Can vendors help dealers meet the markup disclosure rules?

PHOENIX - Third-party vendor products to help dealers comply with soon-to-be effective markup disclosure requirements are hitting the market as the industry holds out hope for a compliance extension.

Municipal Securities Rulemaking Board rule amendments, which will require dealers to disclose their markups and markdowns in retail transactions, are set to become effective on May 14 and vendors are now optimistic that they have products available that will help dealers comply with the rules.

Under the rule changes, markup disclosures will have to be given as a total dollar amount and a percentage of the prevailing market price, commonly referred to as the “PMP.”

BondWave CEO Michael Ruvo.

The amendments establish a “waterfall” of factors for determining the PMP. Dealers initially must look at their contemporaneous trades of the same muni with other dealers or customers to establish a presumption of prevailing market price. If that data is unavailable, they must make a series of other successive considerations.

They must look at contemporaneous trades of the muni in interdealer trades, then trades of the muni between other dealers and institutional investors, then trades on alternative trading systems or other electronic platforms. Further down the waterfall, dealers can look at contemporaneous trades of similar securities.

BondWave announced the launch of its PMP product on Feb. 14. Delivered via its analytics platform Effi, BondWave said its clients have the flexibility to generate calculations at different time intervals, providing up to eight values for the various levels and steps of the waterfall. The product can also identify trades that are subject to disclosure, flag exceptions based on client-defined criteria, and provide supervisory controls. It also has other support features.

But while vendors are publicly confident in the products they’ve created, the products are not yet live and there remains some skepticism that dealers will be able to integrate third-party services into their trading processes in time to comply with the current deadline.

“BondWave’s solution follows the rule and provides the precision necessary to support requirements, however implementation and coordination among multiple systems make the current timeline difficult to achieve,” said BondWave chief executive officer Michael Ruvo.

Douglas Galm, a director at TMC Bonds, said TMC’s product is called “Cascade” and is available as a stand-alone product or as an add-on to existing TMC services.

Galm said that Cascade is highly customizable and that TMC is working with multiple clients, and has successfully executed a number of “proof of concept” dry runs. “For all intents and purposes, it is production ready,” Galm said.

The rush to integrate these products with dealer trading systems goes on as the dealer community pushes for a compliance extension.

Bond Dealers of America has asked the Securities and Exchange Commission to allow dealers to commit to a “business plan” of defined steps towards markup disclosure compliance, and to then agree not to enforce the new regulations until 2019.

The MSRB has acknowledged that the industry has many questions about the new requirements, and that new guidance explaining certain aspects of the waterfall is forthcoming.

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Securities law BDA Washington DC
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