[ by Howard Haykin ]

The SEC approved the MSRB proposed rule amendment that will impact the Real-Time Transaction Reporting System (“RTRS”) information system and subscription service.  As proposed, the changes will enhance the transaction data publicly disseminated from RTRS in real-time by including the exact par value on all transactions with a par value of $5 million or less, an increase from the current $1 million or less threshold, and including an indicator of “MM+” in place of the exact par value on transactions where the par value is greater than $5 million. 

As is done currently, the exact par value of all transactions will be disseminated from RTRS 5 business days later.  The changes will be made effective on 11/5/12.
 

BACKGROUND. MSRB Rule G-14, on transaction reporting, requires brokers, dealers and municipal securities dealers (collectively “dealers”) to report all transactions in municipal securities to RTRS within 15 minutes of the time of trade, with limited exceptions.  Since the implementation of RTRS in 2005, the MSRB has made transaction data available to the public through subscription services designed to achieve the widest possible dissemination of transaction information with the goal of ensuring the fairest and most accurate pricing of municipal securities transactions.

In addition to subscription services, MSRB makes publicly available for free transaction data on the EMMA website.  Since the launch of EMMA as a pilot in 2008, MSRB has incorporated into the display of market-wide and security specific information all transaction data disseminated from RTRS so that transaction information would be available on the EMMA website simultaneously with the availability of information to subscribers to the RTRS subscription service.

LARGE TRADE SIZE MASKING. In connection with the MSRB’s predecessor end-of-day trade reporting system and the subsequent development of RTRS, MSRB received comments that, given the prevalence of thinly traded securities in the municipal securities market, it sometimes is possible to identify institutional investors and dealers by the exact par value included on trade reports.  It was noted that, where the market for a specific security is thin and only one or two dealers are active, revealing the exact par amount also may convey information about a dealer’s inventory - i.e., size of position and acquisition cost - and allow other dealers to use this information to trade against the dealer’s position, thus reducing the incentive for a dealer to take large positions in these circumstances.

To address these concerns, transaction information disseminated through RTRS subscription services and displayed on EMMA includes an indicator of “1MM+” for any trade with a par value greater than $1 million.  This indicator is replaced with the exact par value of the trade five business days later.  The MSRB implemented this approach to help to preserve the anonymity of trading parties while not detracting in a substantial way from the benefits of price transparency.  The MSRB noted that it would review this masking policy as it gains experience with real-time transparency.

A foundational principal of RTRS is that ... all market participants would have equal access to transaction information.  The GAO observation that certain market participants are able to determine, through their relationships with dealers, the par amount of large transactions for which the par value is masked in RTRS subscription services and on EMMA undermines the purpose of masking the exact par value.  Further, if certain market participants are able to determine exact par values yet the information disseminated by RTRS masks exact par values, then the foundational principal of RTRS has been compromised since the equality of access to transaction information is lost for the five business day period that certain institutional customers have access to the exact par value while the rest of the marketplace must await the unmasking of such information by RTRS five business days after the trade was reported.

To ensure that as many market participants as possible have equal access to the same amount of information about each transaction disseminated from RTRS and to further promote price transparency consistent with the MSRB’s intent to review its masking policy as it gained experience with real-time transparency, the changes will enhance the transaction data publicly disseminated from RTRS in real-time by including the exact par value on all transactions with a par value of $5 million or less.  While MSRB considered discontinuing masking of the exact par value on transactions where the par value is greater than $1 million, with the result that RTRS subscription services and EMMA would include the exact par value on all transactions when initially disseminated to the public, as more fully discussed in the MSRB’s statement on comments received on the proposal, dealers and institutional investors oppose eliminating the practice of masking large trade sizes and cited concerns related to adverse impacts on liquidity.  However, these commenters stated that raising the par value threshold for masking large trade sizes would provide additional transparency to the municipal market without adversely impacting liquidity.  Based upon 2011 trade data, the number of trades that were subject to the over $1 million trade size mask was 342,906 and, if the trade size mask was raised to par values over $5 million, this number would have been 97,124 trades.

Rationale for Current Rule Change.  The MSRB believes that raising the par value threshold to par values over $5 million would be an appropriate first step to take in the short term as it would greatly reduce the number of trades subject to the par value mask.  The MSRB plans to continue to evaluate whether this threshold can be raised further or completely eliminated with a view towards bringing full transparency of exact par values to the municipal market in real-time.  As part of the MSRB’s Long-Range Plan for Market Transparency Products, the MSRB plans to undertake an initiative to reengineer RTRS.  Through the RTRS reengineering initiative, additional industry comment will be solicited on long-term measures for increasing transparency of large trade sizes or alternative methods of disseminating such information.  MSRB also plans to evaluate any impacts on liquidity from the near-term increase of the trade size mask threshold to $5 million to assist it in determining whether any future changes to this threshold are merited or could result in unanticipated consequences.

MSRB Contact. Direct questions about this notice to Justin Pica, Director, Product Management - Market Transparency at 703-797-6716.

For further details, go to:   [MSRB Notice 12-53, 10/25/12,"SEC Approves Enhancement ..."].