Letter from Kenneth
E. Bentsen, Jr., President and Chief Executive Officer, Securities
Industry and Financial Markets Association and the SIFMA Asset
Management Group, dated October 3, 2022, at 8-9; Letter from Nyron
Latif, Head of Operations, Wells Fargo Wealth and Investment
Management, and Todd Primavera, Head of Operations, Wells Fargo
Corporate and Investment Bank, Wells Fargo & Company, dated October
3, 2022, at 3; Email from Glenn Burnett, Zia Corporation, dated
September 6, 2022, at 1. See also MSRB Notice 2013-02 (Request for
Comment on More Contemporaneous Trade Price Information Through a
New Central Transparency Platform) (Jan. 17, 2013) (eliciting
similar comments), available at <a href="https://www.msrb.org/Request-Comment-More-Contemporaneous-Trade-Price-Information-Through-a-New-Central-Transparency">https://www.msrb.org/Request-Comment-More-Contemporaneous-Trade-Price-Information-Through-a-New-Central-Transparency</a>.
\96\ For example, the most widely used curve is the
Refinitiv[supreg] Municipal Market Data (MMD) AAA benchmark yield
curve that only includes institutional block size trades of $2
million par amount or more in the secondary or primary market. For
additional information regarding the MMD AAA curve, see Cameron
Marcus Arial, ``Public Administrator Choice Idaho School District
Finance Policy Observed'' (May 2019). Boise State University Theses
and Dissertations, File No. 1516, page 68, available at <a href="https://scholarworks.boisestate.edu/cgi/viewcontent.cgi?article=2639&context=td">https://scholarworks.boisestate.edu/cgi/viewcontent.cgi?article=2639&context=td</a>. This is in addition to the
IHS Markit AAA Curve and Bloomberg BVAL municipal AAA curves
displayed on the MSRB's EMMA website, which exclude small-sized
trades from their methodologies.
\97\ While more immediate transparency is beneficial to the
market in general, there has been some concerns about information
leakage if large-sized trades were reported and disseminated sooner.
See Letter from Sarah A. Bessin, Associate General Counsel,
Investment Company Institute, dated October 3, 2022, at 11.
---------------------------------------------------------------------------
A slight variation of the above alternative on divergent trade
reporting requirements would consider trades on Alternative Trading
System (``ATS'') platforms and other non-ATS trades differently, since
the speed of reporting differs between these two groups of inter-dealer
trades, with 79.7 percent of inter-dealer trades on an ATS platform
being reported within one minute in 2022 while only 69 percent of non-
ATS inter-dealer trades being reported within one minute. However,
variation of requirements could similarly cause confusion and may
further add burden on dealers who may have to maintain policies and
procedures with multiple exception paths. In addition, there is a
possibility that this alternative may impact the competition between
ATS platforms and other non-ATS platforms. Finally, ATS platforms also
report trades differently, with some ATS platforms being the reporting
party while other ATS platforms let participants on the ATS platforms
report trades directly to RTRS. Hence, not all ATS platforms have the
same reporting procedures.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
On August 2, 2022, the MSRB published the 2022 Request for Comment
to solicit comment on a potential amendment to Rule G-14 to require
that, absent an exception, dealers report transactions to an RTRS
Portal as soon as practicable, but no later than within one minute
following the Time of Trade (the ``Proposal'').\98\ The MSRB also
published a memorandum during the comment period for the 2022 Request
for Comment providing supplemental data regarding counts of trade
volume and time of reporting.\99\
---------------------------------------------------------------------------
\98\ See MSRB Notice 2022-07 (Request for Comment on Transaction
Reporting Obligations under MSRB Rule G-14) (Aug. 2, 2022),
available at <a href="https://www.msrb.org/sites/default/files/2022-09/2022-07.pdf">https://www.msrb.org/sites/default/files/2022-09/2022-07.pdf</a>.
\99\ Memorandum from John Bagley, Chief Market Structure
Officer, MSRB (Supplemental Data with respect to MSRB Notice 2022-07
Request for Comment on Transaction Reporting Obligations under MSRB
Rule G-14) (``MSRB Memorandum'') (providing supplemental trade
report time data), (Sep. 12, 2022), available at <a href="https://www.msrb.org/sites/default/files/2022-09/2022-07-MSRB.pdf">https://www.msrb.org/sites/default/files/2022-09/2022-07-MSRB.pdf</a>.
---------------------------------------------------------------------------
In response to the 2022 Request for Comment, the MSRB received 53
comment letters from 51 commenters.\100\
[[Page 5403]]
Following consideration of the comments received and in light of
ongoing engagement with affected market participants, FINRA, the
Commission and other stakeholders, the MSRB determined to file the
proposed rule change, which incorporates certain key modifications to
the Proposal designed to address many of the key concerns expressed by
commenters and other market participants, including the establishment
of the two new intra-day exceptions \101\ to the baseline reporting
requirement.
---------------------------------------------------------------------------
\100\ See Letter from Kelli McMorrow, Head of Government
Affairs, American Securities Association (``ASA'') dated September
30, 2022; Letter from Mike Petagna, President, Amuni Financial, Inc.
(``AMUNI''), dated August 23, 2022; Email from Bill Bailey
(``Bailey''), dated August 4, 2022; Letter from Matt Dalton, Chief
Executive Officer, Belle Haven Investments, L.P. (``Belle Haven''),
dated October 3, 2022; Letter from Ronald P. Bernardi, President and
Chief Executive Officer, Bernardi Securities, Inc. (``BSI''), dated
September 30, 2022; Letter from Will Leahey, Head of Regulatory
Compliance, BetaNXT Inc. (``BetaNXT''), dated October 3, 2022;
Letter from Michael Decker, Senior Vice President for Public Policy,
Bond Dealers of America (``BDA''), dated October 3, 2022; Letter
from David Long, Executive Vice President, Correspondent Banking/
Capital Markets, and Vincent Webb, Managing Director, Bryant Bank
Capital Markets, Bryant Bank (``BB''), dated September 28, 2022;
Letter from Seth A. Miller, General Counsel, President, Advocacy and
Administration, Cambridge Investment Research, Inc. (``Cambridge''),
dated October 3, 2022; Email from Jay Lanstein, Chief Executive
Officer and Chief Technology Officer, Cantella & Co., Inc.
(``C&C''), dated September 16, 2022; Email from Maryann Cantone,
Cantone Research, Inc. (``CRI''), dated August 2, 2022; Letter from
J.D. Colwell (``Colwell''), dated September 9, 2022; Email from
Raymond DeRobbio (``DeRobbio''), dated August 3, 2022; Letter from
Gerard O'Reilly, Co-Chief Executive Officer and Chief Investment
Officer, and David A. Plecha, Global Head of Fixed Income,
Dimensional Fund Advisors LP (``Dimensional''), dated September 26,
2022; Letter from Robert A. Estrada, Esq., Chairman (Emeritus),
Estrada Hinojosa & Co., Inc. (``EH&C''), dated October 3, 2022;
Letter from Melissa P. Hoots, Chief Executive Officer and Chief
Compliance Officer, Falcon Square Capital, LLC (``Falcon Square''),
dated October 3, 2022; Letter from Howard Meyerson, Managing
Director, Financial Information Forum (``FIF I''), dated October 3,
2022; Supplemental Letter from Howard Meyerson, Managing Director,
Financial Information Forum (``FIF II''), dated April 27, 2023;
Letter from Jonathan W. Ford, Senior Vice President, Ford &
Associates, Inc. (``F&A''), dated September 9, 2022; Letter from
Edward J. Smith, General Counsel and Chief Compliance Officer,
Hartfield, Titus & Donnelly, LLC (``HTD''), dated September 14,
2022; Letter from Melissa Messina, Executive Vice President,
Associate General Counsel, R. Jeffrey Sands, Managing Principal,
General Counsel, and William Sims, Managing Principal, Herbert J.
Sims & Co., Inc. (``HJS''), dated October 3, 2022; Email from
Deborah Higgins, Higgins Capital Management, Inc. (``HCM''), dated
September 19, 2022; Letter from Lana Calton, Executive Managing
Director, Head of Clearing, Hilltop Securities (``Hilltop''), dated
October 3, 2022; Letter from Joe Lee, Chief Executive Officer, Honey
Badger Investment Securities, Inc. (``Honey Badger''), dated
September 30, 2022; Letter from Robert Laorno, General Counsel, ICE
Bonds Securities Corporation (``ICE Bonds''), dated September 30,
2022; Letter from Robert D. Bullington, Vice President, Compliance
Officer, InspereX LLC (``InspereX''), dated October 3, 2022; Letter
from Scott Hayes, President and Chief Executive Officer, and Chris
Neidlinger, Chief Compliance Officer, Institutional Securities
Corporation (``ISC''), dated September 30, 2022; Letter from Sarah
A. Bessin, Associate General Counsel, Investment Company Institute
(``ICI''), dated October 3, 2022; Email from Darius Lashkari,
Investment Placement Group (``IPG''), dated August 2, 2022; Letter
from John Isaak, Senior Vice President, Isaak Bond Investments
(``IBI I''), dated August 16, 2022; Letter from Donald J. Lemek,
Vice President--Operations and Chief Financial Officer, Isaak Bond
Investments, Inc. (``IBI II''), dated October 3, 2022; Email from
Mike Kiley, Owner, Kiley Partners, Inc. (``KPI''), dated September
27, 2022; Letter from Gary Herschitz, Chief Executive Officer,
Madison Paige Securities (``MPS''), dated September 30, 2022; Email
from Christopher Mayes (``Mayes''), dated September 27, 2022; Letter
from Kathy Miner (``Miner''), dated October 2, 2022; Letter from
Randy Nitzsche, President and Chief Executive Officer, Northland
Securities Inc. (``NSI''), dated October 3, 2022; Letter from James
W. Oberweis, President, Oberweis Securities, Inc. (``OSI''), dated
September 28, 2022; Letter from H. Deane Armstrong, Chief Compliance
Officer, and Joseph A. Hemphill III, Chief Executive Officer,
Regional Brokers, Inc. (``RBI''), dated October 3, 2022; Letter from
Robert Blum, President, Robert Blum Municipals, Inc. (``RBMI''),
dated September 16, 2022; Letter from F. Gregory Finn, Chief
Executive Officer, Roosevelt & Cross, Inc. (``R&C''), dated October
3, 2022; Letter from Christopher Ferreri, President, RW Smith &
Associates, LLC (``RWS''), dated September 13, 2022; Letter from Lee
Maverick, Chief Compliance Officer, SAMCO Capital Markets, Inc.
(``SAMCO''), dated September 30, 2022; Letter from Matthew Kamler,
President, Sanderlin Securities LLC (``Sanderlin''), dated September
27, 2022; Letter from Kenneth E. Bentsen, Jr., President and Chief
Executive Officer, Securities Industry and Financial Markets
Association and the SIFMA Asset Management Group (collectively,
``SIFMA''), dated October 3, 2022; Letter from Joseph Lawless, Chief
Executive Officer, Sentinel Brokers Company, Inc. (``SBC''), dated
September 30, 2022; Email from Edward Sheedy (``Sheedy''), dated
August 2, 2022; Letter from Glen Essert, Stern Brothers & Co.
(``Stern''), dated October 3, 2022; Letter from Jesy LeBlanc and Kat
Miller, TRADEliance, LLC (``TRADEliance''), dated September 28,
2022; Email from William Tuma (``Tuma''), dated August 8, 2022;
Letter from Nyron Latif, Head of Operations, Wells Fargo Wealth and
Investment Management, and Todd Primavera, Head of Operations, Wells
Fargo Corporate and Investment Bank, Wells Fargo & Company (``Wells
Fargo''), dated October 3, 2022; Letter from Keener Billups,
Managing Director, Municipal Bond Department, Wiley Bros.-Aintree
Capital (``Wiley''), dated September 20, 2022; Email from Thomas
Kiernan, Wintrust Investments, LLC (``Wintrust''), dated August 2,
2022; Email from Glenn Burnett, Zia Corporation (``Zia''), dated
September 6, 2022. All comments are available at: <a href="https://www.msrb.org/sites/default/files/2023-03/All-Comments-to-Notice-2022-07.pdf">https://www.msrb.org/sites/default/files/2023-03/All-Comments-to-Notice-2022-07.pdf</a>.
\101\ See supra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement.''
---------------------------------------------------------------------------
While two commenters expressed support for the Proposal,\102\ and
several other commenters expressed some support for the overall goal
and certain specific aspects of the Proposal,\103\ most commentors
objected to shortening the timeframe for reporting from 15 minutes to
one minute after the Time of Trade. The comments received in response
to the 2022 Request for Comment are summarized below by topic and the
corresponding MSRB responses are provided.\104\
---------------------------------------------------------------------------
\102\ See Dimensional; Tuma.
\103\ See ICE Bonds at 1; ICI at 2; SIFMA at 2; Wells Fargo at
1.
\104\ Simultaneously with the MSRB's publication of the 2022
Request for Comment, FINRA published a request for comment on a
proposal to similarly shorten FINRA's TRACE trade reporting
timeframe for transactions in TRACE-eligible securities (the ``FINRA
TRACE Proposal''). See FINRA Regulatory Notice 22-17 (FINRA Requests
Comment on a Proposal to Shorten the Trade Reporting Timeframe for
Transactions in Certain TRACE-Eligible Securities From 15 Minutes to
One Minute) (Aug. 2, 2022); see also 2024 FINRA Proposed Rule
Change. Many commenters responding to the 2022 Request for Comment
also commented on the FINRA TRACE Proposal. The discussion of
comments herein is mostly confined to those comments addressing the
Proposal or the MSRB.
---------------------------------------------------------------------------
As Soon as Practicable Requirement
The MSRB sought comment on the Proposal's addition of a requirement
that trades must be reported as soon as practicable. Section (a)(ii) of
the Rule G-14 RTRS Procedures does not currently include the
requirement to report trades as soon as practicable. Adding this
requirement would harmonize this provision with FINRA Rule 6730(a),
which currently requires that, with certain exceptions, trades in
TRACE-eligible securities be reported as soon as practicable.
One commenter suggested that the MSRB more closely harmonize its
trade reporting requirements with FINRA's requirements by adopting the
existing ``as soon as practicable'' provision of FINRA Rule
6730(a),\105\ and most commenters addressing this aspect of the
Proposal supported this change or viewed it as consistent with current
practices.\106\ No commenter that opposed the Proposal noted that the
addition of the ``as soon as practicable'' language was the basis for
such opposition.\107\ Several commenters noted that the market already
effectively reports trades as soon as practicable.\108\ Another
commenter, while not explicitly supporting the ``as soon as
practicable'' language, supported the notion of examining and
investigating dealers to ensure compliance with such standard as an
alternative to shortening the timeframe for reporting.\109\ One
commenter also recommended that the MSRB provide supervisory guidance
that parallels the provisions of Supplementary Material .03 of FINRA
Rule 6730 with respect to the obligation to report trades as soon as
practicable.\110\
---------------------------------------------------------------------------
\105\ See SIFMA at 4, 7, 17, 21-22. BetaNXT, HJS, Hilltop and
R&C expressed general support for SIFMA's comment letter.
\106\ See Dimensional; EH&C at 2; SIFMA at 4, 7, 17, 21-22.
\107\ Rather, commenters opposing the Proposal, as discussed
herein, focused on the shortening of the deadline from 15 minutes to
one minute.
\108\ See BDA at 1-2; HJS at 5; SBC at 2. Hilltop and R&C
expressed general support for BDA's comment letter.
\109\ See Belle Haven at 7.
\110\ See SIFMA at 21-22.
---------------------------------------------------------------------------
In light of the comments received, the MSRB proposes to incorporate
the requirement that trades be reported as soon as practicable into the
proposed rule change for trades subject to an intra-day reporting
deadline, as well as to require the establishment of policies and
procedures for complying with the as soon as practicable reporting
requirement in proposed new Supplementary Material .03. As discussed in
``Purpose--Proposed Rule Change--New Requirement to Report Trades ``as
Soon as Practicable'' above, where a dealer has reasonably designed
policies, procedures and systems in place to comply with this standard,
and does not purposely withhold trade reports if it would have been
practicable to report such trades more rapidly, the dealer generally
would not be viewed as violating the ``as soon as practicable''
requirement because of delays in trade reporting due to extrinsic
factors that are not reasonably predictable and where the dealer does
not purposely intend to delay the reporting of the trade (e.g., due to
a systems outage).
One Minute Timeframe for Reporting
The MSRB sought comment on shortening the timeframe for reporting
transactions currently required to be reported within 15 minutes after
the Time of Trade to one minute after the Time of Trade under the
Proposal.\111\
---------------------------------------------------------------------------
\111\ Transactions would also be required to be reported as soon
as practicable, as described above.
---------------------------------------------------------------------------
As noted above, most commenters objected to shortening the
timeframe for reporting from 15 minutes to one minute after the Time of
Trade, raising a number of issues regarding the merits of shortening
the reporting timeframe,
[[Page 5404]]
specific operational aspects of implementing a shortened timeframe, the
range of transactions and dealers subject to the new timeframe, and the
speed and manner of transitioning to a general one-minute reporting
requirement.
Operational Issues Relating To Reporting Within One Minute
Time of Trade
In the 2022 Request for Comment, the MSRB noted that the time to
report a trade is triggered at the time at which a contract is formed
for a sale or purchase of municipal securities at a set quantity and
set price. The 2022 Request for Comment asked whether ``Time of
Trade,'' as currently defined, is the appropriate trigger and, if not,
what other elements of the trade should be established before the
reporting obligation is triggered.
One commenter agreed that the definition of ``Time of Trade''
referenced in the 2022 Request for Comment is the appropriate trade
reporting trigger.\112\ Several other commenters expressed a desire for
greater clarity regarding the definition of ``Time of Trade.'' \113\
---------------------------------------------------------------------------
\112\ See Colwell at 3.
\113\ See BSI at 2; Colwell at 2; ISC at 2; ICI at 3; IBI II at
1; SIFMA at 14, 20-21; TRADEliance at 1.
---------------------------------------------------------------------------
A few commenters discussed certain trading scenarios in which they
believed that the ``Time of Trade,'' as defined by the MSRB, would not
be the appropriate trigger for trade reporting. One commenter noted
that manual trade entry does not necessarily begin at the time of
execution, particularly for firms that manually report trades to the
RTRS Web Portal.\114\ This commenter noted that a number of issues may
arise that can result in a delay of the manual trade entry process,
including information gaps due to new or unfamiliar securities or
having to wait to receive necessary information from the other side of
the transaction.
---------------------------------------------------------------------------
\114\ See Belle Haven at 5.
---------------------------------------------------------------------------
Two commenters acknowledged that while personalized negotiation
effectively occurs prior to the formal time of execution that marks the
beginning of the trade reporting process, the two stages are
inextricably linked.\115\ These commenters were concerned that
mandating one-minute trade reporting across the board would require a
de-linking of these two processes, which could introduce artificiality
into the broker-client relationship and hinder execution until adequate
technological advances are developed. Another commenter argued that the
primary consideration should be the business method used in trade
execution, such as in the case of the business model of a voice broker.
This commenter provided an example of a one-on-one transaction created
between a buyer and seller when a dealer executes a trade with a
customer, and contrasted this with an intermediated trade by a voice
dealer that includes multiple components. For these types of
intermediated trades, the commenter noted that perhaps an appropriate
trigger would be when the intermediate transaction is complete (e.g.,
when all underlying trades of the intermediate transaction are
executed).\116\
---------------------------------------------------------------------------
\115\ See HJS at 4 (quoting SIFMA at 9).
\116\ See HTD at 4.
---------------------------------------------------------------------------
One commenter noted that if dealers are not permitted 15 minutes to
report manually executed trades, a firm that wants to continue to
execute trades manually might need to reach an agreement or
understanding with its customers that the execution time for a trade
agreed to by telephone, instant messaging or chat communication is the
time that the firm inputs the trade into the firm's books and records
in a systematized format for reporting to RTRS without manual
input.\117\
---------------------------------------------------------------------------
\117\ See FIF I at 4. BetaNXT expressed general support for
FIF's comment letter.
---------------------------------------------------------------------------
Another commenter noted that current fixed income trade matching
processes are not keyed off of time of execution, which would naturally
have an impact on the degree of precision of the time of trade
execution data when looking at finer time gradations, such as within a
single minute.\118\
---------------------------------------------------------------------------
\118\ See SIFMA at 7.
---------------------------------------------------------------------------
The MSRB is not seeking to amend the definition of ``Time of
Trade'' in conjunction with the proposed one-minute reporting
requirement. However, the MSRB has provided a discussion of certain
factors that may be relevant to determining the Time of Trade that
should address many of the concerns that the shorter reporting
timeframe would create greater pressure and require greater precision
in determining the Time of Trade.\119\ The MSRB believes that its use
of the term ``Time of Trade'' is appropriate and consistent with how
that term is understood by FINRA in connection with the reporting of
TRACE-eligible securities to TRACE under applicable FINRA rules, and
that the guidance provided herein would provide more assurance for
dealers in determining the Time of Trade with greater clarity and
precision.
---------------------------------------------------------------------------
\119\ See supra ``Purpose--Proposed Rule Change--Time of Trade
Discussion'' for a discussion of and related guidance on the
definition of Time of Trade under Rule G-14 RTRS Procedures Section
(d)(iii).
---------------------------------------------------------------------------
Automation of Trade Execution and Reporting
The 2022 Request for Comment noted that 76.9 percent of trades in
2021 subject to the existing 15-minute reporting requirement were
reported within one minute and requested input on whether there are any
commonalities with the trades that were reported within one minute or
reported after one minute. The 2022 Request for Comment also noted
that, based on the MSRB's analysis, trades conducted on ATS platforms
in 2021 were reported in less time than trades not conducted on ATS
platforms (``non-ATS trades''), with 84.4 percent of inter-dealer
trades conducted on an ATS platform being reported within one minute
while only 74.9 percent of non-ATS trades were reported within one
minute. The 2022 Request for Comment sought information on the
reason(s) it takes more time to report non-ATS trades.
Commenters generally noted that the commonalities in the trades
reported within one minute or after one minute depend on the extent of
human intervention required to execute and report a trade.\120\ In
general, these commenters acknowledged that faster reporting may be
achieved for the remaining approximately 20-25 percent of trades
depending on the level of automation of trades with more straight-
through processing and progressively reduced human intervention.
---------------------------------------------------------------------------
\120\ See BB at 1; Colwell at 2; Falcon Square at 1-2; FIF I at
2; HTD passim; OSI at 1; TRADEliance at 2.
---------------------------------------------------------------------------
Commenters generally agreed that the shorter reporting times of ATS
trades are the result of those trades being executed on a fully
automated and connected trading venue.\121\ They acknowledged that in a
connected system, trades flow automatically and timing is almost
instantaneous, with little to no manual intervention.\122\ In contrast,
these commenters acknowledged that trades executed away from an ATS
take more time to report due to higher levels of human intervention.
---------------------------------------------------------------------------
\121\ See HTD at 5; RWS at 5; Sanderlin at 6.
\122\ See Baily at 1.
---------------------------------------------------------------------------
The MSRB understands that automated processes currently play a
significant role in facilitating rapid reporting of trade information
to RTRS. The MSRB is aware, both through its own statistics and from
input from commenters, as more fully discussed below, that trades that
involve full automation through the trade execution and reporting
process typically achieve near instantaneous trade reporting that is
already consistent with the proposed
[[Page 5405]]
one-minute timeframe, but that other trades face higher challenges to
achieving one-minute reporting. As discussed previously, the MSRB
reminds dealers seeking to comply with the proposed rule change--
including the one-minute reporting requirement and new or existing
exceptions from such requirement--that they should consider the extent
to which they can automate their trade reporting and related execution
processes, consistent with their clients' needs and the dealers' best
execution and other regulatory obligations.\123\
---------------------------------------------------------------------------
\123\ See supra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement--Exception for Trades with a
Manual Component'' for a discussion of and related guidance on
trades having a manual component.
---------------------------------------------------------------------------
Manual Steps in the Negotiation, Execution and Reporting Process
Several commenters raised issues about the potential impact of the
proposed rule change on trades that are negotiated by voice and/or
where the reporting process includes one or more manual components in
execution or trade reporting, such as in the case of large block trades
that require subsequent allocation, portfolio trades or other types of
complex trades that require some form of human intervention.\124\ These
commenters generally agreed that while manual trades represent a
relatively small percentage of trades by trade count, for the types of
trades identified above, a dealer may not be able to input and verify
trade data within one minute if that process involves human
intervention. These commenters further asserted that the proposed rule
change would disproportionately impact firms that accept orders that
are not electronically entered into an order management system
(including orders received via telephone or instant message) and would
effectively prohibit, by trade reporting rule, an entire category of
transactions that are otherwise customary industry practice. These
commenters also noted that this practice was particularly important to
the municipal securities industry where large institutional trades or
block trades are more likely to be negotiated and executed by voice and
processed manually.
---------------------------------------------------------------------------
\124\ See e.g., ASA at 4-5; Bailey at 2; C&C at 1; and FIF I at
1-2; HTD passim; HJS at 2-4; ISC at 2; IBI I at 1; KPI at 1; Mayes
at 1; RBMI at 1; RWS at 1-5; SAMCO at 1-2; SIFMA at 8-12, 24; SBC at
1-2; TRADEliance at 2; Wells Fargo at 3; Wintrust at 1. Hilltop,
Honey Badger, MPS and RBI expressed general support for ASA's
comment letter.
---------------------------------------------------------------------------
Another commenter argued that in most cases, it is not financially
feasible for a firm to report a trade to RTRS or TRACE within one
minute if the trade has been executed manually. This commenter noted
that manual trading is common in the very large universe of fixed
income securities for various reasons.\125\ One commenter noted that
the only way for a trade to be entered within 60 seconds is if two
opposing traders are on the phone at the same time and they agree to
drop their tickets at that very moment and input the data
immediately.\126\
---------------------------------------------------------------------------
\125\ See FIF at 2.
\126\ ISC at 2.
---------------------------------------------------------------------------
The MSRB recognizes that for some trades in the municipal
securities market, the trade details are entered manually due to the
inherent nature and characteristics of such trades. The MSRB also
understands that voice and electronic communications as a means of
trade execution that are not utilizing straight-through processing or
are not part of an automated trade execution and reporting process are
common for the municipal securities market. For these trades, the trade
reporting process might be difficult or impossible to complete within
one minute following the time of trade, even where the dealer has
established efficient reporting processes and commences reporting the
trade without delay.
As outlined below, commenters discussed a number of specific
scenarios involving such communications or other manual steps in the
process of executing and reporting trades for which shortening the
trade reporting timeframe could, in their view, potentially result in
adverse consequences.
To address these concerns, including the specific aspects raised by
commenters outlined in subparagraphs below, the MSRB has included in
the proposed rule change an exception from the proposed one-minute
trade reporting timeframe for trades with a manual component, which
would retain the existing 15-minute deadline for the first year in
which the proposed rule change is effective and then provide for a
measured decline in the timeframe to five minutes beginning two years
after such effectiveness, as discussed in greater detail herein.\127\
This phased approach would provide dealers effecting trades with a
manual component with a phased approach to achieving compliance that,
the MSRB believes, appropriately addresses the concerns that commenters
expressed.\128\
---------------------------------------------------------------------------
\127\ See supra ``Purpose--Proposed Rule Change--Exceptions to
the Baseline Reporting Requirement--Exception for Trades with a
Manual Component'' discussing the proposed exception for trades with
a manual component.
\128\ While the MSRB believes that the exception for trades with
a manual component effectively addresses the core issues raised in
the comments described in Subsections (1) through (6) below, the
MSRB also addresses certain other related comments not fully
resolved by such exception in ``One Minute Timeframe for Reporting--
Potential Negative Consequences of the One Minute Requirement.''
---------------------------------------------------------------------------
Voice and Negotiated Trading
Many commenters expressed concern about the potential impact of the
Proposal specifically on voice and negotiated trading, asserting that,
unlike equity markets, business in fixed income markets is often
conducted through voice negotiations, for institutional customers as
well as certain retail investors.\129\
---------------------------------------------------------------------------
\129\ See e.g., ASA at 3-4; AMUNI at 1; Bailey at 1; BDA at 2;
Cambridge at 4; Colwell at 3; HTD passim; FIF at 3, 4; HJS 2, 5;
InspereX at 3-5; ICI at 3, 4, 7, 9, 11; IBI I at 1; RBMI at 1; RWS
at 1-5; SAMCO at 1-2, 4; SIFMA at 5, 8, 11, 15, 24; SBC at 2; Wells
Fargo at 3; Wintrust at 1.
---------------------------------------------------------------------------
One commenter that is a dual registrant as a dealer and investment
advisor noted that an accelerated trade reporting regime would
negatively impact market participants that continue to prefer manually
negotiated trades for some portion of their fixed income trading
activity. While acknowledging that the volume of fixed income trades
executed electronically has risen, this commenter stated that many
investors still prefer to trade with dealers by voice or electronic
message (manually negotiated trades) rather than on an electronic
platform to benefit from receiving input on market color, including
credit information and information about comparable bonds trading in
the market. The commenter stated that some investors may also prefer to
negotiate on price directly because they are executing block-size
trades or portfolio trades. This commenter stated that trades
negotiated and executed manually (by voice or electronic message) take
longer to input and report in comparison to trades executed
electronically. This commenter further noted that a one-minute
reporting requirement would present a variety of process-oriented,
timing, and operational challenges, especially for a trading desk
engaging with multiple clients simultaneously and, therefore, the
proposed acceleration of reporting could alter the efficiency of fixed
income markets.\130\
---------------------------------------------------------------------------
\130\ See Wells Fargo at 3.
---------------------------------------------------------------------------
One commenter noted that the issue is not that dealers that execute
larger trades are using inefficient processes but that such trades are
typically executed by institutions using voice brokers. This commenter
also noted that there is a difference between institutional, voice
brokered fixed income markets and retail fixed income markets with
respect
[[Page 5406]]
to the manner in which trades in these markets are negotiated, executed
and processed. This commenter expressed concern that one-minute
reporting would effectively eliminate voice trading.\131\
---------------------------------------------------------------------------
\131\ See SAMCO at 1-2.
---------------------------------------------------------------------------
Larger-Sized Trades
The 2022 Request for Comment noted that larger-sized trades take
longer to report than smaller-sized trades and requested input on the
reason(s) it takes a firm that reports larger-sized trades more time to
report a trade (e.g., voice trades). The MSRB also asked if dealers and
investors would need process changes for executing and/or reporting
larger-sized trades in a shorter timeframe and if so, how.
A commenter stated that many small trades are executed on
electronic platforms and require minimal, if any, manual intervention,
allowing many smaller trades to be executed and reported almost
instantly. In contrast, the commenter stated that larger trades
typically require traders to negotiate and confirm details with a
client and manually enter the transaction into risk and reporting
systems. This commenter noted that large trades generally require
greater focus on risk management to promptly source and accurately
hedge the transaction in question, and an inability for firms to manage
their risk could hamper firms' willingness to incur risk, which could
dampen liquidity, increase systemic risk if dealers become less capable
of hedging on a timely basis and reduce execution quality for the
institutional investor.\132\
---------------------------------------------------------------------------
\132\ See SIFMA at 14-16.
---------------------------------------------------------------------------
A trade association commenter representing regulated investment
funds with members that are participants in the municipal securities
market noted that many of its members send large trades to dealers that
are worked throughout the day, which may have implications for dealers'
ability to report transactions within one minute or an otherwise
shortened timeframe.\133\ This commenter also noted that certain
characteristics of trades, particularly large trades and trades in less
liquid securities, are often done via ``high touch'' methods such as
voice protocol, often involving negotiation as to prices and size of
the trade.\134\
---------------------------------------------------------------------------
\133\ See ICI at 13 n.41.
\134\ Id. at 9 n.30.
---------------------------------------------------------------------------
Mediated Transactions
One commenter identified itself as a broker's broker that engages
in mediated transactions with other dealers to facilitate anonymity. It
noted that these mediated trades are often voice negotiated and require
manual intervention and processing from the point of execution through
the clearance and settlement processes. The commenter stated that these
trades are not reported within five minutes of execution, especially
for trades involving multiple counterparties, but that dealers use
their best efforts to report their trades as soon as practicable. The
commenter noted that processing of such trades is typically manual
given the complexities of mediated institutional transactions.\135\
---------------------------------------------------------------------------
\135\ See RWS at 1; see also SIFMA at 15.
---------------------------------------------------------------------------
This commenter further asserted that broker's brokers and other
inter-dealer brokers often are tasked by their dealer clients to
anonymously facilitate trades in numerous different credits as part of
the clients' trading needs on behalf of their own customers, requiring
reports of a large number of trades executed at the same time. The
commenter added that in some cases a transaction involves the
simultaneous purchase of a security and a hedge or other corresponding
security with multiple counterparties (e.g., buyer and seller is
intermediated by a broker's broker). The commenter stated that, to the
extent that all of these securities have a one-minute reporting
requirement, both set of trades would need to be reported within the
same minute, which may be functionally impossible.\136\
---------------------------------------------------------------------------
\136\ See RWS at 1.
---------------------------------------------------------------------------
Block Trades and Trade Allocations
A few commenters expressed concerns about large block trades
executed by firms that are dual registrants as dealers and investment
advisers, noting that these large trades must be further allocated to
their advisory customers. They noted that large block trades may be
executed contemporaneously with one or more counterparties, usually
through voice negotiation and a coordinated effort, and the allocation
may involve several additional smaller transactions with multiple
customers to fully reflect the deal and may potentially involve
multiple systems.\137\
---------------------------------------------------------------------------
\137\ See AMUNI at 2; BSI at 3; BetaNXT at 5; HJS at 4; ICI at
6, NSI at 1, RWS at 3; SIFMA at 10, 15, 19, Wells Fargo at 2-4.
---------------------------------------------------------------------------
Specifically, one commenter noted that a trade reporting exception
is necessary for block trades executed by a dealer and allocated to
client accounts of a registered investment adviser that is part of the
same legal entity. This commenter noted that as a dual registered
dealer and investment adviser, it regularly executes and reports block
trades and allocates portions of those trades to individual advisers'
client accounts and the sub-account allocations are executed at the
same price as the initial block trade.\138\ Another commenter noted
that when a dually-registered dealer/investment adviser purchases a
large block from the secondary market, it must report the block trade
to RTRS and also report each allocation to the sub-accounts held in its
investment adviser capacity, including managed retail customer
accounts.\139\ This commenter stated that the reporting issues
presented by such allocations are similar to those for the reporting of
portfolio trades, particularly the difficulty of reporting potentially
thousands of portfolio trades or allocations within a one-minute
reporting paradigm, as described below.\140\
---------------------------------------------------------------------------
\138\ See Wells Fargo at 2-3.
\139\ See SIFMA at 15.
\140\ Id.
---------------------------------------------------------------------------
Portfolio Trades and Trade Lists
Multiple commenters noted that dealers may receive large orders and
trade lists that involve rapid execution and frequent communications on
multiple transactions with multiple counterparties. They stated that
these trades may be executed as a series of trades that then must be
entered into the system one-by-one and could be difficult to report
within one minute following the Time of Trade.\141\ In addition,
several commenters noted that some transactions including large blocks
of transactions such as portfolio transactions may be subject to a
firm's internal approval processes for risk and regulatory compliance
and additional due diligence by way of, for example, a second review to
ensure accuracy.\142\
---------------------------------------------------------------------------
\141\ See BSI at 2; BB at 1; ICI at 13 n.41; FIF I at 4; SIFMA
at 14-15; Wells Fargo at 4.
\142\ See BSI at 2; BB at 1; FIF I at 4; HJS at 6; SIFMA at 14-
15; Wells Fargo at 4.
---------------------------------------------------------------------------
One trade association commenter noted that its members execute and
report their portfolio trades electronically because of the challenges
presented by manually inputting a large number of trades within a
limited time period.\143\ In contrast, another trade association
commenter stated that many customers engaging in portfolio trades seek
to do so through personalized negotiation rather than through
electronic venues, due in part to the complexity of counterparties
assessing potentially thousands of different securities without the
targeted interactions that occur in personalized negotiation, and
because of concerns about potential pre-execution leakage of
[[Page 5407]]
information regarding the nature of the investor's positions and
trading strategies from electronic trading venues.\144\
---------------------------------------------------------------------------
\143\ See FIF I at 4.
\144\ See SIFMA at 14.
---------------------------------------------------------------------------
One commenter noted that dealers often provide liquidity for
portfolios of bonds, including portfolios with more than one hundred
individual bonds. This commenter asserted that under a one-minute
reporting rule, dealers may not be able to execute these types of
portfolio trades at one point in time and report the trades in a timely
manner. The commenter advocated for an exception for portfolio trades
and for instances where market participants solicit actionable bids or
offers on multiple securities, such as a portfolio trade or a ``bid
wanted'' list.\145\
---------------------------------------------------------------------------
\145\ See Wells Fargo at 4.
---------------------------------------------------------------------------
Another trade association commenter representing regulated
investment funds with members that are participants in the municipal
securities market noted that some of its members engage in portfolio
trades, which require members to give certain information to dealers,
and that this may have implications for those dealers' ability to
report transactions within one minute or an otherwise shortened
timeframe and encouraged the MSRB to fully explore potential
operational issues.\146\
---------------------------------------------------------------------------
\146\ See ICI at 13 n.41.
---------------------------------------------------------------------------
Trading a Bond for the First Time/Security Master Issues
The 2022 Request for Comment sought information on any necessary
process(es) a dealer needs to complete before trading a bond for the
first time that could impact the ability to report a trade within a
reduced timeframe (e.g., querying an information service provider to
obtain indicative data on the security).
Many commenters were concerned about delays introduced by trades of
newly issued or infrequently traded securities where the security
reference information or indicative data is not already available
within the firm's or the clearing firm's security master.\147\ One
trade association commenter advocated that the MSRB provide an
exception for a security that may not be in a firm's security master at
the time the trade is executed. It also maintained that this exception
should extend to instances where a firm maintains separate security
masters for different customers.\148\ Another trade association
commenter noted that one-minute reporting may raise practical
challenges for certain asset classes, citing as an example, the
municipal securities market as being characterized by a large number of
individual security references, many of which are infrequently
traded.\149\
---------------------------------------------------------------------------
\147\ See ASA at 5; Bailey at 1; BetaNXT at 4; Colwell at 2, 4;
ISC at 2, RWS at 4; SAMCO at 3; Sanderlin at 6-7.
\148\ See FIF I at 8.
\149\ See ICI at 4 n.9.
---------------------------------------------------------------------------
Relatedly, some commenters noted that the absence of a centralized
global security master for municipal securities introduces delays in
the trade execution and reporting process and advocated for the MSRB to
consider hosting a security master for municipal securities.\150\ A few
commenters suggested that a one-minute trade reporting deadline would
be more practicable if the MSRB hosted a security master or hosted a
securities master jointly with FINRA.\151\ One commenter stated that
most market participants, including large clearing firms, do not have
the entire municipal securities market reference information in their
database, with new security references created daily and old securities
maturing. This commenter noted that, in general, if a security is not
set up in a security master, it is because there has not been a past
transaction at the dealer or clearing firm, and the time necessary to
process the set-up of a security in the security master greatly exceeds
one minute.\152\ A trade association commenter observed that its
members state that it takes almost all of the allotted 15 minutes to
query an information service provider to upload the missing security
master information and indicative data to refresh their securities
master, then submit the trade report.\153\ Another commenter stated
that some back-office systems that provide the connection to the MSRB
for reporting of corresponding trades also require the security master
update to be performed manually and therefore cannot report a received
trade within one minute.\154\
---------------------------------------------------------------------------
\150\ See Bailey at 1; BetaNXT at 3-4; BB at 1-2; Cambridge at
2; ISC at 2; RWS at 5; Sanderlin at 6; SIFMA at 11-12; TRADEliance
at 2.
\151\ See FIF I at 8; SAMCO at 3; SIFMA at 22-23; Wells Fargo at
4; Zia at 1.
\152\ See SAMCO at 3.
\153\ See SIFMA at 22.
\154\ See Zia at 1.
---------------------------------------------------------------------------
The exception for trades with a manual component is designed to
address these concerns as described above. While the MSRB acknowledges
the suggestion that it host a global security master for use by dealers
in reporting trades to RTRS, and while the MSRB continues to focus on
making its market transparency systems more useful for market
participants, the MSRB would not at this time be instituting such a
global security master in connection with the proposed rule change.
Multiple Layers in Reporting Process
A commenter opined that the current RTRS workflow is not suitable
for reporting trades within a one-minute time frame due to multiple
layers (i.e., third-party vendors and systems) that trade reports often
pass through before they are received by RTRS. This commenter
identified the various layers, including submission of the trade by the
executing firm to RTTM; if an executing firm is not a clearing firm,
the need to have the clearing firm report the executing firm's trade to
RTTM; and, if the clearing firm outsources the trade reporting function
to a service provider, such provider must make the submission in the
format accepted by RTRS. To address limitations faced by some vendors,
this commenter advocated for allowing trade submissions of municipal
securities to be made directly to TRACE using FIX, rather than RTRS, or
that the implementation period for the RTRS reporting changes be
postponed until a reasonable period after the TRACE reporting changes
proposed in the FINRA TRACE Proposal have been implemented to avoid
dealers being overburdened with implementing reporting changes for two
different systems at the same time.\155\ Other commenters expressed
similar concerns regarding the reliance on a third party for clearing
and trade reporting.\156\
---------------------------------------------------------------------------
\155\ See FIF I at 6-7 nn.25-28.
\156\ See BSI at 2; Colwell at 2; Falcon Square at 1-2; HTD at
6; Hilltop at 1; RBMI at 1; Wells Fargo at 4.
---------------------------------------------------------------------------
One commenter noted that while many firms use semi-automated
systems, many others use a manual system to execute trades with their
clearing firm, and that converting to a fully automated system is far
too expensive and therefore an impractical solution for many
firms.\157\ Another commenter stated that it relies on a third party
for clearing and trade reporting to RTRS, and such clearing firm
performs the trade reporting within one minute of the time the trade is
submitted by the dealer using the clearing firm's order entry system.
However, this commenter states it does not have an automated order
entry system, indicating the trade may be input into the clearing
firm's order entry system after the time of trade and entails manual
steps.\158\ A third commenter noted that the industry generally
fulfills the regulatory trade reporting obligation further downstream
in the trade
[[Page 5408]]
management process, and that industrywide processes may need further
rearchitecting and significant re-engineering of systems to move trade
reporting upstream. This commenter noted that this problem is of
particular concern for firms that rely on third parties for trade
reporting or for firms that employ systems that, by design, report
trades through their respective back-end systems.\159\
---------------------------------------------------------------------------
\157\ See BSI at 2.
\158\ See Sanderlin at 6.
\159\ See SIFMA at 20-21.
---------------------------------------------------------------------------
Trades Reported Through RTRS Web Interface
The MSRB noted that submitting transactions to RTRS directly
through the RTRS Web interface takes longer. The 2022 Request for
Comment sought information regarding the average amount of time
required to report a trade through the RTRS Web interface, how the MSRB
could improve the process for reporting through the RTRS Web interface
and the instance(s) in which a dealer might choose to or need to use
the RTRS Web interface.
A few commenters noted that their trades are reported
electronically by their clearing firms and that they do not normally
report trades via the RTRS Web interface.\160\ One commenter noted
that, at least until alternative methods of reporting trades are
developed to allow dealers to efficiently and effectively report the
types of trades that they currently report manually, retaining but
considerably improving the existing web interfaces is necessary.\161\
The commenter requested greater transparency in system outages and
performance degradations, heightened service level agreements and
emphasized that dealers should not be penalized for MSRB system
outages. Similarly, some commenters noted that there may be issues
external to MSRB systems, including internet and other types of broad-
based or localized outages or degradations outside the control of
dealers that may sometimes interfere with their ability to make timely
trade reports through the SRO web interfaces, which would be
increasingly problematic with any potential shortening of the trade
reporting window.\162\
---------------------------------------------------------------------------
\160\ See Colwell at 4; SAMCO at 1; HTD at 6; RWS at 5.
\161\ See Colwell at 2.
\162\ See id.; FIF I at 6-7; FIF II at 1-2; SIFMA at 23-24.
---------------------------------------------------------------------------
The RTRS Web interface is one of three available RTRS Portals under
Rule G-14 RTRS Procedures Section (a)(i)(B) (RTRS Web Portal or RTRS
Web) and would be maintained as such under the proposed rule change.
The MSRB will continue to explore ways in which to assure RTRS Web's
reliability and efficiency for use. With regard to systems outages, the
MSRB maintains a Systems Status Page on the MSRB website,\163\ which
indicates the current operational status of each of the MSRB's market
transparency systems and related supporting systems and provides any
then-applicable status updates. In addition, users are able to access a
historical catalogue of past MSRB systems outages through the Systems
Status Page.
---------------------------------------------------------------------------
\163\ See <a href="https://www.msrb.org/System-Status">https://www.msrb.org/System-Status</a>.
---------------------------------------------------------------------------
Potential Negative Consequences of the One Minute Requirement
Accuracy of Information Reported and Potential Data Entry Errors
The MSRB requested input on whether reducing the timeframe to as
soon as practicable, but no later than within one minute after the Time
of Trade, would affect the accuracy of information reported and/or the
likelihood of potential data entry errors and if so, the reason for
such impact.
A number of commenters predicted that a rapid transition to a one-
minute standard would result in increased errors and corrections in
trade reporting as well as late trade reporting that would lead to
increased enforcement action.\164\ One commenter observed that the
current 15-minute reporting timeframe allows for traders to adequately
review trade tickets for errors in settlement, price, amount, and
similar data fields. This commenter stated that, even with the current
15-minute reporting window, human errors in completing trade tickets
often lead to trade cancellations and modifications.\165\ Some
commenters noted that reducing the trade reporting time to one minute
would likely have a detrimental effect on reporting accuracy because
market participants would be far more concerned with timely reporting
than reviewing for accurate trade information.\166\ Other commenters
expressed the concern that, if the Proposal were to be adopted, firms
may not have sufficient time to correct errors and would therefore be
in violation of trade reporting requirements.\167\
---------------------------------------------------------------------------
\164\ See ASA at 5; BB at 1; Cambridge at 3; Colwell at 2; EH&C
at 1-2; HJS at 2-3; ICI at 12-13; IBI II at 1-2; Miner at 1; SIFMA
at 15-17.
\165\ InspereX at 5.
\166\ Id. at 5-6. Accord. Cambridge at 3; HTD at 6; RWS at 5;
SAMCO at 2.
\167\ ASA at 5. See also SIFMA at 17.
---------------------------------------------------------------------------
One commenter expressed concern that portfolio trades with
potentially thousands of unique securities might overwhelm the error
and correction process, or result in a surge of late trade reports, if
placed under a one-minute reporting standard. This commenter stated
that, depending on the nature of an adjustment or other small change in
terms in the context of a portfolio trade, that single adjustment might
result in the need for trade reporting correction for all the reported
trades for the basket of securities within the portfolio.\168\
---------------------------------------------------------------------------
\168\ See SIFMA at 16.
---------------------------------------------------------------------------
Additional commenters felt that the dissemination of inaccurate
data caused by rushed reporting would be detrimental to the MSRB's goal
of increased market transparency.\169\ One of these commenters stated
that, if a sizable percentage of trades must be revised or are reported
late due to practical limitations regarding dealer operational
workflow, this could result in inaccurate data being reported to the
MSRB and disseminated publicly, thus undercutting a key purpose of
adopting the shortened reporting timeframes.\170\
---------------------------------------------------------------------------
\169\ See Colwell at 2; HJS at 2-3; ICI at 12-13; InspereX at 6;
Miner at 1.
\170\ ICI at 12-13.
---------------------------------------------------------------------------
A commenter noted that large trades require a higher level of
review than other trades and, as a result, large trades could land in
error queues or other queues for manual reviews for margin or credit
issues. The commenter stated that it would be extraordinarily difficult
to engage in these types of reviews in an effectively instantaneous
manner as would be required under a one-minute reporting regime. This
commenter further stated that ensuring that large trades are executed
accurately is critically important not only because of the higher
financial stakes inherent in large trades, but also because the larger
trades are often viewed by the market as the most informative, as to
current price levels, have the greatest influence on market indices and
generally set market tone. The commenter believed that the Proposal, if
adopted, could significantly curtail parties' ability to engage in
manual handling of trades and would have negative impacts on risk
management and liquidity, with, at best, little to no actual benefit to
the overall quality of market data.\171\
---------------------------------------------------------------------------
\171\ See SIFMA at 16.
---------------------------------------------------------------------------
The MSRB believes that the degree to which a shortened trade
reporting timeframe might result in a greater prevalence of the
reporting of inaccurate information is significantly ameliorated by the
inclusion of the two new reporting exceptions under the proposed rule
change since the most likely circumstances where the risk of errors
could be heightened would be in the case of trades with a manual
component or trades by dealers that
[[Page 5409]]
only engage in limited municipal securities trading activities. Under
the exception for trades with a manual component, the existing 15-
minute deadline would be retained for the first year in which the
proposed rule change is effective and then decline in phases to five
minutes beginning two years after such effectiveness to provide dealers
adequate time to adjust their processes and systems. The exception for
dealers with limited trading activity would retain the current 15-
minute timeframe and therefore there would be no appreciable impact on
the accuracy of trade reports for such dealers' transactions.
Impact on Risk Management and Hedging
Several commenters articulated concern that one-minute trade
reporting would result in a decreased ability of dealers to manage
risks through timely hedging activity. These commenters noted that
unlike securities that are purchased and sold to customers almost
immediately, securities that are held in a firm's own inventory may
require additional coordination and diligence to hedge those positions
or take down a hedge when the position is unwound.\172\ One commenter
noted that institutional clients and/or dealers trading in blocks often
need to simultaneously take action to hedge their risk on such trades,
particularly during periods of volatility. This commenter expressed
concern that the need for dealers to attend to trade reporting to meet
a one-minute requirement on their fixed income trades in lieu of
immediately focusing on hedging or assisting institutional clients with
their own hedging would have an adverse impact on such efforts.\173\
---------------------------------------------------------------------------
\172\ See Hilltop at 1; ICI at 10; R&C at 1; SIFMA at 11, 15-16.
\173\ See SIFMA at 11, 15-16.
---------------------------------------------------------------------------
Based on the comments received on the 2022 Request for Comment, the
MSRB believes that such risk management or other hedging activities
typically occur during the course of the types of municipal securities
transactions that commenters identified as requiring manual or other
human intervention. Such trades would, in many cases, qualify for the
exception for trades with a manual component, thereby providing dealers
with a phased approach to reducing the reporting timeframe to an
eventual five minutes in a manner that should allow such dealers to put
in place appropriate process or systems changes that would
significantly mitigate these concerns.
Impact on Best Execution Obligations
Many commenters also expressed concern that compliance with the
proposed rule change would negatively impact some firms' best execution
obligations.\174\ For example, one commenter noted that it built out a
semi-automated system to incorporate the human element, purposely
relying on a person to check and verify several factors before trade
execution, so that its process protocol reduces trade error frequency
and helps ensure compliance with due diligence, best execution and
other obligations.\175\ Another commenter noted that, due to the human
factor of voice brokerage activities and the impracticability, if not
impossibility, of automating these modes of trading, any attempt to
decrease reporting time would require additional personnel to
essentially shadow traders, preparing tickets and performing accuracy
checks, best execution checks and suitability checks, while the trader
is verbally negotiating the terms of the transaction with the
counterparty or broker. This commenter expressed concern about the
ongoing costs as well as the practicality of such shadowing of
traders.\176\ One commenter noted that the Proposal could create an
incentive for firms to ``auto-route'' more orders to help with
compliance, resulting in fewer individuals at such firms being involved
with handling orders with the potential consequences for price
improvement and best execution obligations.\177\
---------------------------------------------------------------------------
\174\ See ASA at 5; AMUNI at 1; BSI at 2; HJS at 5; ISC at 2;
IBI II at 1-2; SAMCO at 2; SIFMA at 9; SBC at 2.
\175\ See BSI at 2.
\176\ See HJS at 5.
\177\ See ASA at 5.
---------------------------------------------------------------------------
While it is likely that many dealers fulfill their best execution
obligations under MSRB Rule G-18 using processes that would not
normally have an impact on the timing of trade reporting of individual
transactions, the MSRB understands from commenters that some dealer
[…truncated; see source link]Indexed from Federal Register on January 26, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.