WASHINGTON – The Municipal Securities Rulemaking Board plans to amend its proposal that would require dealers to disclose their markups and markdowns in principal trades with retail customers.
The amendments will be "minor" and technical and will "not change the substance of the proposal in any way," said MSRB executive director Lynnette Kelly.
They will be filed in the coming weeks, she said during a press call about the MSRB's first quarterly meeting of its fiscal 2017, which was held here last week.
Kelly added that the MSRB, which is coordinating with the Financial Industry Regulatory Authority, is "committed to moving forward with the proposal."
Dealer groups have said the proposal and accompanying guidance on how to determine prevailing market price are overly complex and would hurt liquidity. They have sought revisions and new guidance that would allow for compliance through dealers' automated systems.
Kelly called the comments that groups filed with the Securities and Exchange Commission "thoughtful" and "constructive" and said the MSRB will file a response to the comments in the near future.
The MSRB's proposed changes would be made to its Rules G-15 on confirmation and G-30 on prices.
The rule changes would require a dealer, which buys or sells munis for or from its own account to a retail customer and engages in one or more offsetting transactions on the same trading day in the same security, to disclose its markups and markdowns in the confirmation it sends the customer.
The MSRB proposal, filed with the SEC on Sept. 2, also establishes a waterfall of factors for determining prevailing market price, which dealers would then use to calculate their compensation. Dealers would initially look at their contemporaneous trades of the same muni with other dealers or customers to establish a presumptive prevailing market price. They would then make a series of other successive considerations if that data is not available. They can look at contemporaneous trades of the muni in interdealer trades, then trades of the muni between other dealers and institutional investors, then trades on alternative trading systems or other electronic platforms.
Further down the waterfall, firms could look at contemporaneous trades of similar securities. The MSRB included a list of "non-exclusive factors" like credit quality, size of the issue, and comparable yield that could be used to show securities are similar.
The bottom of the waterfall allows dealers to use prices or yields derived from economic models.
The MSRB, at its meeting, also discussed potential actions related to pre-trade price transparency and primary offering practices. Both topics are large, multi-year initiatives, Kelly said.
The board has been exploring the idea of adding third-party market indicators like yield curves to its EMMA system and is also planning to add a new issue calendar and new issue scales to the system in the coming months, Kelly said about potential pre-trade price developments.
"Professional investors have access to a wide range of pre-trade information," Kelly said. "The goal is to ascertain what kinds of pre-trade information might be valuable for a retail investor."
The board's work on primary offering practices in the market will begin with the MSRB staff doing a holistic review of the board's rules related to the topic with the goal of enhancing existing protections under the rules. The review will include analysis of syndicate practices as well as further discussion of amending MSRB Rule G-34 on CUSIP numbers, new issue, and market information requirements.
Other discussions at the board meeting included an agreement to publish a request for comment on proposed updates to MSRB Rule G-26 on customer account transfers that would modernize it and make it more consistent with similar rules of other regulators.
The board has also agreed to publish interpretive guidance on the application of certain MSRB rules in situations where investment advisors have been given full discretion to act for their clients' accounts. The planned guidance is a response to the MSRB receiving questions from dealers on the topic.
