Exceptions for manual trades and limited trading activity are crucial if the Municipal Securities Rulemaking Board's amendments to Rule G-14, its controversial move to a one-minute reporting standard from the current fifteen minute window, is adopted by the Securities and Exchange Commission.
That's according to comments submitted to the SEC, which ranged from cautious acceptance to outright disapproval and even the threat of litigation if the proposal advances in anything resembling its current form.
"We agree with FINRA and the MSRB that it would be inappropriate and excessively costly to expect dealers with limited trading activity who may report trades manually to build compliance infrastructures to support shortening trade reports to one minute," Michael Decker, senior vice president of research and federal policy at Bond Dealers of America wrote in their comment letter.
He also noted that BDA members "unanimously agree that the second exception provided in the proposals regarding trades executed or processed with a manual component is essential for dealer compliance with the proposals," Decker wrote. "We reiterate that without those two exceptions, the proposals would not be workable at this time."
Decker also addressed how some changes he'd like to see made to make these exceptions more workable.
"Under the proposals, trades with a manual component would be required to be reported with a new 'special condition indicator,' or flag. BDA recognizes the utility of distinguishing trades with a manual component from trades that are subject to the proposals' one-minute reporting requirement," Decker wrote. "From an operations perspective, however, it may be simpler and arguably more accurate to require a flag for trades subject to the one-minute reporting requirement rather than trades which are not."
Kenneth Bentsen, president and chief executive officer of the Securities Industry and Financial Markets Association, said that a manual trade exception is necessary if the proposal is implemented but generally thinks the proposal aims in the wrong direction.
"Fundamentally, subjecting the fixed income market to trade reporting requirements that appear to be inspired by the equities markets is misguided," Bentsen wrote in SIFMA's comment letter. "The fixed income markets, including the municipal securities market, are not the equity market and over-the-counter execution, where elements of trading and post-execution processing rely on manual processes, or are subject to still developing and non-comprehensive automation, remains common."
The proposals also state that for manual trades, the required reporting time will be reduced from 15 minutes in the first year, ten minutes in the second year and to five minutes in the third year and thereafter. But the technology to accommodate such a move doesn't exist and may never exist, Bentsen noted.
"Because of the evolutionary nature of the process towards faster reporting, the SROs should implement a pause at the ten minute reporting standard to give the industry and the SROs a meaningful opportunity to examine and discuss the results of the shorter reporting time, consider the effects on trading costs, bid/ask spread, concentration of trading activity, and market liquidity, and then decide on the best pathway to shorter reporting periods," Bentsen wrote.
Others noted the improvements already made to trading and pricing information in recent years, and suggested that attempts to speed things up for the sake of it may have unintended consequences.
"Transparency in the pricing and trading of municipal securities has improved dramatically over the past decade and is more than adequate for fairness in the marketplace and protection of market participants," wrote Ben Watkins, director of the State of Florida's Division of Bond Finance. "The municipal securities market is not and never will be an exchange traded market in which real-time reporting of prices and trades matters."
"The proposed amendment appears to be regulation for regulations' sake with no corresponding benefits being provided for fairness in the marketplace or the protection of investors," Watkins added. "The argument that liquidity will be improved because of more real-time pricing ignores the practical realities of the municipal market and serves to enrich technology firms, algorithmic traders and others seeking to monetize their technological capabilities."
While almost all commenters objected to the proposals, some have made it clear what they'll do if the SEC adopts it as is.
"Fixed income markets have performed remarkably well despite multiple crises and black swan events. Yet, the SEC is demanding that MSRB and FINRA change rules without identifying any market failure or investor harm," said Chris Iacovella, president and chief executive officer of the American Securities Association. "The only justification we have gotten for this proposal is that the SEC Chair wants it. Well, we reject that reasoning because this is not a monarchy, and the Chair of the SEC is not our king. We will not hesitate to protect this well-functioning market in court if the SEC finalizes this legally and economically flawed rule."
The SEC can choose to accept the proposal as is, or could require the MSRB to amend it.
