The primary municipal bond market may have ground to a virtual halt, but yesterday marked the startup of the New Issue Information Dissemination System, which is designed to improve the accuracy and timeliness of information about new municipal securities issues that is disseminated to market participants.
A slower market could give muni dealers more time to adjust to the new system, Justin Pica, the Municipal Securities Rulemaking Board's uniform practice and policy adviser, said in a brief interview.
"Perhaps it will make the transition easier," he said, describing NIIDS as "a big initiative" that "will be a big improvement" in the way information about new bonds is reported and disseminated in the muni market.
The MSRB's rules on NIIDS require broker-dealers to report to the Depository Trust and Clearing Corp. key information about new bonds, as well as the time of first execution of a trade, within two hours after the formal award of the bonds.
In negotiated transactions, the formal award of the bonds is either the time the contract to purchase the securities from the issuer is executed, or the time the issuer notifies the underwriter of its execution of the agreement, whichever occurs later. In competitive deals, the formal award is either the time the issuer formally awards the issue, or the time the issuer notifies the underwriter of the award, whichever is later.
A dealer cannot begin executing trades until at least two hours after it submits information on the new issue to the DTCC. After receiving the data, it will almost simultaneously transmit information to its dealer members and information vendors.
For example, if a dealer signs a bond purchase agreement with an issuer at noon, it must submit data on the new bonds, as well as the time the first trade is to be executed, to the DTCC by 2:00 p.m. The earliest time that trading on the bonds could begin is 4:00 p.m., or two hours after the information on the bonds is disseminated to the market.
"That's to allow a dealer who is not part of the underwriting group to get information into its trade processing system," Pica said.
Until recently, lead underwriters were reporting the information about new muni issues separately to information vendors and the vendors, in turn, were sometimes disseminating different information about the bonds at varying times to market participants.
NIIDS "is going to centralize the collection of this information so that information vendors and dealers have access to the same information at the same time, which is something that has not been done previously," Pica said.
NIIDS should have a significant impact on trade reporting, he said. The MSRB's Real-Time Transaction Reporting System, took effect on Jan. 31, 2005, and requires dealers to report trade data to the MSRB within certain time frames. It has shown that in the first one or two days that a new issue is traded, dealers report a lot of late trades, as well as a number of amendments to the trade data or even cancellations of their trade reports.
"It just shows that dealers have difficulty getting access to the information they need to process and report these trades," Pica said. "This is a big initiative with respect to trade processing efficiency."
Dealers have been reporting information from new muni issues to the DTCC under its rules since Sept. 2, but that had until the end of the day after a trade to report the data.
The MSRB rules, which significantly tightened the time in which the trade data had to be reported, became effective yesterday.
Dealers also have had all summer to test compliance with the boardB's NIIDS rules. Pica said that 95% of the dealers responsible for last year's new issue volume successfully completed the tests and registered for NIIDS during the summer.
"If we've got well over 95%, it's probably everybody," Pica said. He noted that "it's hard to get a precise number" of the firms that haven't registered because of all of the contraction and changes among dealers that has occurred during the past month.
A DTCC spokesman said yesterday that dealers were submitting data on new issues to NIIDS, but that it would not be possible to count the issues until the end of the day.
The MSRB also has adopted record-keeping requirements that will allow examiners from the Financial Industry Regulatory System to see if dealers have complied with the board's NIIDS rules, Pica said.
While the MSRB writes rules for dealers in the market, the enforcement of those rules is left up to FINRA and the Securities and Exchange Commission.