The Municipal Securities Rulemaking Board yesterday warned dealers against "bunching," or lumping interdealer transactions together when reporting them under the MSRB's transaction reporting program.
"Recently, some dealers have reported the sum of two trades as one transaction in instances when two dealers effected two trades with each other in the same issue and at the same price," the MSRB said in a one-page notice.
"When two transactions are effected, two transactions should be reflected in each dealer's books and records, and two transactions are required to be reported to the MSRB," the notice said.
"Failure to do so causes erroneous information concerning transaction size and time of trade to appear in the transparency reports published by the MSRB, as well as in the audit trail used by regulators and enforcement agencies," the board said.
"To the extent that dealers use the records generated by the comparison system for purposes of complying with MSRB Rule G-8 on record-keeping, it may also create erroneous information as to the size of transactions effected or time of trade execution," it said. Under the comparison system, information from both sides of a trade is compared to make sure it matches.
The time of trade for each transaction must accurately reflect the time at which a contractual commitment was formed for each quantity of securities, the MSRB said in the notice.
For example, the board said, if a dealer purchases $50,000 of a municipal issue at a price of par from another dealer at 11:00 a.m. and then purchases an additional $50,000 at par from the same dealer at 2:00 p.m., two transactions must be reported to the MSRB and must be recorded on the dealers' books.
Christopher Taylor, the MSRB's executive director, said yesterday that bunching does not appear to be the result of any intended abuse.
"It's a question of people doing something that's a lot easier for them," Taylor said.
"You're going to probably see a lot more technical notices like this as we get closer and closer to real-time trade reporting, because people have been used to more flexibility and now we are putting a system in place that requires consistent treatment of all trades," he added.
Under the real-time trade reporting system, which is to begin in January 2005 after six months of testing, dealers will have to report information from trades to the Fixed Income Clearing Corp. within 15 minutes of when those trades occur, and the FICC will then report the data to the MSRB.
Any questions about the notice on bunching should be referred to Justin R. Pica, the MSRB's uniform practice specialist, or P. John Baughman, its senior data analyst, the board said. They can be reached at 703-797-6600.
