# Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change To Amend MSRB Rule G-14 To Shorten the Timeframe for Reporting Trades in Municipal Securities to the MSRB > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-01394 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** January 26, 2024 - **Citation:** 89 FR 5384 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-99402; File No. SR-MSRB-2024-01] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change To Amend MSRB Rule G-14 To Shorten the Timeframe for Reporting Trades in Municipal Securities to the MSRB January 19, 2024. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act” or “Exchange Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on January 12, 2024, the Municipal Securities Rulemaking Board (“MSRB” or “Board”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the MSRB. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The MSRB filed with the Commission a proposed rule change to (i) amend Rule G-14 RTRS Procedures under MSRB Rule G-14, on reports of sales or purchases (“Rule G-14”), to shorten the amount of time within which brokers, dealers and municipal securities dealers (individually and collectively, “dealers”) must report most transactions to the MSRB, require dealers to report certain transactions with a new trade indicator, and make certain clarifying amendments, and (ii) make conforming amendments to MSRB Rule G-12, on uniform practice (“Rule G-12”), and the MSRB's Real-Time Transaction Reporting System (“RTRS”) Information Facility (“IF-1”) to reflect the shortened reporting timeframe (collectively, the “proposed rule change”). If the Commission approves the proposed rule change, the MSRB will announce the effective date of the proposed rule change in a regulatory notice to be published on the MSRB website. The text of the proposed rule change is available on the MSRB's website at https://msrb.org/2024-SEC-Filings, at the MSRB's principal office, and at the Commission's Public Reference Room. 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 MSRB 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 MSRB has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Background Since 2005, the MSRB has collected and disseminated information from dealers about their municipal securities purchase and sale transactions. 3 Dealers currently are required to report their transactions to RTRS within 15 minutes of the Time of Trade, 4 absent an exception, 5 in accordance with Rule G-14, the Rule G-14 RTRS Procedures, and the RTRS Users Manual. 6 3 See Exchange Act Release No. 50605 (Oct. 29, 2004), 69 FR 64346 (Nov. 4, 2004), File No. SR-MSRB-2004-06; see also MSRB Notice 2004-29 (Approval by the SEC of Real-Time Transaction Reporting and Price Dissemination: Rules G-12(f) and G-14) (September 2, 2004). 4 Rule G-14 RTRS Procedures Section (d)(iii) defines “Time of Trade” as the time at which a contract is formed for a sale or purchase of municipal securities at a set quantity and set price. 5 Transactions in securities without CUSIP numbers, transactions in municipal fund securities, and certain inter-dealer securities movements not eligible for comparison through a clearing agency are currently exempt from the reporting requirements under Rule G-14(b)(v). 6 The RTRS Users Manual is available at https://www.msrb.org/RTRS-Users-Manual. Prior to the creation of RTRS in 2005, the MSRB collected trade data on an end-of-day basis for next day dissemination and surveillance purposes through a predecessor transaction reporting system. The transaction information collected by the MSRB in accordance with Rule G-14 serves the dual primary purposes of market transparency and market surveillance. 7 To advance the goal of market transparency, the MSRB disseminates trade reporting information from RTRS to paid subscribers through certain data subscription feeds. These data subscription feeds serve as the core source of price-related information used by market participants, industry utilities and vendors that, among other things, operate pricing-related tools and services used throughout the municipal market to support execution of trades at fair and reasonable prices that reflect current market values. To further advance the goal of market transparency and to make such price-related information available to individual investors and other market participants contemporaneously with data flowing to market professionals through the RTRS subscription feeds, the MSRB disseminates trade reporting information free of charge to the general public through the MSRB's centralized Electronic Municipal Market Access (“EMMA®”) website. 8 7 See Rule G-14(b)(i). Transaction information collected by RTRS is also used in connection with assessments under MSRB Rule A-13(d). 8 See MSRB Notice 2009-22 (MSRB Receives Approval to Launch Primary Market Disclosure Service of MSRB's Electronic Municipal Market Access System (EMMA) for Electronic Dissemination of Official Statements) (May 22, 2009). To advance the goal of market surveillance, the MSRB maintains a comprehensive database of transaction information, which is made available to the examining authorities, including the Commission, the Financial Industry Regulatory Authority (“FINRA”), and other appropriate regulatory agencies. The availability of trade reporting data strengthens market transparency, promotes investor protection and reduces information asymmetry between institutional and retail investors. Fixed income markets have changed dramatically since the current 15-minute requirement went into effect in 2005, including a significant increase in the use of electronic trading platforms or other electronic communication protocols to facilitate the execution of transactions. The MSRB has continued to explore ways to modernize the rule and provide for more timely, granular and informative data to further enhance the value of disseminated transaction data. In doing so, the MSRB has taken a measured and data-driven approach, using available trade reporting data and the public comment process to help inform its policy objectives and actions. The MSRB has utilized a series of concept releases, requests for comments and extensive outreach to solicit input from market participants and stakeholders. 9 As a result of these efforts and of RTRS re-engineering to ensure its on-going effectiveness as demands on the system were expected to rise over time, the MSRB has implemented various refinements to RTRS, RTRS Information Facility (IF-1), and the content and quality of trade-related information made available to investors and the public. 10 9 See MSRB Notice 2013-02 (Request for Comment on More Contemporaneous Trade Price Information Through a New Central Transparency Platform) (Jan. 17, 2013); MSRB Notice 2013-14 (Concept Release on Pre-Trade and Post-Trade Pricing Data Dissemination through a New Central Transparency Platform) (July 31, 2013); MSRB Notice 2014-14 (Request for Comment on Enhancements to Post-Trade Transaction Data Disseminated Through a New Central Transparency Platform) (Aug. 13, 2014); MSRB Notice 2022-07 (Request for Comment on Transaction Reporting Obligations under MSRB Rule G-14) (Aug. 2, 2022) (the “2022 Request for Comment”). 10 See, e.g., Exchange Act Release No. 75039 (May 22, 2015), 80 FR 31084 (June 1, 2015), File No. SR-MSRB-2015-02, and Exchange Act Release No. 77366 (Mar. 14, 2016), 81 FR 14919 (Mar. 18, 2016), File No. SR-MSRB-2016-05 (expanding and adding trade indicators); Exchange Act Release No. 83038 (Apr. 12, 2018), 83 FR 17200 (Apr. 18, 2018), File No. SR-MSRB-2018-02 (modernizing RTRS Information Facility (IF-1)). The MSRB has found that, in 2022, approximately 73.7 percent of the trades in the municipal securities market that are currently subject to the 15-minute reporting timeframe were reported within one minute of execution, and approximately 97 percent of trades in the municipal securities market that are currently subject to the 15-minute reporting timeframe were reported within five minutes of execution. 11 In light of the technological advances and evolving market practices in the intervening 19 years since the MSRB first adopted the 15-minute reporting requirement, including the increase in electronic trading, and consistent with the MSRB's longstanding goals of increasing transparency and improving access to timely transaction data, the MSRB is proposing updates to modernize the reporting timeframes and provide timelier transparency. In this effort, the MSRB would continue to assess its RTRS reporting requirements in light of market developments, including reporting timeframes, and consider whether any further modifications are warranted. 11 See infra “Self-Regulatory Organization's Statement on Burden on Competition—Trade Reporting Analysis” in Section 4(a) Table 1. Trade Report Time by Trade Size—Cumulative Percentages. January to December 2022. Proposed Rule Change The proposed rule change is intended to bring about greater market transparency through more timely disclosure and dissemination of information to market participants and market-supporting vendors so that the information better reflects current market conditions on a real-time basis, while carefully balancing the considerations raised by commenters throughout the rulemaking process. The proposed amendments to Rule G-14 RTRS Procedures under Rule G-14 would: • Establish a baseline one-minute trade reporting requirement; • Establish a requirement that, with limited exceptions, trades be reported as soon as practicable and that dealers adopt policies and procedures in connection with this requirement; • Create two new exceptions to the new one-minute reporting requirement, consisting of (1) a 15-minute exception for dealers with “limited trading activity,” and (2) a phased-in approach for implementation from 15 minutes to an eventual five-minute reporting requirement for “trades with a manual component”; • Maintain and clarify all existing exceptions to the current 15-minute reporting requirement, as well as the 15-minute from start of next day reporting requirement for trades conducted outside the trading day, so that they would continue to apply under the new one-minute reporting requirement; • Require that dealers reporting any trade with a manual component use a new special condition indicator when the trade is reported to the MSRB; • Specify that dealers may not purposely delay the execution or reporting of a transaction, introduce any manual steps following the Time of Trade, or otherwise modify any steps to execute or report the trade for the purpose of utilizing the manual trade exception; • Provide that a rule violation would be found where there is a “pattern or practice” of late trade reporting without “reasonable justification or exceptional circumstances”; and • Clarify within Rule G-14 RTRS Procedures the usage of all existing and new special condition indicators. The proposed rule change would also make certain conforming technical changes to Rule G-12(f)(i) and IF-1. A more detailed description of the proposed rule change follows. If the proposed rule change is approved, the MSRB would review the available trade reporting information and data arising from implementation of the changes to trade reporting introduced by the proposed rule change, including but not limited to the two exceptions to the one-minute reporting requirement. Such monitoring would inform any further potential changes by the MSRB, through future rulemaking, to the trade reporting requirements due to increasing marketplace and technology efficiencies, process improvements, continuing or new barriers to accelerated reporting, unanticipated market impacts, or other factors. New Baseline Reporting Requirement: One Minute After the Time of Trade Proposed amendments to Rule G-14 RTRS Procedures Section (a)(ii) generally would provide that transactions effected with a Time of Trade during the hours of an RTRS Business Day 12 must be reported to an RTRS Portal 13 “as soon as practicable, but no later than one minute” (rather than within the current 15-minute standard) after the Time of Trade, subject to several existing reporting exceptions, which would be retained in the amended rule, 14 and two new intra-day reporting exceptions relating to dealers with limited trading activity and trades with a manual component that would be added by the proposed rule change, as described below. 15 Except for those trades that would qualify for a reporting exception, all trades currently required to be reported within 15 minutes after the Time of Trade would, under the proposed rule change, be required to be reported no later than one minute after the Time of Trade. 12 Rule G-14 RTRS Procedures Section (d)(ii) defines “RTRS Business Day” as 7:30 a.m. to 6:30 p.m., Eastern Time, Monday through Friday, unless otherwise announced by the MSRB. 13 RTRS has three “Portals” for submission of transaction data, and aspects of RTRS are designed to function in coordination with the Real-Time Trade Matching (“RTTM”) system of the Depository Trust & Clearing Corporation (“DTCC”) in conjunction with its subsidiary National Securities Clearing Corporation. Rule G-14 RTRS Procedures Section (a)(i) describes the three RTRS Portals: Message Portal used for trade submission and trade modification as described in Section (A) thereof; RTRS Web Portal used for low-volume transaction submission and modification as described in Section (B) thereof; and RTTM Web Portal used only for inter-dealer transactions eligible for automated comparison as described in Section (C) thereof. 14 Three of these existing exceptions, consisting of List Offering Price/Takedown Transactions, trades in certain short-term or variable rate instruments, and away from market trades, require that trades be reported by the end of the day on which they are executed and do not rely on the Time of Trade. These three end-of-trade-date reporting exceptions would be retained without change and would be redesignated as Rule G-14 RTRS Procedures Section (a)(ii)(A)(1), (2) and (3), respectively. Two other existing exceptions for certain special circumstances would also be retained without change, consisting of dealers reporting inter-dealer “VRDO ineligible on trade date” transactions, which must be reported by the end of the day on which the trade becomes eligible for automated comparison, and of dealers reporting inter-dealer “resubmission of an RTTM cancel,” which must be reported by the end of the next RTRS Business Day following cancellation of the original trade. These two exceptions would be redesignated as Rule G-14 RTRS Procedures Sections (a)(ii)(B)(1) and (2), respectively. 15 The two new intra-day reporting exceptions, consisting of trades by dealers with limited trading activity and trades with a manual component, would be designated as Rule G-14 RTRS Procedures Sections (a)(ii)(C)(1) and (2), respectively. New Requirement To Report Trades “as Soon as Practicable” The proposed amendment to Rule G-14 RTRS Procedures Section (a)(ii) adds a new requirement that, absent an exception, trades must be reported as soon as practicable (but no later than one minute after the Time of Trade). In addition, this same “as soon as practicable” requirement would apply to trades subject to longer trade reporting deadlines under the two new exceptions for dealers with limited trading activity pursuant to Rule G-14 RTRS Procedures Section (a)(ii)(C)(1) and Supplementary Material .01, 16 or trades with a manual component pursuant to Rule G-14 RTRS Procedures Section (a)(ii)(C)(2) and Supplementary Material .02, 17 as described below. 16 See infra “Purpose—Proposed Rule Change—Exceptions to the Baseline Reporting Requirement—Exception for Dealers with Limited Trading Activity.” 17 See infra “Purpose—Proposed Rule Change—Exceptions to the Baseline Reporting Requirement—Exception for Trades with a Manual Component.” The new “as soon as practicable” language, which does not currently appear in Rule G-14 RTRS Procedures, would harmonize this element of RTRS trade reporting requirements for municipal securities with FINRA's trade reporting requirement for its Trade Reporting and Compliance Engine (“TRACE”) for TRACE-eligible securities. 18 Thus, while Rule G-14 RTRS Procedures do not currently explicitly prohibit a dealer from waiting until the existing 15-minute deadline to report a trade notwithstanding the fact that the dealer could reasonably have reported such trade more rapidly, under the proposed rule change a dealer could not simply await the deadline to report a trade if it were practicable to report such trade more rapidly. 18 See e.g., FINRA Rule 6730(a). In connection with the new “as soon as practicable” requirement, the proposed rule change includes new Supplementary Material .03 relating to policies and procedures for complying with the “as soon as practicable” reporting requirement. Under proposed Supplementary Material .03(a), consistent with Supplementary Material .03(a) of FINRA Rule 6730, dealers would be required to adopt policies and procedures reasonably designed to comply with the “as soon as practicable” standard and would be required to implement systems that commence the trade reporting process without delay upon execution. Where a dealer has reasonably designed policies, procedures and systems in place, the dealer generally would not be viewed as violating the “as soon as practicable” requirement because of delays in trade reporting due to extrinsic factors that are not reasonably predictable and where the dealer does not intend to delay the reporting of the trade (for example, due to a systems outage). Dealers must not purposely withhold trade reports, for example, by programming their systems to delay reporting until the last permissible minute or by otherwise delaying reports to a time just before the deadline if it would have been practicable to report such trades more rapidly. For trades with a manual component, and consistent with Supplementary Material .03(b) of FINRA Rule 6730, the MSRB recognizes that the trade reporting process may not be completed as quickly as, for example, where an automated trade reporting system is used. In these cases, the MSRB expects that the regulatory authorities that examine dealers and enforce compliance with this requirement would take into consideration the manual nature of the dealer's trade reporting process in determining whether the dealer's policies and procedures are reasonably designed to report the trade “as soon as practicable” after execution. 19 19 See Supplementary Material .03(b) of FINRA Rule 6730. See also infra “Purpose—Proposed Rule Change—Exceptions to the Baseline Reporting Requirement—Exception for Trades with a Manual Component” for a discussion of the new exception for trades with a manual component. Time of Trade Discussion The “Time of Trade” is the time at which a contract is formed for a sale or purchase of municipal securities at a set quantity and set price. 20 While the definition of Time of Trade would not be changed, the precision with which the establishment of the Time of Trade for a particular transaction would become more critical in the context of the proposed shorter, one-minute reporting requirement compared to the current 15-minute reporting requirement because, absent an exception, dealers would have less time to report the trade. The time taken to report the trade is measured by comparing the Time of Trade reported by the dealer with the timestamp assigned when the initial trade report is received by an RTRS Portal. 21 For transaction reporting purposes, Time of Trade is considered to be the same as the time that a trade is “executed” and, generally, is consistent with the “time of execution” for recordkeeping purposes. 22 Importantly, the time that the trade is executed is not necessarily the time that the trade information is entered into the dealer's processing system. For example, if a trade is executed on a trading desk but not entered for processing until later, the time of execution (not the time of entering the record into the processing system) is required to be reported as the “Time of Trade.” 23 20 See current Rule G-14 RTRS Procedures Section (d)(iii). 21 See Exchange Act Release No. 49902 (June 22, 2004), 69 FR 38925 (June 29, 2004), File No. SR-MSRB-2004-02; see also MSRB Notice 2004-13 (Real-Time Transaction Reporting: Notice of Filing of Proposed Rule Change to Rules G-14 and G-12(f)) (June 1, 2004); IF-1. 22 See Rule G-8(a)(vi) and (vii); see also RTRS G-14 Transaction Reporting Procedures (FAQs regarding Time of Trade Reporting) at question 8 (Aug. 1, 1996); MSRB Notice 2016-19 (MSRB Provides Guidance on MSRB Rule G-14, on Reports of Sales or Purchases of Municipal Securities) at question 1 (Aug. 9, 2016) (the “2016 RTRS FAQs”). Pursuant to Rule G-15(a)(vi)(A), the time of execution reflected on customer confirmations is required to be the same as the time of execution reflected in the dealer's records and thus should generally be consistent with the time of trade reported by the dealer. 23 See RTRS Users Manual (Questions and Answers on Reporting Trades), at question 1 (Aug. 09, 2016), available at https://www.msrb.org/Questions-and-Answers-Notice-Concerning-Real-Time-Reporting-Municipal-Securities-Transactions. Similarly, transactions effected outside of the hours of an RTRS Business Day are required to be reported within 15 minutes after the start of the next RTRS Business Day. The time the trade was executed (rather than the time that the trade report is made) is the “Time of Trade” required to be reported. While the principles of contract law are mostly governed by state statutory and common law, generally, in order to form a valid contract, there must be at least an offer and acceptance of that offer. As a result, dealers should consider the point in time at which an offer to buy or sell municipal securities was met with an acceptance of that offer. This offer and acceptance, or a “meeting of the minds,” 24 cannot occur before the final material terms, such as the exact security, price and quantity, have been agreed to and such terms are known by the parties to the transaction. 25 Further, dealers should be clear in their communications regarding the final material terms of the trade and how such terms would be conveyed between the parties to ensure that such a valid trade contract has been formed. 26 24 See FINRA Regulatory Notice 16-30 (Trade Reporting and Compliance Engine (TRACE): FINRA Reminds Firms of their Obligation to Report Accurately the Time of Execution for Transactions in TRACE-eligible Securities) (Aug. 2016) (describing this meeting of the minds that substantively parallels the guidance provided by the MSRB in the 2016 RTRS FAQs at questions 1 and 2). 25 See MSRB Notice 2004-18 (Notice Requesting Comment on Draft Amendments to Rule G-34 to Facilitate Real-Time Transaction Reporting and Explaining Time of Trade for Reporting New Issue Trades) (June 18, 2004) (“Transaction reporting procedures define the `time of trade' as the time when a contract is formed for a sale or purchase of municipal securities at a set price and set quantity. For purposes of transaction reporting, this is considered to be the same as the time that a trade is `executed.'”) (internal citations omitted); see also 2016 RTRS FAQs at question 1. 26 See FINRA Regulatory Notice 16-30 (Trade Reporting and Compliance Engine (TRACE): FINRA Reminds Firms of their Obligation to Report Accurately the Time of Execution for Transactions in TRACE-eligible Securities) (Aug. 2016). In the context of new issue securities, the MSRB has previously stated that a transaction effected on a “when, as and if issued” basis cannot be executed, confirmed and reported until the municipal security has been formally awarded by the issuer. 27 Thus, while dealers may take orders for securities and make conditional trading commitments prior to the award, dealers cannot execute transactions, send confirmations or make a trade report prior to the time of formal award. The MSRB has previously characterized pre-sale orders as expressions of the purchasers' firm intent to buy the new issue securities in accordance with the stated terms, which order may only be executed upon the award of the issue or the execution of a bond purchase agreement. 28 Importantly, such expressions of an intent to purchase municipal securities are subject to material conditions that negate execution of an agreed upon offer and acceptance until the issuer has committed to the issuance of the securities. 27 2016 RTRS FAQs at question 2. 28 See MSRB Interpretive Guidance, Rule G-12 (Confirmation: Mailing of WAII Confirmation) (Apr. 30, 1982). In the same vein, retail orders submitted during a retail order period under MSRB Rule G-11 are viewed as conditional commitments. See MSRB Rule G-11(a)(vii) (defining the term “retail order period”). See also, e.g., MSRB Notice 2014-14 (Request for Comment on Enhancements to Post-Trade Transaction Data Disseminated Through a New Central Transparency Platform) (Aug. 13, 2014) (describing the conditional nature of conditional trading commitments). The MSRB believes that this same rationale applies to secondary market transactions where the commitment of the parties is subject to material conditions. When a sales representative of a dealer takes a customer order, but is unable to execute that order until their trader performs supervisory or other firm-mandated reviews or approvals of such order—for example, to determine that the customer order does not exceed internally-set risk and compliance parameters or to complete best-execution, suitability/best interest or fair pricing protocols that may result in a changed price or quantity to the customer or in not completing execution of the trade—the dealer reasonably may determine that the “meeting of the minds” has not yet occurred until such processes, procedures or protocols have been completed and the dealer has affirmatively “accepted” the order. In such circumstances, the dealer should be clear in its communications with its counterparty regarding the final terms of the trade and how such terms would be conveyed between the parties to ensure that such a valid trade contract has been formed, such as clearly communicating to the customer that the order should not be viewed as accepted until such processes, procedures or protocols are completed and the trade is finally executed. Such processes, procedures or protocols should be appropriately reflected in a dealer's written policies and procedures. Because the Time of Trade is tied to the contractual agreement (that is, offer and acceptance, whether oral or written) between the parties to a transaction, a dealer and its counterparty may come to an express agreement as to the Time of Trade for a given transaction, as appropriate, that is consistent with the time at which the agreement becomes binding upon the parties under contract law. Exceptions to the Baseline Reporting Requirement Proposed amendments to Rule G-14 RTRS Procedures Section (a)(ii) add two new exceptions to the proposed one-minute reporting requirement. New Section (C)(1) provides an exception for a dealer with “limited trading activity” and new Section (C)(2) provides an exception for a dealer reporting a “trade with a manual component.” These two new exceptions would have the narrowly-tailored purpose of addressing the timing of trade reporting for the dealers and transactions qualifying for one of the exceptions (either retaining the current 15-minute timeframe or taking a more stepwise approach to shortening the reporting timeframe). As with the existing exceptions, these two new exceptions would not alter or diminish any of the investor protections afforded by other MSRB rules or federal securities laws or regulations applicable to pricing, best execution, disclosure, suitability/best interest, and other aspects of the trades being reported. Exception for Dealers With Limited Trading Activity A dealer with “limited trading activity” would be excepted from the one-minute reporting requirement pursuant to new Section (a)(ii)(C)(1) and would instead be required to report its trades as soon as practicable, but no later than 15 minutes after the Time of Trade for so long as the dealer remains qualified for the limited trading activity exception, as further specified in new Supplementary Material .01. 29 29 Transactions effected by such a dealer with a Time of Trade outside the hours of an RTRS Business Day would be permitted to be reported no later than 15 minutes after the beginning of the next RTRS Business Day pursuant to Rule G-14 RTRS Procedures Section (a)(iii). As is the case today, transactions for which an end-of-trade-day or post-trade-day reporting exception is available under redesignated Sections (A) and (B) would continue to have that exception available. Proposed Section (d)(xi) of Rule G-14 RTRS Procedures defines a dealer with limited trading activity as a dealer that, during at least one of the prior two consecutive calendar years, reported to an RTRS Portal fewer than 1,800 transactions, excluding transactions exempted under Rule G-14(b)(v) and transactions specified in Rule G-14 RTRS Procedures Sections (a)(ii)(A) and (B) ( i.e., transactions having an end-of-trade-day reporting exception). 30 A dealer relying on this exception to report trades within the 15-minute timeframe, rather than the new standard one-minute timeframe, must confirm that it meets the criteria for a dealer with limited trading activity for each year during which it continues to rely on the exception ( e.g., the dealer could confirm its eligibility based on its internal trade records and by checking MSRB compliance tools, as described below, which would indicate a dealer's transaction volume for a given year). 31 If a dealer does not meet the criteria for a given calendar year (that is, has 1,800 or more transactions not having an end-of-trade-day or post-trade-day reporting exception in both preceding calendar years), such dealer would not be eligible for the exception, after a three-month grace period at the beginning of such calendar year, for transactions reported on and after April 1 of such calendar year. Therefore, the dealer would be required to report transactions to RTRS no later than one minute after the Time of Trade for the remainder of that calendar year, unless another exception under the rule applies. A dealer that meets the criteria for a given calendar year may utilize the exception on or after January 1 of such calendar year. 32 30 This number of transactions is expected to capture approximately 1.5 percent of the trades in the municipal securities markets in a given calendar year, based on transaction data from calendar year 2022, and generally aligns with FINRA's proposal to similarly shorten trade reporting requirements for TRACE-eligible securities, in which FINRA would except dealers with similarly limited trading activity for the respective markets of TRACE-eligible securities. See File No. SR-FINRA-2024-004 (Jan. 11, 2024) (the “2024 FINRA Proposed Rule Change”). 31 See infra “Purpose—Proposed Rule Change—Exceptions to the Baseline Reporting Requirement—Exception for Dealers with Limited Trading Activity.” 32 A previously active dealer that newly becomes eligible for the exception for dealers with limited trading activity following the first year of the implementation of the proposed rule change may continue to see their trades marked as late on RTRS report cards and related RTRS feedback based on the one-minute deadline for a short period of time at the beginning of a new calendar year until the MSRB is able to systematically update the dealer's status in the RTRS system. Any such late indicator would not, for examination or enforcement purposes, be viewed as a violation by a dealer that otherwise was qualified as a dealer with limited trading activity at the time of the report. For example, assume the following hypothetical trade counts for Dealer X for a given calendar year: 33 33 While the first two years of data shown in the chart represent trades occurring in years prior to the likely effective date of the proposed rule change, such data would be used to determine whether a dealer would be eligible for the limited trading activity exception in the first years after the effective date. The chart assumes that the first calendar year in which the new reporting timeframes under the proposed rule change, including the exception for a dealer with limited trading activity, would be effective is calendar year 2026. Calendar year Trade count 34 Eligible for exception during calendar year? 2024 1,900 N/A. 2025 1,700 N/A. 2026 2,000 Yes, based on 2025 trade count below the 1,800 threshold. 2027 1,900 Yes, based on 2025 trade count below the 1,800 threshold. 2028 1,700 No, based on 2026 and 2027 trade counts above the 1,800 threshold in both years (must transition reporting to one minute on and after April 1, 2028). 2029 2,000 Yes, based on 2028 trade count below the 1,800 threshold (may resume reporting in 15 minutes on January 1, 2029). Based on the hypothetical data presented in the table above, Dealer X would be eligible for the exception as a dealer with limited trading activity for the calendar years 2026 and 2027 effective January 1 of each such year, 35 based on trade count for the year 2025. However, Dealer X would no longer qualify for such an exception for the calendar year 2028. As a result, for 2028, beginning on and after April 1, 2028, after the three-month grace period, Dealer X must begin reporting all of its trades (other than those subject to another exception) no later than one minute after the Time of Trade. However, Dealer X would again qualify for calendar year 2029 as a dealer with limited trading activity based upon its 2028 trade count and may resume reporting its trades no later than 15 minutes after the Time of Trade on January 1, 2029. 34 The trade count is intended to reflect the number of transactions not subject to a reporting exception under proposed Section (a)(ii) of Rule G-14 RTRS Procedures. For purposes of illustration, the hypotheticals include manual trades subject to an intra-day exception as proposed. 35 See supra n.32. As shown above, this approach may cause some dealers' eligibility for the exception to change from year to year. However, based on substantial historical trade reporting data, the majority of dealers that are eligible for the exception are expected to stay within the exception. Similarly, the majority of dealers that are not eligible for the exception are expected to remain ineligible for the exception in subsequent years. 36 36 Approximately 30 out of 647 dealers reporting trades, or less than five percent of such dealers, were within a 20 percent deviation of 1,800 trades in 2022. Notwithstanding the foregoing, dealers with limited trading activity are reminded of the new overarching obligation to report trades as soon as practicable, as described above. 37 37 See infra “Purpose—Proposed Rule Change—New Requirement to Report Trades `as Soon as Practicable.' ” Exception for Trades With a Manual Component A “trade with a manual component” as defined in new Section (d)(xii) of Rule G-14 RTRS Procedures would be excepted from the one-minute reporting requirement pursuant to Rule G-14 RTRS Procedures Section (a)(ii)(C)(2). Instead, dealers with such trades would be required to report such trades as soon as practicable and within the time periods specified in new Supplementary Material .02, unless another exception from the one-minute reporting requirement applies under proposed Rule G-14 RTRS Procedures Sections (a)(ii)(A) and (B) ( i.e., transactions having an end-of-trade-day or post-trade-day reporting exception) or (a)(ii)(C)(1) ( i.e., transactions by dealers with limited trading activity). 38 38 Transactions effected with a Time of Trade outside the hours of an RTRS Business Day would be permitted to be reported no later than 15 minutes after the beginning of the next RTRS Business Day pursuant to Rule G-14 RTRS Procedures Section (a)(iii). Trades Having a Manual Component As proposed, Section (d)(xii) of Rule G-14 RTRS Procedures would define a “trade with a manual component” as a transaction that is manually executed or where the dealer must manually enter any of the trade details or information necessary for reporting the trade directly into an RTRS Portal (for example, by manually entering trade data into the RTRS Web Portal) or into a system that facilitates trade reporting (for example, by transmitting the information manually entered into a dealer's in-house or third-party system) to an RTRS Portal. As described below, a dealer reporting to the MSRB a trade meeting the definition for a “trade with a manual component” would be required to append a new trade indicator so that the MSRB can identify manual trades. 39 39 See infra “Purpose—Proposed Rule Change—Manual Trade Indicator.” As described therein, such new indicator would be required for any trade with a manual component, whether the dealer reports such trade within the new one-minute timeframe or the dealer seeks to take advantage of the longer timeframes permitted for trades with a manual component. This “manual” exception would apply narrowly, and would normally encompass any human participation, approval or other intervention necessary to complete the initial execution and reporting of trade information after execution, regardless of whether undertaken by electronic means ( e.g., keyboard entry), physical signature or other physical action. To qualify as a trade with a manual component, the manual aspect(s) of the trade generally would occur after the relevant Time of Trade ( i.e., the time at which a contract is formed for the transaction). Any manual aspects that precede the time of trade ( e.g., phone calls to locate bonds to be sold to a customer before the dealer agrees to sell such bonds to a purchasing customer) would normally not be relevant for purposes of the exception unless they have a direct impact on the activities that must be undertaken post-execution to enter information necessary to report the trade. 40 40 This manual exception applies to the reporting of a trade upon the trade being executed. If a report has been made and the dealer detects a mistake that requires cancellation or correction, any modification of an already submitted trade report must be performed as soon as possible pursuant to Rule G-14 RTRS Procedures Section (a)(iv). See MSRB Interpretive Guidance (Reminder Regarding Modification and Cancellation of Transaction Reports: Rule G-14) (Mar. 2, 2005), available at https://www.msrb.org/Reminder-Regarding-Modification-and-Cancellation-Transaction-Reports-Rule-G-14. While a trade modification to a previously reported automated trade may be manual in nature (for example, the trade is corrected through the RTRS Web Portal or is corrected through a dealer's system and not using a cancel and replace process), that manual modification process would not, by itself, result in the initial trade qualifying as a trade with a manual component. Where the trade correction is made through a cancel and replace process, the time of trade must reflect the time of execution of the initial trade report and not the time when the modification was reported to RTRS. While RTRS will continue to provide dealers with the option to either modify the trade or cancel and replace the trade, the MSRB has stated that modification is preferred when changes are necessary because a modification is counted as a single change to a trade report, whereas cancellation and resubmission are counted as a change and (unless the resubmission is done within the original deadline for reporting the trade) also as a late report of a trade. Id.; see also infra n.50. In that regard, while an exhaustive list cannot be provided here, the MSRB contemplates that the exception would often be appropriately applicable to the following situations, depending on the specific facts and circumstances, due to the manual nature of components of the trade execution or reporting process that would make reporting a transaction within one minute of the Time of Trade unfeasible, even where the dealer makes reasonable efforts to report the trade as soon as practicable after execution (as required): • where a dealer executes a trade by manual or hybrid means, such as voice or negotiated trading by telephone, email, or through a chat/messaging function, and subsequently must manually enter into a system that facilitates trade reporting all or some of the information required to book the trade and report it to RTRS; • where a dealer executes a trade (typically a larger-sized trade) that requires additional steps to negotiate and confirm details of the trade with a client and manually enters the trade into risk and reporting systems; • where a dually-registered broker-dealer/investment adviser executes a block transaction that requires allocations of portions of the block trade to the individual accounts of the firm's advisory clients that must be manually inputted in connection with a trade; • where an electronically or manually executed trade is subject to manual review by a second reviewer for risk management ( e.g., transactions above a certain dollar or par amount or other transactions meriting heightened risk review) and, as part of or following the review, the trade must be manually approved, amended or released before the trade is reported to RTRS; • where a dealer's trade execution processes may entail further diligence following the Time of Trade involving a manual step ( e.g., manually checking another market to confirm that a better price is not available to the customer); 41 41 Dealers experiencing significant levels of post-Time of Trade price adjustments due to such post-trade best execution processes should consider whether these processes are well suited to the dealer's obligations under MSRB Rule G-18 and whether the dealer is appropriately evaluating when a contract has in fact been formed with its customer. • where a dealer trades a municipal security, whether for the first time or under other circumstances where the security master information may not already be populated ( e.g., information has been removed or archived due to a long lapse in trading the security), and additional manual steps are necessary to set up the security and populate the associated indicative data in the dealer's systems prior to executing and reporting the trade; • where a dealer receives a large order or a trade list resulting in a portfolio of trades with potentially numerous unique securities involving rapid execution and frequent communications on multiple transactions with multiple counterparties, and the dealer must then book and report those transactions manually, one by one; 42 42 In instances where a dealer trades a basket of securities at a single price for the full basket, rather than individual prices for each security based on its then-current market price, such price likely would be away from the market, requiring inclusion of the “away from market” special condition indicator and qualifying for an end-of-trade-day reporting exception under proposed Rule G-14 RTRS Procedures Section (a)(ii)(A)(3). • where a broker's broker engages in mediated transactions that involve multiple transactions with multiple counterparties; and • where a dealer reports a trade manually through the RTRS Web Portal. Dealers should review their trade flow and processes and consider which of their trades would be deemed a “trade with a manual component” under the proposed rule change. 43 43 Dealers should undertake this review regardless of whether they intend to take advantage of the longer timeframes permitted for trades with a manual component since all reports of trades meeting the definition of a trade with a manual component would be required to append the new manual trade indicator, as described infra “Purpose—Proposed Rule Change—Manual Trade Indicator.” The appropriateness of treating any step in the trade execution and reporting process as being manual must be assessed in light of the anti-circumvention provision included in the proposed rule change with regard to the delay in execution or insertion of manual tasks for the purpose of meeting this new exception. 44 New Supplementary Material .02(a) would require all trades with a manual component to be reported as soon as practicable and would specify that in no event may a dealer purposely delay the execution of an order, introduce any manual steps following the Time of Trade, or otherwise modify any steps prior to executing or reporting a trade for the purpose of utilizing the exception for manual trades. 45 New Supplementary Material .03 would require that dealers adopt policies and procedures for complying with the as soon as practicable reporting requirement, including by implementing systems that commence the trade reporting process without delay upon execution and provides for additional guidance for regulatory authorities that enforce and examine dealers for compliance with this requirement to take into consideration the manual nature of the dealer's trade reporting process. 46 44 See infra “Purpose—Proposed Rule Change—Exceptions to the Baseline Reporting Requirement—Exception for Trades with a Manual Component—Prohibition on Purposeful Insertion of Manual Steps in Trade Reporting Process.” 45 Id. 46 See infra “Purpose—Proposed Rule Change—New Requirement to Report Trades `as Soon as Practicable.' ” In light of the overarching obligation to report trades as soon as practicable, dealers should consider the types of transactions in which they regularly engage and whether they can reasonably reduce the time between a transaction's Time of Trade and its reporting, and more generally should make a good faith effort to report their trades as soon as practicable. 47 Each dealer seeking to comply with the proposed rule change—including the one-minute reporting requirement and new or existing exceptions from such requirement—should consider the extent to which it can automate its trade reporting and related execution processes, consistent with its client's needs and the dealer's best execution and other regulatory obligations. Where automation is not feasible at a reasonable cost in light of the specific facts and circumstances with respect to the dealer's trading activity and overall business ( e.g., the level, nature and economic viability of its activity in municipal securities), dealers should be implementing more efficient trade entry processes to meet the applicable reporting requirement, including the new requirement to report trades as soon as practicable, particularly with a view to the phased-in reduction in the reporting timeframe for trades with a manual component under the proposed rule change where a process that may provide sufficient time to report timely during the first year may not be sufficiently efficient to meet the further shortened timeframe in a subsequent year. The MSRB expects that dealers would periodically assess their systems and processes to ensure that they have implemented sufficiently efficient policies and procedures for timely trade reporting. 47 See infra “Purpose—Proposed Rule Change—Exceptions to the Baseline Reporting Requirement—Exception for Trades with a Manual Component.” For trades with a manual component, the MSRB recognizes that the trade reporting process may not be completed as quickly as, for example, where an automated trade reporting system is used. In these cases, the MSRB expects that the regulatory authorities that examine dealers and enforce compliance with this requirement would take into consideration the manual nature of the dealer's trade reporting process in determining whether the dealer's policies and procedures are reasonably designed to report the trade “as soon as practicable” after execution. The MSRB currently collects and analyzes data regarding dealers' historic reporting of transactions to RTRS under various scenarios and such data will continue to be available to the regulators for analysis under the proposed one-minute standard. Subject to the Commission approval of the proposed rule change, the MSRB would be reviewing the use of the manual exception and would share with the examining authorities any analyses resulting from such reviews. Phase-In Period for Trades With a Manual Component New Supplementary Material .02(b) would subject trades with a manual component to a phase-in period for timely reporting over three years (“phase-in period”). Specifically, during the first year of effectiveness of the exception, trades meeting this definition would be required to be reported as soon as practicable, but no later than 15 minutes after the Time of Trade. 48 During the second year, such trades would be required to be reported as soon as practicable, but no later than 10 minutes after the Time of Trade. After the second year and thereafter, such trades would be required to be reported as soon as practicable, but no later than five minutes after the Time of Trade. 48 While the deadline for reporting during this first year would remain the same as the current 15-minute timeframe, such trade reports would also be subject to the new requirement that they be reported as soon as practicable. See supra “Purpose—Proposed Rule Change—New Requirement to Report Trades `as Soon as Practicable.' ” In establishing the phase-in period, the MSRB intends to provide sufficient time for dealers to implement programming and/or other policy and process changes necessary to meet an eventual five-minute reporting requirement, as well as to provide regulators an opportunity to assess any potential market impact from the gradual reduction in reporting timeframe. However, dealers are also reminded that the “as soon as practicable” reporting obligation as described above may, depending on the facts and circumstances, require quicker reporting than the applicable outer reporting obligation during and after the phase-in period. For example, while dealers must report their trades with a manual component no later than 15 minutes from the Time of Trade during the first year that the rule is operational, dealers should be reviewing their policies, procedures and practices and considering whether they can report such trades more quickly. In general, the MSRB would expect a dealer's trade reporting statistics to show overall improvements in trade reporting speed without compromising data quality, due to the new “as soon as practicable” obligation and the two new intra-day exceptions. If the proposed rule change is approved, the MSRB would be reviewing the available trade reporting information and data arising from implementation of the changes to trade reporting introduced by the proposed rule change, including but not limited to the two exceptions to the one-minute reporting requirement, as well as marketplace developments, feedback from market participants, and examination or enforcement findings from the Commission, FINRA and the other appropriate regulatory agencies. Such monitoring would inform any further potential changes by the MSRB to the trade reporting requirements. Prohibition on Purposeful Insertion of Manual Steps in Trade Reporting Process As noted above, new Supplementary Material .02(a) would specifically prohibit dealers from purposely delaying the execution of an order, introducing any manual steps following the Time of Trade, or otherwise purposefully modifying any steps to execute or report a trade to utilize the exception for manual trades. This would not prohibit reasonable manual steps that are taken for legitimate purposes (such as a manual review of trades that exceed certain risk thresholds or that meet certain criteria for regulatory purposes). Further, this prohibition would not apply to any steps that are taken prior to the time of trade that do not have the effect of delaying the subsequent reporting of such trade. It is important to note that a manual step added to the trade execution or reporting process that may have only a nominal or pretextual purpose other than qualifying a trade for the exception for manual trades, particularly where such purpose can be effectively fulfilled in an alternative manner that does not introduce such manual step into the trade execution or reporting process, may be viewed as being made for the purpose of qualifying for this exception within the meaning of proposed Supplementary Material .02(a), depending on the facts and circumstances. This express prohibition is intended to facilitate movement in the direction of more timely reporting and increased transparency in circumstances where there is no reasonable justification for the delay in trade execution and related subsequent trade reporting or for insertion of manual steps after the Time of Trade. Manual Trade Indicator Proposed amendments to Rule G-14 RTRS Procedures Section (b)(iv) would require the report of a trade meeting the MSRB's definition for a “trade with a manual component,” as defined in proposed Section (d)(xii) of Rule G-14 RTRS Procedures, 49 to append a new trade indicator to such a trade report. This indicator would be mandatory for every trade that meets the standard to append the indicator, 50 regardless of whether the trade is actually reported within one minute after the Time of Trade, is reported within the applicable timeframe under the manual trade exception or is otherwise subject to another reporting exception. 49 See supra “Purpose—Proposed Rule Change—Exceptions to the Baseline Reporting Requirement—Exception for Trades with a Manual Component—Trades Having a Manual Component.” 50 Rule G-14 RTRS Procedures Section (a)(iv) currently requires that transaction data that is not submitted in a timely and accurate manner must be submitted or corrected as soon as possible. See also supra n.40. The manual trade indicator is not intended to be used to reflect the manual nature of any correction to a prior trade report; rather the use of the indicator is driven solely by whether or not the initial trade had a manual component. In addition to serving as a critical component of the manual trade exception, this trade indicator would allow the MSRB to collect additional data to help it better understand the extent to which the municipal securities market continues to operate manually. 51 Such understanding would assist the MSRB in engaging with market participants regarding impediments to greater use of automation, and help determine the effectiveness and potential impediments to full compliance with the proposed phase-in period to determine whether adjustments should be made or other next steps should be taken. 51 The manual trade indicator would be used for regulatory purposes only and would not, under the proposed rule change, be included in the trade data disseminated to the public through the EMMA website and subscription feeds. This information would help inform the MSRB regarding broader trends in the marketplace beyond the specific provisions of the proposed rule change. For example, the use of the manual trade indicator would help identify changes in the prevalence of manual trades as market conditions change or in light of other events or trends having an impact on the municipal securities market. Pattern or Practice of Late Trade Reporting Rule G-14 RTRS Procedures Section (a)(iv) currently requires that transaction data that is not submitted in a timely and accurate manner must be submitted or corrected as soon as possible—even when a dealer is late in reporting a trade, the dealer remains obligated to report such trade as soon as possible. Proposed amendments to this section would further provide that any transaction that is not reported within the applicable time period shall be designated as “late.” 52 A pattern or practice of late reporting without exceptional circumstances or reasonable justification may be considered a violation of Rule G-14. 52 Late trade designations are currently, and would continue to be, available to regulators and, through the MSRB compliance tool described below in “Purpose—Proposed Rule Change—Compliance Tools,” to the dealer submitting the late trade. See Section 2.9 of the Specifications for Real-Time Reporting of Municipal Securities Transactions in connection with error codes currently generated by RTRS with respect to late trade reports. The trade data disseminated to the public through the EMMA website and subscription feeds does not currently and would not have appended to it a late report indicator nor an indicator of which deadline was applicable (other than the indicators currently published). The determination of whether exceptional circumstances or reasonable justifications exist for late trade reporting is dependent on the particular facts and circumstances and whether such circumstances are addressed in the dealer's systems and procedures. For example, failures or latencies of MSRB, third-party or internal systems used to submit trade information generally would constitute exceptional circumstances or reasonable justifications, particularly where such incident is outside of the reasonable control of the dealer and could not be resolved by the dealer within the applicable reporting timeframe. However, dealers must have sufficiently robust systems with adequate capability and capacity to enable them to report in accordance with Rule G-14; thus, recurring systems issues in a dealer's or a vendor's systems would not be considered reasonable justification or exceptional circumstances to excuse a pattern or practice of late trade reporting. As another example, unusual market conditions, such as extreme volatility in a security or in the market as a whole, can constitute exceptional circumstances. In addition, a dealer may have reasonable justification for late trade reporting where it is executing a bid list that includes a large number of distinct securities that cannot reasonably be reported within the applicable timeframe. These three examples do not represent the only potential situations that could constitute exceptional circumstances or reasonable justification. Dealers would bear the burden of proof related to such exceptional circumstances or reasonable justification. The pattern or practice approach to determining rule violations would take into consideration factors such as the complexity of the trade, differences in market segments, differences in the execution of trades of varying types of municipal securities products, impediments to use of straight through processing and electronic trading venues, the nature and purpose of any manual steps involved in the execution and reporting of transactions with a manual component, the existence of systems and procedures that provide for reporting timeliness and any other relevant factors to determine if a rule violation has occurred. While this approach recognizes that there may be legitimate situations involving exceptional circumstances or reasonable justification in which trades may not be reported within the required time limit, dealers are reminded of the overarching obligation to report trades as soon as practicable in light of the effects of such circumstances or justification. As a result, all dealers should consider the types of transactions in which they regularly engage and whether they can reasonably reduce the time between a transaction's Time of Trade and its reporting, and more generally should make a good faith effort to report their trades as soon as practicable. The MSRB expects that the regulatory authorities that examine dealers and enforce compliance with the reporting timeframes established under Rule G-14 RTRS Procedures would focus their examination for and enforcement of the rule's timing requirements on the consistency of timely reporting and the existence of effective controls to limit late reporting to exceptional circumstances or where reasonable justifications exist for a late trade report, rather than on individual late trade report outliers. Notwithstanding such expectation, where facts and circumstances indicate that an individual late report was intentional or otherwise egregious, or could reasonably be viewed as potentially giving rise to an associated fair practice, fair pricing, best execution or other material regulatory concern under MSRB or Commission rules with respect to that or a related transaction, the regulatory authorities could reasonably determine to take action with respect to such late trade in the examination or enforcement context. Compliance Tools The MSRB would continue to provide various compliance tools to assist dealers with compliance and for examining authorities to monitor for compliance. For example, currently, if a trade is reported late, an error message indicating this fact is sent in real-time to the submitter through the Message Portal, through the RTRS Web Portal, and by means of electronic mail. Such error messages are designed to promote dealer awareness of the late report and provide an opportunity to evaluate the reason for lateness and make appropriate adjustments as needed. In addition, on a monthly basis, RTRS produces statistics on dealer performance related to the timely submission of transactions and correction of errors and provides these statistics to dealers as well as to regulators. The MSRB expects to create additional compliance tools in the form of new or modified reports for dealers and examining/enforcement authorities, allowing them to more easily monitor compliance. 53 Such tools would be expected to provide data that would permit a dealer to monitor compliance patterns as well as provide support for the dealer to determine and confirm its relevant trade count for the current and preceding calendar years, including for the purpose, among other things, of assisting dealers to determine whether the exception for dealers with limited trading activity is available. 54 Similarly, through a late trade indicator, data would be available for regulators to determine the applicable trade reporting obligation for each trade and analyze the data to assist in identifying a pattern or practice of late trade reporting, based on the specific facts and circumstances relevant to the particular trade reports. 53 For example, the MSRB currently produces a series of reports for dealers submitting trades to RTRS, including a Dealer Data Quality Report (commonly referred to as a “report card”). See MSRB Real-Time Transaction Reporting System (RTRS) Manual (Nov. 2022), available at https://www.msrb.org/sites/default/files/RTRSWeb-Users-Manual.pdf. This report describes a dealer's transaction reporting data with regard to status, match rate, timeliness of reporting, and the number of changes or corrections to reported trade data. For most statistics, the industry rate is also provided for comparison. The Lateness Breakout portion of the report has a category for each type of reporting deadline, showing how many trades were reported timely and late relative to the applicable deadline. Such reports are available in both single-month and twelve-month formats. 54 See proposed Supplementary Material .01(a), which would require a dealer relying on the exception for dealers with limited trading activity to confirm on an annual basis that it meets the criteria for a dealer with limited trading activity. Where a dealer resubmits an RTTM cancel under proposed redesignated Rule G-14 RTRS Procedures Sections (a)(ii)(B)(2), for purposes of avoiding double counting, only the original trade, if not otherwise excepted, would count for purposes of this exception and not the resubmitted trade. Technical Amendments Non-Substantive Amendments Non-substantive amendments to Rule G-14 RTRS Procedures Section (a)(ii) regroup and renumber its current Sections (A) through (C) to new Sections (A)(1) through (A)(3), renumber current Sections (D) and (E) to new Sections (B)(1) and B(2), and correct a cross-reference in Section (b)(iv) to certain of these Sections to be consistent with such renumbering. In addition, a technical amendment to Rule G-14 RTRS Procedures Section (a)(ii) changes the word “of” to “after” and omits the word “within” in the phrase “within 15 minutes of Time of Trade” for clarity and consistency of usage throughout the Rule G-14 RTRS Procedures as amended. Clarifying Amendments—Special Condition Indicators and Trades on an Invalid RTTM Trade Date The proposed rule change would make certain clarifying amendments to Rule G-14 RTRS Procedures Section (b)(iv) relating to transactions with special conditions. That Section currently specifically sets forth information regarding certain existing special condition indicators while also referencing the existence of other special condition indicators in Section 4.3.2 of the Specifications for Real-Time Reporting of Municipal Securities Transactions. The proposed clarifying amendments to Section (b)(iv) of Rule G-14 RTRS Procedures would incorporate into the language thereof reference to all applicable special condition indicators, including the new trade with a manual component indicator and existing special condition indicators previously adopted by the MSRB but that are currently only documented explicitly in the Specifications for Real-Time Reporting of Municipal Securities Transactions. 55 Other than the addition of the new trade with a manual component indicator, the proposed clarifying amendments to this provision would not make any changes to the types or usage of existing special condition indicators. 55 Each of these special condition indicators were formally adopted through MSRB rulemaking and also appear in various interpretive or other regulatory materials. See generally Section 4.3.2 and Appendix B.2 of the Specifications for Real-Time Reporting of Municipal Securities Transactions. See also Exchange Act Release No. 49902 (June 22, 2004), 69 FR 38925 (June 29, 2004), File No. SR-MSRB-2004-02; Exchange Act Release No. 55957 (June 26, 2007), 72 FR 36532 (July 3, 2007), File No. SR-MSRB-2007-01; Exchange Act Release No. 74564 (Mar. 23, 2015), 80 FR 16466 (Mar. 27, 2015), File No. SR-MSRB-2015-02. In addition, Rule G-14 RTRS Procedures Section (a)(iii) would be amended to reflect that, in addition to trades effected outside the hours of the RTRS Business Day, inter-dealer trades may be executed on certain holidays (other than those recognized as non-RTRS Business Days) that are not valid RTTM trade dates (“invalid RTTM trade date”), and in either case such trades are to be reported no later than within 15 minutes after the beginning of the next RTRS Business Day. Such invalid RTTM trade date transactions are already subject to this same next RTRS Business Day reporting requirement. 56 The proposed clarifying amendment to this provision would not make any changes to the circumstances or timing of reporting of such trades. 56 See Section 4.3.2 of the Specifications for Real-Time Reporting of Municipal Securities Transactions; Exchange Act Release No. 55957 (June 26, 2007), 72 FR 36532 (July 3, 2007), File No. SR-MSRB-2007-01. Proposed Conforming Amendments to Rule G-12 and RTRS Information Facility Proposed amendments to Rule G-12, on uniform practice, would make conforming changes to Section (f)(i) thereof to require that each transaction effected during the RTRS Business Day shall be submitted for comparison as soon as practicable, but no later than one minute after the Time of Trade unless an exception applies. The proposed rule change would also modify the IF-1 to clarify lateness checking against the applicable reporting deadline(s) provided for in proposed amendments to Rule G-14 RTRS Procedures, as opposed to the current 15-minute requirement. Effective Date and Implementation The MSRB intends to provide time for dealers and the MSRB to undertake the programming, process changes and/or vendor arrangements needed to implement the proposed rule change, as well as to provide an adequate testing period for dealers and subscribers that interface with RTRS or third parties involved in the submission and/or subscription process (including but not limited to DTCC, its RTTM system, other dealers, or other key utilities or vendors). Thus, if the proposed rule change is approved by the Commission, the MSRB would announce an effective date (for example, approximately within 18 months from such Commission approval) in a notice published on the MSRB website. Such effective date would be intended to maintain implementation of the proposed rule change on substantially the same implementation timeframe as the 2024 FINRA Proposed Rule Change. 2. Statutory Basis Section 15B(b)(2) of the Exchange Act 57 provides that the MSRB shall propose and adopt rules to effect the purposes of the Exchange Act with respect to, among other matters, transactions in municipal securities effected by dealers. Section 15B(b)(2)(C) of the Exchange Act 58 further provides that the MSRB's rules shall 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, clearing, settling, processing information with respect to, and facilitating transactions in municipal securities and municipal financial products, to remove impediments to and perfect the mechanism of a free and open market in municipal securities and municipal financial products and, in general, to protect investors, municipal entities, obligated persons and the public interest. 57 15 U.S.C. 78 o -4(b)(2). 58 15 U.S.C. 78 o -4(b)(2)(C). The MSRB believes the proposed rule change, consisting of proposed amendments to Rule G-14 RTRS Procedures under Rule G-14 as well as conforming proposed amendments to Rule G-12(f)(i) and IF-1, is consistent with Section 15B(b)(2)(C) of the Exchange Act 59 because it would promote just and equitable principles of trade, foster cooperation and coordination with personnel engaged in regulating and facilitating transactions in municipal securities, remove impediments to a free and open market in municipal securities and generally protect investors and the public interest. The proposed rule change would promote just and equitable principles of trade because it would reduce information asymmetry between market professionals (such as dealers and institutional investors) and retail investors by ensuring increased access to more timely information about executed municipal securities transactions for all investors. Currently, market professionals may in some circumstances have better or more rapid access to information about trade prices through market venues to which retail investors do not have access, and the reduction in the timeframe for trade reporting would shorten or eliminate the period during which any such asymmetry in access to such information may exist. 59 Id. The proposed rule change would foster cooperation and coordination with persons engaged in regulating and processing information, facilitating a consistent standard for trade reporting across many fixed income products, including municipal securities. As noted above, the proposed rule change was developed in close coordination with FINRA, which is proposing a similar shortened trade reporting requirement for many TRACE-eligible securities. Fostering a consistent standard across classes of securities would facilitate greater and more efficient compliance among MSRB-registered dealers, the majority of which also transact in other fixed income securities that are subject to FINRA's regulatory authority. Consistent trade reporting requirements reduce the risk of potential confusion and may reduce compliance burdens resulting from inconsistent obligations and standards for different classes of securities. A shortened trade reporting time, as facilitated by the proposed rule change, would promote regulatory consistency, reducing potential errors caused by market participants' imperfect application of differing standards when executing and reporting transactions in municipal securities. The proposed rule change would remove impediments to a free and open market in municipal securities by making publicly available more timely information about the market for and the price at which municipal transactions are executed, which is central to fairly priced municipal securities and a dealer's ability to make informed quotations. The MSRB believes that the proposed rule change would promote investor protection and the public interest through increased market transparency by reducing the timeframe for trade reporting, providing the market with more efficient pricing information, which would enhance investor confidence in the market. At the same time, the exceptions balance potential burdens for dealers with limited trading activity in municipal securities by permitting such dealers to report trades as soon as practicable but not later than the currently applicable 15-minute reporting requirement. The proposed rule change also addresses potential burdens faced by dealers engaged in complex transactions, including voice/electronically negotiated transactions involving a manual post-transaction component, by permitting a phase-in period for a gradual implementation. This approach would enable market participants to achieve compliance with the shortened reporting target over a period of time while not adversely affecting their ability to execute such transactions consistent with applicable MSRB or Commission rules. B. Self-Regulatory Organization's Statement on Burden on Competition Section 15B(b)(2)(C) of the Exchange Act 60 requires that MSRB rules not be designed to impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. The MSRB does not believe the proposed rule change to amend Rule G-14 RTRS Procedures under Rule G-14, Rule G-12(f)(i) and IF-1would result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The proposed rule change would apply the new one-minute reporting timeframe to all transactions in municipal securities currently subject to the 15-minute reporting requirement and would provide two new exceptions designed to balance the benefits of timelier reporting with the potential costs of disrupting markets from transactions most likely to realize a negative impact by the shortening of the timeframe and disproportionally impacting less active and smaller dealers. 61 60 Id. 61 See supra “Purpose—Proposed Rule Change—Exceptions to the Baseline Reporting Requirement” for a discussion of the proposed two new exceptions. The proposed rule change is intended to provide more immediate post-trade transparency in the municipal securities market and is consistent with the purposes of RTRS. In the past, the municipal securities market has sometimes been associated with information opacity and low trading volume for a majority of securities with relatively few securities that trade compared to the number of outstanding securities. 62 Information opacity likely affects retail investors more than institutional investors and other market participants; for example, pre-trade quotes are not widely available in the municipal securities market, especially for retail investors who may not have the access and may be more reliant on trade data. Furthermore, with far fewer trades in municipal securities when compared to equity securities, Treasury and corporate bonds, each additional data point from post trade reporting in municipal securities would potentially be more valuable to investors and other market participants than a data point from these other markets. The reduction in this opacity resulting from the proposed rule change would make more timely information available to all market participants and help level the playing field among retail investors, institutional investors, and dealers, thereby potentially promoting competition in the market for municipal securities. 62 Based on MSRB's trade data, approximately one percent of the outstanding municipal securities trade on a given day. Therefore, the MSRB believes the proposed rule change would not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act for the following reasons. In making this determination, the MSRB staff was guided by the MSRB's Policy on the Use of Economic Analysis in MSRB Rulemaking. 63 In accordance with this policy, the MSRB evaluated the potential impacts on competition of the proposed rule change. The proposed rule change in trade reporting time to one minute after Time of Trade is intended to better align with the actual time that it takes a dealer to report most transactions and provides more immediate transparency to the market by reducing the reporting time for the remaining transactions to as soon as practicable but no later than 15 minutes after the Time of Trade standard for trades by dealers with limited trading activity and to a deadline that would ultimately be shortened to five minutes after the Time of Trade for trades with a manual component. 63 Policy on the Use of Economic Analysis in MSRB Rulemaking is available at https://www.msrb.org/Policy-Use-Economic-Analysis-MSRB-Rulemaking. In evaluating whether there was a burden on competition, the MSRB was guided by its principles that require the MSRB to consider costs and benefits of a rule change, its impact on capital formation and the main reasonable alternative regulatory approaches. The MSRB previously shortened the trade reporting timeframe from the end of day to 15 minutes from the Time of Trade in January 2005 with the creation of RTRS. Since the 2005 change, the MSRB's analysis shows that most trades are indeed reported much sooner than the current 15-minute trade reporting deadline, potentially due at least in part to the advancement in technology. Specifically, as illustrated in Table 1 below, approximately 73.7 percent of trades in 2022 were reported within one minute after a trade execution, with another approximately 23.3 percent of trades reported between one minute and five minutes after the Time of Trade. 64 As presently reported, due in part to technological advancements, most trades already satisfy a shorter than 15-minute reporting requirement. A shorter reporting timeframe is intended to provide more immediate transparency to a market that historically has been associated with low trading volume for a majority of Committee on Uniform Securities Identification Procedures (“CUSIP”) numbers, relatively few securities that trade compared to the number of outstanding securities and sometimes has been associated with information opacity. 64 The analysis in this rule filing only includes trades reportable within 15 minutes and excludes trades that are exempt from the current 15-minute reporting time including, for example, trades flagged as being executed at the List Offering or Takedown Transactions, trades in short-term instruments maturing in nine months or less, Auction Rate Securities, Variable Rate Demand Obligations, trades in commercial paper, as well as trades “away from market,” among other exceptions. See also Rule G-14 RTRS Procedures Sections (a)(ii)(A) and (B). For purposes of the analysis in this section, if an initially reported trade was corrected later, the later timestamp was used for calculating the trade reporting time more conservatively. All figures are approximate. Trade Reporting Analysis Table 1 summarizes the MSRB's analysis comparing Time of Trade to trade reporting time for all trades required to be reported within 15 minutes in 2022. 65 Out of all reportable municipal securities trades 66 that are not subject to another end of day reporting exception or a post-trade day reporting exception, approximately 73.7 percent were reported within one minute, while 97.0 percent were reported within five minutes and 98.9 percent were reported in 15 minutes or less. 67 The MSRB observed a noticeable difference in the speed of trade reporting by different trade size groups, with the reporting time increasing with trade size. While 76.2 percent of trades with trade size of $100,000 par value or less (approximately 84.2 percent of all trades) were reported within one minute, only 38.4 percent of trades with trade size between $1,000,000 and $5,000,000 par value and 23.1 percent of trades with trade size above $5,000,000 par value were reported within one minute. A possible explanation is that larger institutional-sized trades are more likely to be executed via non-electronic means and may rely upon more manual processing steps. 68 However, smaller-sized trades are more likely executed and processed electronically, which could facilitate faster trade reporting. 65 In 2022, RTRS had the highest number of trades on record since its implementation in 2005. The record is likely attributable to interest rate rallying and volatility throughout the year, though the amount of par value traded was not a record high. The heightened level of trading persisted through 2023, with the number of trades reported to RTRS exceeding the previous record in 2022. 66 See proposed Rule G-14 RTRS Procedures Sections (a)(ii)(A) and (B) for lists of existing end of trade day reporting exceptions and post-trade day reporting exceptions. 67 By comparison, in 2021, a year with much lower overall trading volume than 2022, 76.7 percent of trades subject to the 15-minute standard were reported within one minute, 97.3 percent of such trades were reported within five minutes and 99.5 percent of trades were reported within 15 minutes. 68 MSRB staff conducted oral interviews with dealers and data providers in the fall of 2022 and the winter and spring of 2023 and was informed that larger institutional-sized trades are more likely to be executed via negotiations and involve manual processes. EN26JA24.007 Table 2 illustrates a variation in trade reporting time in 2022 between dealers with 1,800 trades or more annually during both prior two calendar years (“Active Dealers”), and dealers with less than 1,800 trades annually during at least one of the prior two calendar years (“Dealers with Limited Trading Activity”). 69 A threshold of 1,800 trades a year was selected to demonstrate that Dealers with Limited Trading Activity as a whole had a relatively small impact on the entire market and transparency, with approximately 98.5 percent of trades in 2022 conducted by Active Dealers collectively and only 1.5 percent of trades conducted by all Dealers with Limited Trading Activity. When calculating the market share by par value traded, Active Dealers conducted 98.2 percent of par value traded in 2022 while Dealers with Limited Trading Activity conducted only 1.8 percent of par value traded. 70 In 2022, out of 647 dealers conducting at least one transaction in municipal securities 474 were Dealers with Limited Trading Activity and 173 were Active Dealers. 71 This difference in trade reporting time was pronounced for the one-minute trade reporting percentages where Active Dealers had 77.2 percent of trades reported within one minute while only 47.5 percent of trades conducted by Dealers with Limited Trading Activity were reported within one minute. 69 See infra “Self-Regulatory Organization's Statement on Burden on Competition—Trade Reporting Analysis” in Table 2. 70 The proportion of trades in municipal securities conducted by Dealers with Limited Trading Activity is aligned with the proportion of aggregate trades conducted by dealers with limited trading volume in TRACE-eligible securities subject to the 2024 FINRA Proposed Rule Change when using FINRA's annual transactions threshold. See supra n.30. 71 While low in terms of the trading volume, these Dealers with Limited Trading Activity may still serve many underserved investors, especially retail and institutional investors with a regional focus. EN26JA24.008 Benefits, Costs, and Effect on Competition The MSRB considers the likely costs and benefits of a proposed rule change when the proposal is fully implemented against the context of the economic baselines. The baseline is the current iteration of Rule G-14 RTRS Procedures (a)(ii) that requires transactions to be reported within 15 minutes after the Time of Trade with limited exceptions, while the future state would be following the conclusion of the second calendar year from the effective date of the proposed rule change, with the full implementation of the gradual reduction in reporting timeframe for trades with a manual component. In performing this economic analysis and related cost-benefit estimates, the MSRB has made a number of assumptions based on 2022 RTRS data as explained in more detail below. For instance, there are few publicly available sources of information about revenue and expense data for relevant business lines of a dealer, especially in relation to potential spending on acquiring or upgrading technology and infrastructure for some dealers. The effort is further hampered by the fact that some dealers are privately-owned, who are not required to disclose business operation data in public filings. Therefore, the MSRB conducted interviews with select dealers and vendors who provide electronic trade reporting services as well as dealer subscribers of these services to gauge the likely impact from the proposed rule change. 72 The MSRB believes the analysis provides a useful projection on the scale of benefits and costs relative to the current baseline irrespective of whether an assumption changes the absolute estimated costs and benefits. 72 See supra n.68. Benefits The primary benefit of the proposed rule change on accelerated trade reporting would be improved transparency in the municipal securities market. Historically, the municipal securities market has been considered less liquid and more opaque when compared to other securities markets, with only about 1 percent of all municipal securities trading on a given trading day, and pre-trade quotes are not widely available to all market participants, especially retail investors who may not pay for vendor pricing tools and may be more reliant on trade data. 73 Therefore, post trade data is important information available to all market participants, including particularly to retail investors and the market professionals that service retail accounts. By implementing the proposed rule change, investors would receive greater advantages on trade pricing information through the reporting of more contemporaneous transactions. 74 This emphasis on contemporaneous trades as opposed to distant trades would help ensure that the pricing information remains vital, potentially decreasing trading costs and increasing liquidity. In addition, since only about 1 percent of municipal securities trade on a given trading day, 73 See Wu, Simon Z., John Bagley and Marcelo Vieira, “Analysis of Municipal Securities Pre-Trade Data from Alternative Trading Systems,” Research Paper, Municipal Securities Rulemaking Board, October 2018; Government Accountability Office (“GAO”), “Municipal Securities: Overview of Market Structure, Pricing, and Regulation,” Report to Congressional Committees, January 2012, page 6; Green, Richard C., Burton Hollifield, and Norman Schürhoff. “Financial intermediation and the costs of trading in an opaque market.” The Review of Financial Studies 20.2 (2007): 275-314. 74 As an illustration, in its 2022 Request for Comment, the MSRB's economic analysis showed that out of the universe of 251,635 “analyzed trades” with same-CUSIP-number-matched trades in 2021, where a matched trade was executed before the analyzed trade's execution but was reported after the analyzed trade's execution, approximately 27.9 percent of those analyzed trades had at least one matched trade executed more than a minute before the analyzed trade's execution. This suggests those analyzed trades would have benefited from the matched trades' execution information if matched trades were required to be reported no later than one minute after their execution times. information on trades in other comparable municipal securities would also be valuable in pricing a security. Lowering the reporting time would make more contemporaneous trades in comparable securities transparent for other transactions. 75 Finally, with far fewer trades in municipal securities when compared to equity securities, Treasury and corporate bonds, each additional data point from post trade reporting in municipal securities would potentially be more valuable to investors and other market participants than a data point from these other markets. According to established economic literature, investors, especially retail investors, benefit from transparency (more and/or better information) by enhancing their negotiation power with dealers as well as reducing dealer's own search and intermediation costs, therefore reducing customer trades' transaction costs, also known as bid-ask spread or effective spread. The MSRB believes additional data points from more contemporaneous trades in the same and/or comparable securities would increase an investor's negotiating power. Specifically, regarding trade reporting time, two research papers scrutinized the transition in 2005 from reporting trades at the end of a trading day to 15 minutes after trade execution. Both studies revealed a statistically significant decrease in the average effective spreads for customer trades. When comparing the period before and the period after January 2005, the reduction in average customer trade effective spread ranged between 11 to 28 basis points, all else being equal. 76 In addition, more timely reporting has also been shown to increase dealer market-making activities in the municipal markets, potentially enhancing market liquidity. 77 75 A 2012 report issued by the GAO stated “Broker-dealers we spoke with said that the price of a recently reported interdealer trade for a security was a particularly good indication of its value for that segment of the market. However, if a security has not traded recently, they said they instead look for recent trades in comparable securities.” See GAO, “Municipal Securities: Overview of Market Structure, Pricing, and Regulation,” Report to Congressional Committees, January 2012, page 12. 76 See Sirri, Erik, “Report on Secondary Market Trading in the Municipal Securities Market,” Research Paper, Municipal Securities Rulemaking Board, July 2014, and Chalmers, John, Liu, Yu (Steve) and Wang, Z. Jay, “The Difference a Day Makes: Timely Disclosure and Trading Efficiency in the Muni Market,” Journal of Financial Economics, 2021. Sirri (2014) estimated that following the implementation of RTRS in January 2005, the average customer trade spread was reduced, all other relevant factors being equal, by 11 basis points within the first six-month period and up to 20 basis points within the one-year period. Chalmers, Wang and Liu (2021) found that dealer markups across all trade sizes declined by 28 basis points (14 percent reduction) in a ten-month period (March 2005 through December 2005). The authors concluded that the improved timeliness of the market resulted in large reductions in the costs of trading municipal bonds. 77 As indicated by an increase in the overnight and over-the-week dealer capital committed to inventory, an increase in the number of dealers involved in completing a round-trip transaction, and more round-trip transactions that involve inventory taking. See Erik Sirri, Report on Secondary Market Trading in the Municipal Securities Market, July 2014 (Research Paper, Municipal Securities Rulemaking Board); John Chalmers, Yu (Steve) Liu, & Z. Jay Wang, The Difference a Day Makes: Timely Disclosure and Trading Efficiency in the Muni Market, 139(1) Journal of Financial Economics, 313-335 (2021). Recent MSRB analyses show that effective spreads for customer trades continued to decline in the last decade. 78 However, while the difference in effective spreads between smaller retail-sized customer trades and larger institutional-sized customer trades shrank over the past decade, the shrinkage has stopped, and the gap may have started to widen again since early 2022. 79 Therefore, as of September 2023, retail-sized customer trades continue to have significantly higher effective spreads than institutional-sized customer trades as shown in Chart 1, about three times as large. 80 78 See Wu, Simon Z., “Transaction Costs for Customer Trades in the Municipal Bond Market: What is Driving the Decline?” Research Paper, Municipal Securities Rulemaking Board, July 2018, Page 15; and Wu, Simon Z., and Ostroy, Nicholas J., “What Has Driven the Surge in Transaction Costs for Municipal Securities Investors Since 2022?” Research Paper, Municipal Securities Rulemaking Board, August 2023. 79 Wu and Ostroy (2023). The reduction was mostly due to the steadily declining effective spreads for retail-sized customer trades, as institutional-sized customer trades (par value more than $1,000,000) had a relatively stable level of effective spreads between 2005 and 2023. 80 Id. EN26JA24.009 Based on available economic literature and the MSRB's own analysis of trade data, the MSRB believes that the proposed rule change would further reduce customer trade effective spreads due to the benefit of more immediate transparency, especially for retail-sized trades. The MSRB acknowledges the difference in the potential impact, due to the different scale of the changes, between the launch of RTRS in January 2005 with the introduction of a 15-minute reporting window in place of end-of-day reporting, on the one hand, and the proposed shortening of the trade reporting requirement from 15 minutes to one minute, on the other hand. Nevertheless, while the anticipated positive effect of the proposed one-minute trade reporting with two new exceptions may not match the magnitude of the 2005 RTRS transition, it is expected to yield valuable advantages for investors through the inclusion of more contemporaneous trade data points in the same and/or comparable securities. This holds particularly true for retail investors, who have historically paid higher effective spreads than institutional investors and derived greater benefits from post-trade transparency compared to institutional investors. 81 For illustration purposes, hypothetically if a shortening of trade reporting time to one minute for Active Dealers (except for manual trades) would reduce the effective spread by an average of five basis points 82 for customer trades with $1 million or less par value, this would result in the annual savings (benefits) for investors of approximately $126.2 million based on the 2022 trading volume (see Hypothetical Scenario 1 in Table 3). 83 Table 3 also shows a more conservative scenario when limiting the hypothetical effective spread reduction to a trade size of $100,000 par value or less only, commonly known as a proxy for retail-sized trades. A reduction of five basis points in effective spreads from the proposed rule change applicable to these trades would result in the annual savings of approximately $49 million to retail investors (see Hypothetical Scenario 2 in Table 3). 84 On the other hand, while the MSRB believes dealers would earn less from investors as a result of narrowing effective spreads, the shortfall would be partially offset by gains in market efficiency, potential reduction in dealer search and intermediation costs, and potentially increased revenue from higher customer trading activity as a result of lower transaction costs. This is in line with the economic theory on the law of demand that a reduction in price would generally encourage more purchasing by consumers, all else being equal. 85 In the case of secondary market trading, the expectation is that a reduction in trading costs would encourage more trading by existing investors and/or bring in new investors to the municipal securities market over the long term. The MSRB assumes a reduction of five basis points in the effective spreads for the $1 million par value or lower customer trades would generate an additional 0.2 percent in total customer trading volume for that trade size group, while a reduction of five basis points in the effective spreads for the $100,000 par value or lower customer trades would generate an additional 0.2 percent in total customer trading volume for that trade size group. 86 The MSRB therefore estimates dealers would gain between approximately $1 million to $3 million from projected additional annual customer trading volume. 81 Id. 82 To be conservative, the MSRB uses five basis points as an illustration, where a five-basis point reduction in price value of a $100 par value bond is equivalent to $0.50 per bond. This estimate is less than half of the estimated lower-bound reduction from the 2005 changeover from end-of-day trade reporting to 15 minutes from Time of Trade reporting, and is only applicable to non-institutional-sized customer trades (either sub-$1,000,000 par value or $100,000 or lower par value customer trades). No change in effective spread for other customer trades is included in the analysis, as larger-size institutional customers are assumed to be sophisticated and already have pricing information. 83 In 2022, $504.8 billion annual par value traded from all customer purchase and sell trades with trade size below $1,000,000 par value × 0.05 percent/2 = $126.2 million. Since the five basis points are the difference between the average customer purchase and customer sell trades, when measuring each customer purchase or customer sell trade, the amount is divided by two. 84 In 2022, $196.1 billion annual par value traded from all customer trades with trade size at $100,000 par value or less × 0.05 percent/2 = $49 million. 85 Davenant, Charles, An Essay upon the Probable Methods of Making People Gainers in the Balance of Trade (London: James Knapton, 1699). 86 The 0.2 percent volume increase would be about half of the lower-bound estimate for the 2005 change over ( see Chalmers, Wang and Liu, 2021). EN26JA24.010 While five basis points are used as an illustration in Table 3, even if the reduction in effective spread was only half of the amount, or 2.5 basis points, the total annual savings would still amount to between $24.5 million and $63.1 million approximately. In addition to investors benefiting from more immediate market transparency, other market participants would also benefit from the proposed rule change, including underwriters and issuers who determine evaluated pricing of a new issuance, dealers in the primary and secondary markets who participate in competitive bidding activities, and yield curve providers that rely upon market transactions to update curves or to supply intra-day price and yield movement for the market. Lastly, any trade that meets the definition of a manual trade would be required to append a new trade indicator to such trade when reported to the MSRB, regardless of when the trade is reported. This trade indicator would help the MSRB identify the extent to which the market still operates manually and could help determine whether the proposed gradual reduction in timeframes proposed would be feasible to maintain or to continue reducing in the future. Costs The MSRB acknowledges that dealers would likely incur additional costs, relative to the current state, to meet the new one-minute transaction reporting time of one minute outlined in the proposed amendments to Rule G-14 RTRS Procedures though the compliance costs would be mitigated by the fact that nearly 73.7 percent of all trades were already reported within one minute of an execution in 2022. These additional costs would likely include: (a) one time or upfront costs ( e.g., setting up and/or revising policies and procedures, education and training and implementing the newly required manual trades flag); (b) ongoing costs related to subscription(s) to electronic trade reporting technologies to speed up the trade reporting process for some Active Dealers; and (c) other ongoing costs related to ensuring compliance with the new proposed requirements. Upfront Costs For the upfront costs, it is possible dealers may need to seek appropriate advice of in-house or outside legal and compliance professionals to revise policies and procedures in compliance with the proposed amendments to Rule G-14 RTRS Procedures. Dealers may also incur upfront costs related to education and/or standards of training in preparation for the implementation of these proposed amendments, as well as establishing the newly required manual trades flag. The MSRB believes the upfront costs as related to updating policies and procedures, training and education would be relatively minor, perhaps about $6,720 for Dealers with Limited Trading Activity and up to $11,200 for Active Dealers for a total of about $5.1 million (see Table 3). 87 In addition, there would be a one-time upfront cost for software or compliance system upgrade to flag manual trades and to reprogram the system to comply with the shorter reporting timeframe, though the amount would depend on how this new requirement is implemented by the industry. While the MSRB does not have sufficient data and information presently to estimate the cost, the MSRB believes the upfront cost for implementing the manual trade flag would likely be more substantial than the other upfront cost components. 87 The hourly rate data was gathered from the Commission's Amendments to Exchange Act Rule 3b-16. See Exchange Act Release No. 94062 (Sep. 20, 2022), 17 CFR parts 232, 240, 242, 249 (Jan. 26, 2022) (File No. S7-02-22), p. 477 n.1102 (citing the original source of the data from SIFMA Management & Professional Earnings in the Securities Industry—2013. The data reflects the 2023 hourly rate level after adjusting for the annual wage inflation between 2013 and 2023, using the Federal Reserve Bank of St. Louis Employment Cost Index: Wages and Salaries: Private Industry Workers (available at: https://fred.stlouisfed.org/series/ECIWAG ). The MSRB uses a blended hourly rate of $560 for tasks that could be performed by in-house attorneys, outside counsel, compliance managers and chief compliance managers, and estimates a total of 12 hours for Dealers with Limited Trading Activity to update policies and procedures, and implement training and education, and 20 hours for Active Dealers. As shown in Table 4, the one-time upfront costs are estimated to be $5.1 million ($11,200 × 173 + $6,720 × 474 = $5.123 million). Ongoing Costs: Annual Technology Subscription By comparison, the annual ongoing technology subscription costs for electronic trade reporting would likely be more significant for some Active Dealers, as these dealers may need to obtain assistance from outside vendors or increase in-house programming costs. It should be noted that some dealers may be able to fulfill the new trade reporting time requirement without any upgrade to their technology. While the MSRB is not aware of any evidence that dealers are intentionally delaying trade reporting, the current Rule G-14 provides a 15-minute reporting window without the “as soon as practicable” requirement. As a result, some dealers may not have reported their trades as soon as practicable in the absence of a regulatory obligation. In addition, it is possible that, instead of upgrading existing technologies, some dealers, especially those with relatively few trades in municipal securities, may augment their workforce to ensure a shorter reporting lag after a trade execution. Finally, dealers executing voice trades and secondary market trades in newly issued securities may not be able to speed up the trade reporting process due to the manual nature of these trades, even with the electronic trade reporting technology in place. 88 88 For example, in 2022, approximately 59 percent of the secondary market transactions executed within the first three days of a new issuance were reported within one minute, as compared to 77 percent of other secondary market trades. This may be largely due to the additional time involved in setting up a new CUSIP for the secondary market trading. The MSRB anticipates that such trades requiring manual intervention would be subject to the phased-in reporting requirement down to five minutes. For the ongoing cost estimate, the MSRB assumes that Active Dealers would not need to acquire electronic trade reporting technology if 90+ percent of the dealer's trades are currently reported between one and two minutes after the Time of Trade, 89 as those dealers are assumed to be able to report the trades within the proposed one-minute trade reporting requirement without resorting to an additional technology subscription. However, if a dealer reports 90+ percent of trades by more than two minutes, the MSRB assumes the dealer would need to upgrade its technology to achieve the one-minute requirement. The MSRB believes the proposed rule change would provide an incentive to adjust internal policies and procedures or to improve reporting time without resorting to additional technology subscription, especially with the new one-minute trade reporting requirement for non-excepted trades as well as the new “as soon as practicable” requirement that harmonizes with the current analogous FINRA rules. As to the MSRB's usage of the 90+ percent threshold as opposed to a 100 percent threshold, the proposed rule change provides an exception for manual trades for these Active Dealers, meaning that a 100 percent compliance rate with the baseline one-minute timeframe may not be required. The MSRB believes that many of the trades that took longer than one minute to report likely had a manual component; therefore, it may be that a threshold lower than the 90 percent threshold would still satisfy the new requirements in the proposed rule change, providing Active Dealers additional time to report by using the new exception for manual trades. However, because the MSRB does not know the actual share of manual trades for each dealer at this time, to be aggressive ( i.e., conservative) in estimating the costs, the MSRB includes these Active Dealers in the ongoing technology subscription cost calculation. 89 For each dealer, the MSRB calculated the nearest minute(s) (rounded up) to report at least 90 percent of its trades in 2022. Chart 2 below illustrates the estimated technology subscription cost of acquiring the electronic trade reporting technology for these dealers. From the industry outreach effort, the MSRB learned it would cost a dealer approximately up to an additional $60,000 annually, which includes a bundle of services in addition to the electronic trade reporting. 90 The MSRB believes, however, this cost estimate may be on the high side because: (1) dealers may not need to purchase the bundle simply to speed up the trade reporting depending on their existing subscription services; 91 and (2) some dealers may have more than 10 percent of their trades having a manual component, and since the proposed rule change would use a phase-in period for these trades, with the requirement of as soon as practicable but no later than five minutes after the Time of Trade after the second year, it may reduce the need or the scale to pay for the technology subscription costs. Furthermore, since the requirement for the one-minute trade reporting would likely be applicable to other TRACE-eligible fixed-income securities such as corporate bonds under the 2024 FINRA Proposed Rule Change, dealers that trade both municipal securities and corporate bonds may only need to pay the subscription cost once, or at least not need to pay double the amount. Still, to be aggressive in the cost estimate, the MSRB would use the $60,000 as the minimum annual cost for dealers who would need the new technology subscription. In addition, it is possible that some dealers, especially larger dealers, may need more than one vendor for automated trade reporting when executing orders on multiple electronic platforms. Therefore, the MSRB estimates, among Active Dealers who would need new technology subscription to comply with the proposed rule change, such Active Dealers would incur approximately $100,000 annually to adopt the electronic trade reporting to comply with the proposed rule change, 92 while a dealer with less than 12,000 trades annually 93 would incur $60,000 annually. 94 90 Some comment letters also cited Bloomberg's Trade Order Management Solutions (“TOMS”) system, which would cost $250,000 per year. See Letter from Matthew Kamler, President, Sanderlin Securities LLC, dated September 27, 2022, at 1. Another commenter estimated the cost at $500,000 per year. See Letter from John Isaak, Senior Vice President, Isaak Bond Investments, dated August 16, 2022, at 1. The MSRB understands that TOMS can be used for many purposes, such as sales, trading, risk management, compliance and operations, and not just for electronic trade reporting. TOMS can also be used for many fixed-income products and not just for municipal securities. See https://www.bloomberg.com/professional/product/trade-order-management-solutions/. Thus, the cost associated with TOMS would generally appropriately be allocated among the various uses that a dealer is likely to make of it. 91 For example, one vendor informed the MSRB that it charges up to $1,000 per month for straight-through processing of trades, or $12,000 annually. Some other dealers mentioned $2,000 monthly, or about $24,000 annually to incorporate electronic trade reporting. 92 The MSRB assumes these dealers would need a second vendor, but instead of doubling the amount from $60,000 to $120,000, the MSRB estimates the amount to be approximately $100,000 assuming there would be some efficiency gain. 93 A market share of between 0.01 percent and 0.1 percent based on the 2022 data. 94 Of the 173 Active Dealers, 82 dealers had 12,000 trades or more in 2022 and 91 had less than 12,000 trades. For Dealers with Limited Trading Activity, the MSRB assumes there is no need for technology subscription since they would be able to utilize one or both new exceptions, and therefore the proposed new requirement is similar to the present requirement in Rule G-14 for these dealers. EN26JA24.011 Table 4 provides an estimated total cost of approximately $5.1 million for the one-time policies and procedures revision for all 647 dealers. As to the annual ongoing costs, MSRB staff estimated a total of $6.6 million for the annual technology subscription for the 88 Active Dealers who would need the subscription. EN26JA24.012 Note: There would also be upfront costs for system upgrade to flag manual trades as well as ongoing costs for ensuring compliance. The MSRB cannot provide an estimate for these costs presently because of insufficient information. Other Ongoing Compliance Costs The MSRB anticipates ongoing costs of ensuring the compliance of relevant trades to be reported within one minute, and manual trades to be reported within the timeframes as proposed during and after the phase-in period, with a new trade indictor for such trades. Comparatively speaking, these ongoing compliance costs would be relatively minor and may not significantly exceed the costs in the current baseline, as all dealers should already have compliance programs in place in relation to the current trade reporting requirement. Proposed Supplementary Material .02 would require all manual trades from Active Dealers to be reported within five minutes eventually, following the conclusion of the second calendar year from the effective date. While the RTRS database currently does not flag manual trades, assuming all trades currently reported more than one minute after the Time of Trade are “manual” trades, Table 5 illustrates that 90.4 percent of all trades from Active Dealers were already reported within five minutes in 2022. Hence, the MSRB believes a five-minute trade reporting requirement is achievable for manual trades from Active Dealers, with a three-year phase-in period, which provides ample time for them to prepare and for the industry to create solutions. EN26JA24.013 Effect on Competition, Efficiency and Capital Formation The MSRB believes the proposed change to Rule G-14 RTRS Procedures would improve market efficiency by providing more immediate trade reporting transparency to the market. If indeed there would be a reduction in customer transaction costs, as illustrated by the 2005 RTRS transition, even if on a smaller scale, the benefits to customers would accrue over a longer period that would offset the investment in upgrading technologies by select dealers. In addition, it is possible that lower transaction costs may increase investor participation and stimulate market activities by encouraging more trading by existing investors and/or bringing in new investors to the municipal securities market over the long term, therefore contributing to an overall increase in capital formation. Finally, the harmonization of MSRB rule requirements for municipal securities with FINRA requirements for other TRACE-eligible fixed-income markets, as proposed in the 2024 FINRA Proposed Rule Change, would create consistency for dealers who have trading operations in all these markets, and, thus, would increase efficiency in terms of their compliance burdens. Therefore, the MSRB believes that the proposed rule change would facilitate capital formation. Some dealers may be impacted by the proposed rule change more than other dealers to meet the new reporting time. However, the broader impact on competition in the municipal securities market is expected to be minor. The proposed change to Rule G-14 RTRS Procedures provides a two-tier system (one-minute trade reporting requirement for Active Dealers with an exception for manual trades and 15-minute trade reporting requirement for Dealers with Limited Trading Activity) to mitigate any potential unfavorable financial impact for Dealers with Limited Trading Activity because of a lower revenue base. Therefore, the MSRB does not believe the proposed change to Rule G-14 RTRS Procedures would result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. Identifying and Evaluating Reasonable Alternative Regulatory Approaches The MSRB has considered and evaluated several reasonable regulatory alternatives. One alternative the MSRB reviewed was to introduce a five-minute trade reporting period for Active Dealers. According to the MSRB's estimates, as shown in Table 1 above, 23.3 percent (97-73.7 percent) of all reported trades in municipal securities would have satisfied the five-minute reporting requirement but not the one-minute reporting requirement in 2022. If the MSRB instituted a five-minute trade reporting period, most of the industry would already satisfy the obligations of a five-minute requirement and it would likely be less of a burden for dealers to comply. In effect, MSRB rulemaking would merely align with current market practices. However, considering that most trades (97 percent) already took five minutes or less to be reported to RTRS, the MSRB believes the five-minute reporting requirement, while easier for dealers to comply with, would not have advanced the immediacy of information transparency by a meaningful amount that would make a difference for investors, especially retail investors, and other market participants. Another alternative would be for the MSRB to change the trade reporting time by trade size. The MSRB was informed by comments received in response to the 2022 Request for Comment described below that large-sized trades are in many instances still negotiated telephonically and require more dealer attention, and therefore would be considered as trades with a manual component during the trading reporting process. 95 Table 1 above shows a noticeable difference in the speed of trade reporting by different trade size groups, with the reporting time increasing with trade size. The MSRB could propose that small and medium-sized trades, i.e., trades with par value below $1,000,000 which constitute about 97.3 percent of all trades, be reported within one minute while proposing a longer threshold, for example, a five-minute threshold for larger-sized trades which constitute about 2.7 percent of all trades. However, trades with a manual component are already excepted from the one-minute requirement under the proposed rule change, regardless of the trade size, which would be superior to this alternative method because the length of time to report a trade is heavily influenced by the trade reporting process rather than the size of the trade per se. In addition, anecdotal evidence suggests that large-sized trades do have more of an impact on the direction of the market, as many market participants weigh larger trades more heavily in determining market movements and many of the existing market produced yield curves either exclude small-sized trades from their analysis or weigh them much less than larger-sized trades. 96 While there may be both benefits and costs for large-sized trades to be reported sooner where possible, 97 adding a trade size-based reporting regime with delayed reporting by large-sized trades on top of the manual component exception may cause additional complication in trade reporting, potentially resulting in increased trade reporting errors and/or trade cancellations and corrections. 95 See Letter from Michael Decker, Senior Vice President for Public Policy, Bond Dealers of America, dated October 3, 2022, at 2-3 (“Trades negotiated and executed by phone, still the predominant execution method for block-sized trades in municipals . . . require human involvement and data entry, delaying the reporting process easily past one minute.”); Letter from Seth A. Miller, General Counsel, President, Advocacy and Administration, Cambridge Investment Research, Inc., dated October 3, 2022, at 4; Letter from Howard Meyerson, Managing Director, Financial Information Forum, dated October 3, 2022, at 4; Letter from Edward J. Smith, General Counsel and Chief Compliance Officer, Hartfield, Titus & Donnelly, LLC, dated September 14, 2022, at 4; Letter from Robert D. Bullington, Vice President, Compliance Officer, [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-01394. Public record. Not legal advice.