The Municipal Securities Rulemaking Board is asking for public comment on whether its Rule G-14 on reports of sales or purchases should be revised to require broker-dealers to report municipal securities transactions between a dealer's so-called proprietary desk and another desk within the same firm.
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. There is no transfer of ownership.
For example, a transaction between a dealer's proprietary desk and its syndicate or some other desk is regarded as an internal movement of securities within the firm and is not a reportable transaction under G-14, the board said in a notice released late Friday.
"In certain firms, a [proprietary] desk may look and function like any other institutional customer from the viewpoint of the syndicate or trading desk," the MSRB said. "However, because it operates from within a dealer organization, it is currently considered to be part of that dealer for trade reporting purposes. When a proprietary desk transacts directly with another dealer, such a transaction with an external entity is currently required to be reported to the MSRB as an interdealer transaction."
Specifically, the board is seeking comment on whether dealer proprietary desks function separately from underwriting or trading desks.
"Are transactions between the trading and proprietary desks generally subject to informational or other barriers? Are there ever situations in which the two desks do (or could) act in a concerted manner (either explicitly or implicitly)?" the board asks in its notice. "For example, is it possible that a trading or syndicate desk could, in effect, use the firm's proprietary desk for an inventory function?"
The MSRB also wants to know 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. The board also wants to know how an "internal" customer should be defined.
Meanwhile, the board asks if the description of a proprietary desk transaction as a "customer trade" reflects the actual character of the trade from the viewpoint of a syndicate or trading desk that services a related proprietary desk account. It also seeks comment on whether proprietary desk transactions are categorized separately from other muni transactions in a dealer's books and records.
Citing Rule G-17 on fair dealing, which specifies that customer orders must have priority over similar dealer orders or certain dealer-related account orders where feasible, the MSRB is seeking comment on several questions. They include: "Are proprietary desk transactions treated as related portfolio trades?" and "If proprietary desk transactions are treated as customer trades, how should they be separately identifiable from 'external' customer trades in order not to run afoul of the G-17 interpretation giving such customers priority allocations?"
The board also asks if there are any potential operational difficulties created by the reporting of proprietary desk transactions as customer trades.
