[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Notices]
[Pages 37608-37611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18590]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40176; File No. SR-MSRB-98-9]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to Reports 
of Sales and Purchases, Pursuant to Rule G-14

July 7, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 17, 1998, the Municipal Securities Rulemaking Board (``Board'' 
or ``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Board. The Commission is publishing this notice to solicit comments on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Board is filing a proposed rule change to institute a service 
(``the Service'') to provide daily reports from the Board's Transaction 
Reporting Program (``the Program'') that will summarize information 
about customer and inter-dealer transactions in municipal securities 
reported to the Board under rule G-14. The Board is establishing a fee 
for an annual subscription to the Service of $15,000. The proposed fee 
is structured to defray the Board's cost of disseminating the 
transaction data and to defray, in part, the cost of collecting and 
compiling transaction data that will be used in the Program. The Board 
does not expect or intend to make a profit from the Service.

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 Board 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 Board has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

[[Page 37609]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the Service is to increase transparency in the 
municipal securities market by adding information about transactions 
between dealers and customers (``customer transactions'') to the 
information currently disseminated by the Program. Under the proposed 
rule change, aggregate data about market activity, and certain volume 
and price information about transactions in frequently traded 
securities, would be disseminated to promote investor confidence in the 
market and its pricing mechanism. The information provided by the 
Service would be a daily public report summarizing prices and volumes 
of trading in the municipal securities market during the previous day 
(the ``Combined Daily Report''). The Combined Daily Report's format is 
a revision of the Board's currently produced Inter-Dealer Daily Report. 
Like the Inter-Dealer Daily Report, the Combined Daily Report will be 
made available by approximately 6:00 a.m. each business day, reporting 
on the previous day's market. Subscribers would transfer the report, in 
electronic form, from the Board's system to their own computer systems. 
A printed copy of the report would be available for examination, free 
of charge, in the Board's Public Access Facility in Alexandria, 
Virginia. These dissemination methods are the same as for the current 
Inter-Dealer Daily Report.
    Previous Filings Regarding the Program. As discussed below, the 
Board has been operating a program for inter-dealer transaction 
reporting since 1995. Dealers are required to report their inter-dealer 
transactions to the Board under rule G-14. In 1996, the Board filed 
with the Commission an amendment to rule G-14 to require dealers to 
report their customer transactions in municipal securities to the Board 
in certain prescribed formats and a description of the changes to the 
inter-dealer transaction reporting program necessary to add customer 
transaction information.\3\ The 1996 filing provided for a period from 
July 1, 1997, to December 31, 1997, during which dealers would test 
their customer transaction reporting capabilities with the Board. The 
Commission approved this amendment and plan, with the amendments to 
rule G-14 ultimately becoming effective March 1, 1998.\4\ In March 
1998, the Board filed with the Commission its intention to release 
samples of the Combined Daily Report for public comment and to make the 
Report available on an operational basis in the third quarter of 
1998.\5\
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    \3\ Exchange Act Release No. 37859 (Oct. 23, 1996), 61 FR 56072 
(Oct. 30, 1996).
    \4\ Exchange Act Release No. 37998 (Nov. 29, 1996), 61 FR 64782 
(Dec. 6, 1996) (approved of amendment to rule G-14); Exchange Act 
Release No. 39495 (Dec. 29, 1997), 63 FR 585 (Jan. 6, 1998) (delay 
of effectiveness to March 1, 1998).
    \5\ Exchange Act Release No. 39835 (Apr. 7, 1998), 63 FR 18242 
(Apr. 14, 1998).
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    Background and Description of the Program. Since 1995, rule G-14 
has required brokers, dealers and municipal securities dealers 
(``dealers'') to report to the board their inter-dealer transactions in 
municipal securities via the automated comparison system for municipal 
securities operated by National Securities Clearing Corporation 
(``NSCC''). The Board has used this information to create a database of 
transaction information that can be used for market surveillance 
purposes and for inspection and enforcement by agencies and 
organizations charged with enforcement of Board rules. The Board also 
uses the reported transaction information to create the Inter-Dealer 
Daily Report, which is used by market participants to help gauge the 
value of municipal securities. The Board currently has eight 
subscribers to the Inter-Dealer Daily Report. Most of these are 
information vendors that redistribute the information to their own 
subscribers and/or use the information in various securities valuation 
products that they market.\6\
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    \6\ The current subscribers are Bloomberg Financial Markets, 
Chapdelaine & Company, Dow Jones Telerate, Interactive Data Corp., 
J. J. Kenny Co., Inc., Muller Data Corp., Smith Barney, Inc., and 
TradeHistory, LLC.
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    Customer trades have been reported by dealers to the Board under 
rule G-14 since March 1, 1998. Both customer and inter-dealer 
transactions must be reported by midnight of trade date. Although 
different mechanisms are used for reporting the two types of trades, 
the Board's computerized Transaction Processing System (``TRS'') will 
merge the reported trade data to produce the Combined Daily Report and 
the surveillance database.
    The criteria for including municipal securities information on the 
proposed Combined Daily Report will be the same as that described in 
the Board's March 1998 filing to produce sample daily reports. These 
are essentially the same as the criteria for the current Inter-Dealer 
Daily Report. If a municipal security (identified by its CUSIP number) 
is reported, in compliance with rule G-14, as having been traded four 
or more times on a given day, then the high, low, and average price and 
total par value of all the reported trades in that security will be on 
the Daily Report the next morning. The average price will be calculated 
as the arithmetic mean of reported transaction prices of those trades 
between $100,000 and $1,000,000 in par value. This reporting band is 
meant to exclude odd lots and very large trades from the average price. 
In applying these criteria, inter-dealer and customer transactions will 
be considered together. This means that any combination of inter-dealer 
and customer transactions totaling four or more in one CUSIP will 
trigger the inclusion of price information in the Combined Daily 
Report.
    The Board expects to make the Combined Daily Report Service 
available during the third quarter of 1998, and will file with the 
Commission, in advance, an exact date for beginning operation. In 
addition to the Combined Daily Report Service, the Board also will use 
the data reported by dealers under rule G-14 to create a surveillance 
database available to regulatory agencies and organizations responsible 
for enforcement of Board rules. The surveillance database will not be 
available to regulators until early 1999.
    Methods for Reporting Transaction Reporting Data. Since 1995, 
inter-dealer transactions have been reported to the Board by dealers 
each night through the NSCC automated comparison system. This reporting 
mechanism is convenient for dealers, since most of the trade data that 
must be reported to the Board has to be reported to NSCC in any event, 
for clearance and settlement purposes. The automated comparison system 
processes the transaction data to determine, among other things, 
whether both parties to each trade have agreed to certain details 
(e.g., CUSIP number, par amount, final monies required for 
settlement).\7\ Each night, the automated comparison system provides 
electronic files to the TRS that include trade information reported by 
dealers, plus an indication for each trade whether it was successfully 
``compared'' as to its reported details.
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    \7\ NSCC procedures provide an exception for transactions 
involving the distribution of new issue securities from a syndicate 
manager to syndicate members, wherein only the syndicate manager 
submits information to the automated comparison system.
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    Customer transactions have been reported to the Board each night by 
dealers since March 1, 1998 in accordance with the rule G-14 amendment 
that became effective on that date, requiring dealers to generate

[[Page 37610]]

a file of required information, in a format specified by the Board, and 
transmit the file electronically to the TRS. For most high-volume 
dealers, the first step in file transmission is to send the trade file 
over existing ``computer-to-computer'' connections between their 
computer systems and the NSCC. In the second step, NSCC forwards these 
files to the Board without any processing of the trade data. Some 
dealers, especially those with low volumes of customer trades who do 
not have electronic connections to NSCC, submit customer transaction 
files directly to the Board by means of personal computer software 
provided free by the Board.
    Correction of Data Submitted by Dealers. Corrections to inter-
dealer trade information are made by dealers according to NSCC 
procedures, and, after processing, corrected data is provided by the 
comparison system to the TRS. Regarding customer trade data, the TRS 
sends messages to dealers, electronically or by facsimile, 
acknowledging receipt of a day's file and identifying records that 
appear to be in error. Dealers submit corrections using a methods 
similar to that for repairing trades. A dealer may also ``cancel'' a 
trade record if this is necessary to reflect cancellation of the trade 
by the parties or to remove erroneous information submitted to the 
system.
    Description of the Combined Daily Report. Once all transaction 
information for a business day has been received; the TRS generates the 
Combined Daily Report. As noted, both inter-dealer and customer trades 
are counted to determine whether an issue (CUSIP number) was traded 
four or more times. Based upon transaction data reported to the Board 
in March, April and May 1998, it appears that approximately one 
thousand issues will be traded four or more times on a typical day.
    The Combined Daily Report includes summary information describing 
the day's market in municipal securities. The summary covers all 
municipal securities trades, regardless of frequency of trading. The 
average daily market statistics during the week of March 30, 1998 were:

Total par amount traded: $8.6 billion
Total number of trades reported: 22,199
Total number of issues traded: 11,499
Number of issues traded four or more times: 1,025

The following data elements of each issue would be published in the 
Combined Daily Report.
    CUSIP number: The CUSIP number that identifies the issue.
    Security description: A short description of the issue that was 
traded.
    Number of trades: The total number of trades in the issue (both 
inter-dealer and customer) that were reported to the MSRB.
    Volume traded: The total dollar value of all trades in the issue on 
the trade date.
    High price: The highest price of all trades in the issue.
    Low price: The lowest price of all trades in the issue.
    Average price: The arithmetic mean of all trades whose par values 
were between $100,000 and $1,000,000.
    Trades in average: The number of trades whose par values were 
between $100,000 and $1,000,000.
    When issued: If ``yes,'' indicates that the issue was traded while 
in ``when, as, and if issued'' status.
    Assumed settlement date: In some cases, it is necessary to assume a 
settlement date to calculate price from yield for inclusion of the 
price in the Daily Report. The assumed settlement date for both inter-
dealer and customer trades will be 15 business days after the trade 
date (T+15). When it has been necessary to assume a settlement date, 
this date will be shown on the Daily Report.
    Review Process for Customer Transaction Data Used in Combined Daily 
Report. Customer transaction records submitted by dealers are reviewed 
automatically as part of data processing within the Transaction 
Reporting System. Trade records are excluded from eligibility for the 
Combined Daily Report if: (i) the trade date reported in the record is 
for a day other than the day being reported in the Daily Report; (ii) 
the trade record or the file containing the trade record is not in the 
required format or otherwise violates stated system input requirements; 
\8\ (iii) the submitter of the file has not filed with the Board the 
required information to identify itself; (iv) the trade record contains 
a dealer identifier that is unknown to the Board; \9\ (v) the 
information contained in the trade record is so substantially outside 
expected parameters that an input error is suspected; (vi) the CUSIP 
number submitted is not known to be a valid CUSIP number for a 
municipal securities issue; \10\ or (vii) the trade record contains no 
dollar price and a dollar price cannot be calculated from the reported 
yield on the transaction using the Board's available data about the 
security and standard yield-to-price calculation techniques for 
securities with periodic interest payments and with more than six 
months to redemption, contained in Board rule G-33(b)(i)(B)(2). \11\
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    \8\ Format requirements and input procedures are described in 
``Board to Proceed with Customer Transaction Reporting Program: Rule 
G-14'' (MSRB Reports, Vol. 16, No. 3 (September 1996) at 3-16). This 
document, along with explanatory questions and answers and the 
latest information on the Program, can be found on the Board's World 
Wide Web site (www.msrb.org).
    \9\ To identify dealers, the Board uses symbols assigned to 
dealers by the NASD. Dealers are required to obtain a valid symbol 
under rule G-14(b)(iii). The transaction reporting procedures 
contained within rule G-14 also require that each dealer effecting 
customer transactions provide the Board with certain contact 
information and testing-related information.
    \10\ The Board currently receives updated information on 
municipal securities CUSIP numbers each day from the CUSIP Service 
Bureau and J.J. Kenny Co., Inc.
    \11\ The current software used for calculation is provided by 
TIPs, Inc. The securities information used to calculate price from 
yield currently is provided by J.J. Kenny Co., Inc.
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2. Basis
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act, \12\ which requires, in pertinent 
part, that the Board's rules ``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 . . . transactions in municipal 
securities, to remove impediments to and perfect the mechanism of a 
free and open market in municipal securities, and, in general, to 
protect investors and the public interest.''
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    \12\ 15 U.S.C. 78o-4(b)(2)(C).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change will 
impose any burden on competition in that it applies equally to all 
dealers in municipal securities.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

The 1995 and 1996 Requests for Comments
    The Board published a notice in February 1995,\13\ requesting 
comment on a plan to collect and report information about transactions 
between dealers and institutional customers, and in January 1996 
published a revised plan \14\ to collect information about all

[[Page 37611]]

customer transactions. The Board received a number of comments in 
response. The comments were provided to the Commission and addressed by 
the Board in an August 1996 filing.\15\ Some commentators suggested 
reporting individual transactions,\16\ while others suggested combining 
data from all trades falling within a given par value range.\17\ One 
commentator suggested combining prices and volumes for inter-dealer and 
customer trades for public reporting,\18\ and another suggested 
identifying retail prices as such.\19\ It was also suggested that 
trades be summarized by par value in four categories ($5,000 to 
$45,000, $50,000 to $95,000, $100,000 to $1,000,000, and over 
$1,000,000).\20\ In considering various possible formats for the 
report, the Board decided that it would serve the purpose of 
simplicity, and aid users in comparing the new and old reports, to make 
the Combined Report's format the same as that of the Inter-Dealer 
Report, which has been in use for over three years. If experience with 
the Combined Daily Report indicates revisions are needed, the Board 
will revise the format to ensure that the Program will continue to 
provide market transparency to market participants.
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    \13\ ``Transaction Reporting Program for Municipal Securities: 
Phase II,'' MSRB Reports, Vol. 15, No. 1 (April 1995) at 11-15.
    \14\ ``Reporting Customer Transactions in Municipal Securities: 
Rule G-14,'' MSRB Reports, Vol. 16, No. 1 (January 1996) at 15-18, 
and ``Customer Transaction Reporting: Proposed Technical 
Specifications and Request for Comment,'' ibid. at 19-22.
    \15\ Exchange Act Release No. 37859 (Oct. 23, 1996), 61 FR 56072 
(Oct. 30, 1996).
    \16\ Letter from Ron Moore, Applied Financial Management, Inc., 
to Larry M. Lawrence, MSRB, May 22, 1995, and letter from Glenn 
Burnett, Zia Corporation, to Larry M. Lawrence, July 2, 1996.
    \17\ Letter from George Brakatselos, Public Securities 
Association (PSA), to Larry M. Lawrence, MSRB, May 2, 1996.
    \18\ PSA.
    \19\ Zia.
    \20\ PSA.
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The 1998 Request for Comments
    In April 1998, the Board released samples of the Combined Daily 
Report for comment.\21\ In response, comments were received from 
Bloomberg L.P.\22\ and TradeHistory, LLC.\23\ One commentator \24\ 
requested that the Board continue to publish the Inter-Dealer Daily 
Report after commencing publication of the Combined Daily Report. The 
proposed Service would make no change to the publication of the Inter-
Dealer Daily Report.\25\ The other commentator \26\ requested that the 
Board add ``filler'' (blank) fields in the new format to make the 
format of the electronic Combined Daily Report compatible with its 
programs that process the electronic Inter-Dealer Daily Report. This 
change has been made and would be part of the proposed Service.
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    \21\ Exchange Act Release No. 39835 (Apr. 7, 1998), 63 FR 18242 
(Apr. 14, 1998). The Board also made the sample reports available 
via the Internet at its Web site (www.msrb.org).
    \22\ Letter from John Loza, Bloomberg L.P. , to Harold L. 
Johnson, MSRB (April 20, 1998).
    \23\ Electronic mail from Bruce Hechler, TradeHistory, LLC, to 
Thomas A. Hutton, (May 4, 1998).
    \24\ TradeHistory.
    \25\ The Board will continue to provide, as it has since January 
1995, daily reports of inter-dealer transactions in municipal 
securities in a service whose annual fee will remain unchanged at 
$15,000. The Board has chosen to make the price of the proposed 
Service the same as the price of the existing Inter-Dealer Service.
    \26\ Bloomberg.
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III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and published its reasons for so finding or (ii) as to 
which the MSRB consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street N.W., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of the MSRB. All submissions should 
refer to File No. SR-MSRB-98-9 and should be submitted by August 3, 
1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18590 Filed 7-10-98; 8:45 am]
BILLING CODE 8010-01-M