WASHINGTON — Dealers’ obligations under the Municipal Securities Rulemaking Board’s best execution rule became clearer Thursday after the MSRB published guidance specifying that a firm need not post a bid-wanted on multiple alternative trading systems to comply with the rule.
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“Clarifying guidance is always important to help ensure understanding of and regulatory compliance with our rules,” said MSRB Chief Regulatory Officer Lanny Schwartz. “In the years since the best-ex rule took effect, we’ve had the opportunity to engage with market participants about its practical implications. Today we are amending our guidance appropriately as a result of feedback we received, both informally and through the formal comment process.”
The best execution rule, which took effect in 2016 after a nearly two-year rulemaking process, requires dealers to use “reasonable diligence” in seeking the best prices for their customers under the prevailing market conditions. One of the factors considered in determining reasonable diligence under the rule is “the number of markets checked,” which has led to the practice of posting bid-wanteds on multiple ATSs or with multiple broker’s brokers.
ATSs are platforms that function similarly to an exchange, bringing together purchasers and sellers of securities. A broker’s broker is a dealer or a separately operated and supervised division or unit of a dealer that primarily handles transactions for other dealers.
The guidance states that the use of alternative trading systems and brokers’ brokers can create exposure to multiple dealers, each of which can constitute a separate market.
“However, utilizing one ATS, one broker’s broker or other similar market will not qualify categorically as reasonable diligence in compliance with Rule G-18,” the guidance explains. “To the extent a dealer checks only one ATS, broker’s broker or other similar market when executing customer orders, the dealer’s policies and procedures should establish what facts and circumstances may allow for the checking of only one such market.”
Leslie Norwood, managing director and associate general counsel of the Securities Industry and Financial Markets Association, said SIFMA was pleased the MSRB was receptive to the group's comments.
"The final guidance makes clear that that each dealer reached constitutes a market," Norwood said. "We feel this clarification benefits all market participants by eliminating the perception of the need to post the same bid-wanted simultaneously on multiple trading platforms, which creates a false perception of liquidity.”
The MSRB is not trying to discourage dealers from posting bid-wanteds on multiple platforms, however, as both the board and dealers believe doing so may be warranted in some situations. Bond Dealers of America said in a comment letter last year, for example, that a dealer may have concerns regarding what kinds of bids it may receive on or from any given ATS or broker’s broker and in such cases might choose to post on more than one.
“This simultaneous posting is not prohibited by Rule G-18 and the practice — depending on the specific situation — may be consistent with a dealer’s best-execution obligation and be beneficial to customers,” the MSRB said in a release.
