WASHINGTON - Vendors and dealers say they are making continuous adjustments to the systems they put in place to comply with markup disclosure requirements, and are seeing increased interest in the analysis and possible wider use of prevailing market price calculations.

It’s been about six weeks since new rules took effect requiring dealers to disclose their markups and markdowns on certain transactions in the confirmations they send to retail customers. Although the industry fought hard for a multi-month extension and didn’t get it, the implementation has generally been successful beyond a few hiccups. Now the dealers and the third-party vendors many of them hired to build “prevailing market price” calculation products are looking ahead to how exams by enforcement authorities will go and how market participants might use the new PMP data.

Under the rules, dealers initially must look at their contemporaneous trades of the same municipal security 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 as set out in a “waterfall” established by the Municipal Securities Rulemaking Board. They must look at contemporaneous trades of that bond in interdealer trades, then trades 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.

Markup disclosures must be given as a total dollar amount and a percentage of the prevailing market price.

BondWave CEO Michael Ruvo.
Michael Ruvo, CEO of BondWave.

Mike Nicholas, chief executive officer of Bond Dealers of America, said dealer firms managed to get ready for the rule’s effectiveness. There had been a lot of hand-wringing about whether dealers would have time to fully integrate PMP-calculation engines into their systems end-to-end by the May 14 effective date. The BDA was among the louder voices pushing regulators for a delay, an effort that ultimately failed.

"Hard work and diligence allowed BDA member firms to be prepared for implementation of the rule,” Nicholas said. “While these firms were ready for implementation, many are still fine-tuning the process on a daily basis. This includes tweaking coding and working out still existing issues with vendors in order to provide customers with consistently accurate information. Firms will continue to refine their process in order to have continued compliance with this rule.”

Michael Ruvo, president and chief executive officer of BondWave, said the rush to implement the systems led to a “choice between convenience and completeness.” Ruvo said he thought it would be interesting to see what happens when regulators have had some time to examine the processes, as Financial Industry Regulatory Authority senior director of fixed income regulation Cindy Friedlander said said in May would happen without delay. Ruvo said he thinks there will be further adjustments once regulators have spoken.

Ruvo added that the PMP seems to be taking on significance beyond just complying with the markup disclosure requirements. The industry is looking more broadly at the PMP value, he said, suggesting it could be used for other applications including demonstrating compliance with best execution requirements. BondWave is developing a pre-trade PMP calculator product in addition to its existing product, Ruvo said.

“It’s really kind of interesting how this is beginning to evolve,” said Ruvo.

TMC Bonds CEO Thomas Vales said the implementation was successful, and interest is beginning to turn towards data analysis.

“We’re seeing more people focus on that,” Vales said.

Vales said that so far he’s not aware of much feedback from individual retail investors about the new price transparency. Instead, it mostly seems to be coming from financial advisors, he said.

“There were a few growing pains, but overall it’s been very successful,” Vales said.

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