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Securities Law

MSRB To Consider Best-Execution Rule

OCT 1, 2012 5:57pm ET
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NEW YORK — The Municipal Securities Rulemaking Board will consider a “best-execution” rule during its current fiscal year, which began Monday, MSRB executive director Lynnette Kelly said at an industry meeting here today.

But Kelly, who spoke during a panel discussion at the Securities Industry and Financial Markets Association’s 2012 Municipal Bond Summit, said if such a rule were based on the best-execution rule that the Financial Industry Regulatory Authority has for securities, it would not require dealers to quote the best price to a customer. 

Instead, FINRA’s rule requires dealers to have “written policies and procedures in place that address how [they] will determine the best interdealer market for such a security in the absence of pricing information or multiple quotations.” The FINRA rule also requires dealers to document their compliance with those policies and procedures.

Kelly and other market participants, including Paige Pierce, president and chief executive officer of R.W. Smith & Associates Inc., said many dealers in the muni market already have such policies and procedures in place.

But a similar MSRB rule would require all dealers to have them in place.

MSRB staffers will present the board with an analysis of the Securities and Exchange Commission’s report at a board meeting later this month, she said.

Kelly stressed after the session that the board would to authorize the staff to draft a best-execution rule.

Also during the session, Pierce disclosed that some broker’s brokers and firms that operate alternative trading systems or ATS — electronic trading platforms used by dealers — are discussing the idea of creating their own centralized platform for electronic trading of munis by investors. Many industry members believe they can create a more effective centralized system than regulators, she said.

Pierce said they have been discussing the idea for the last couple of years but added that the SEC’s July 31 report on the muni market, which recommended expanding ATS-like systems to improve pre-trade price transparency, created addition impetus for the industry to develop its own system. The number of firms participating in the effort is “growing by the week,” she said.

Kelly said that many of the SEC’s recommendations on price transparency are discussed in the board’s long-range plan. She said that plan “contemplates” a “central transparency platform,” which could be a source for bids and other pre-trade pricing information.

“Market structure is ... certainly something that the market is going to be hearing about and dealing with for many years to come,” Kelly said.

Asked if the MSRB might create a centralized trading system in the future, she said, “Those are fighting words in this group.”

Industry members on the panel questioned whether investors would know what to do with pre-trade price data if it were made available to them, noting that offers often don’t accurately reflect a security’s value.

“To put out all pre-trade pricing data to the retail market, without context and knowledge, that is of great concern — that would be highly problematic,” Pierce said.

She also said that it costs firms a lot of money to create data.

“To have to ... grow this business and be growing the bottom line, and then be mandated to turn over your work product for free to the regulator who will then monetize it and sell it back to you, that is problematic,” Pierce said.

Thomas Vales, CEO of TMC Bonds LLC, an ATS operator, said his firm “is not overly enthusiastic” about giving away information that could be proprietary. He added that TMC already makes its data available to market participants through dealers.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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