The Securities Industry and Financial Markets Association is urging the Municipal Securities Rulemaking Board not to alter its Rule G-14 on reports of sales or purchases to require broker-dealers to report municipal securities transactions between a dealer's so-called proprietary desk and another desk within the same firm.
In a six-page letter sent to the board Thursday, SIFMA argues that revising G-14 to require the reporting of such transactions would "create new inconsistencies and would result in interpretive issues involving the treatment of the proprietary desk as a customer that would provide significant problems of implementation."
It says making such changes to G-14 would present undue burdens on dealers, and argues that any changes to define a "customer" as any person other than a dealer would have implications for a variety of the board's other rules.
The letter comes in response to a request for comment that the board published in April.
"An important characteristic of fixed income departments is that there are routine flows of securities internally among desks without change in legal ownership of the securities," said the letter, which was written by Leslie Norwood, SIFMA's managing director and associate general counsel. "The fact that there is no change in legal ownership, and the accounting is similar for various flows of securities, suggests that a proprietary desk should not be singled out for unique treatment in contrast to, for example, the derivatives desk."
Under Rule G-14, dealers are required to report information about their muni trades with other dealers and customers to the board's real-time transaction reporting system. However, "internal movements" of securities within a dealer organization are not required to be reported because the dealer is not buying or selling for any external entity.
In arguing against any changes to G-14, SIFMA noted that the Financial Industry Regulatory Authority, which sets rules for corporate trade reporting, has "not attempted to make distinctions in the location in the internal flow of fixed income securities as an event triggering price."
Under a frequently asked questions portion of its Web site, FINRA says: "If there is no change in ownership [then moving a bond from one firm trading account to another] is merely a journal entry between accounts and is not reportable to TRACE," FINRA's reporting system for corporate bonds.
Among several questions in its April request for comment, the board asked if there are reasons to believe that trades between proprietary and trading desks ever result in something other than an "arms-length negotiated price" or if there are ever situations in which the sale or purchase price in an "internal" transaction differs from the price that might have been received from an external customer.
In response, SIFMA said that the "either-or" quality of the questions "fails to take account for important characteristics in the organization of a municipal securities department."
While it is customary for dealers to establish both "informational barriers" between trading and proprietary desks, and to conduct transaction between such desks on an arms-length basis, SIFMA said that the separation between proprietary functions and trading is less rigid than the separation between equity departments and research since reforms were implemented earlier in the decade to prevent research analyst conflicts. Some overlap between the trading desk and fixed income research was deemed necessary and is based on circumstances rather than on legal boundaries, SIFMA said.
"It follows that there is not an explicit identification of a proprietary desk based on conflict rules, and several desks that trade on behalf of the firm using firm capital have proprietary characteristics," the letter said. "Different firms may consider different desks as proprietary, and, if the MSRB proposal were adopted, there would not be a function consistency among firm regarding the desk that would be considered a 'customer'."
