MSRB Proposes Unmasking Large Trades on EMMA

WASHINGTON — The Municipal Securities Rulemaking Board has proposed to discontinue the practice of temporarily masking the exact par value of large muni bond trades disseminated on a near real-time basis over the online EMMA system.

The board published changes to its Rule G-14 on reports of sales and purchases on Friday and asked market participants to comment on them by July 2.

Currently, muni bond trades of more than $1 million are designated “1MM+” on EMMA until five business days after execution.

That designation stems from industry concerns that, because many securities are infrequently traded, market participants might be able to identify institutional investors and dealers trading the bonds if exact par values were reported. They feared that making the exact size available on EMMA would reveal information about a dealer’s inventory, allowing others to trade against that dealer’s position and reducing the incentive for dealers to take large positions.

The MSRB said the 1MM+ designation was designed to help preserve anonymity without substantially detracting from the benefits of price transparency.

But the Government Accountability Office in January published a report on the muni market warning that individual investors generally have less transaction-price information than institutional investors. Institutional investors told the GAO that even though the size of large trades is initially masked, they typically can figure out the amount and price of large trades through relationships with their brokers.

The board said the GAO’s findings suggest the five-day delay may disadvantage some market participants.

“The MSRB believes disseminating the exact trade size of all transactions will help achieve our goal of ensuring the fairest and most accurate pricing of municipal securities transactions by providing all market participants with equal access to transaction information,” executive director Lynnette Kelly said in a release.

In its proposal, the MSRB asked market participants if masking the size of large trades has been an effective means of ensuring firms are not identified, and if the benefits outweigh any negative effects. The board also asks how easily market participants can determine trade size without knowing par value. The board also said it wants commenters to provide any justifications for continued masking, and suggestions for alternative proposals.

The changes would mean that the par value of all transactions is available on EMMA when the trade data is initially released. The MSRB said the proposal would not require dealers to change how they report.

Mike Nicholas, chief executive of Bond Dealers of America, said his group is still reviewing the proposal. But Nicholas said BDA supports moves that boost transparency, and that generally there is “little justification” for the existence of separate rules for different-sized municipal bond trades.

BDA will submit a comment letter to the MSRB after studying the proposal’s impact on retail and institutional investors and market liquidity, he said.

The Securities Industry and Financial Markets Association is also reviewing the proposal. Michael Decker, SIFMA managing director of muni securities, expects some broker-dealers may resist it out of concern the rules could limit liquidity. He said large muni trades — those in the $50 million to $100 million range — are not particularly common, and few firms make such trades. Those that do might fear that near-real-time trade data could make reselling the bonds more difficult.

“Will [the proposal] make it more difficult to get pricing on the other side of the trade? Will that affect dealers’ willingness to take on those positions?” Decker asked.

He also said SIFMA might propose increasing the $1 million cutoff.

“I think that it’s worthwhile to have the discussion of whether a million dollars is the right threshold, or whether it should be raised to something else,” he said.

There were 379,260 muni trades with par values of more than $1 million last year, 3.6% of the 10.39 million trades done during the year, according to MSRB data.

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