Operational Overview of the Real-Time Transaction Reporting System for Municipal Securities

1. Operational Overview of the Real-Time Transaction Reporting System for Municipal Securities Municipal Securities Rulemaking Board April 2003 1

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5. Executive Summary 5

6. Why Real-Time Reporting? • MSRB has been committed to comprehensive, contemporaneous transaction reporting since 1994. • Since 1994, MSRB has implemented transparency in incremental steps. • Real-time reporting is planned to begin in mid-2004. 6

7. What is Real-Time Transaction Reporting? In the real-time environment, dealers will be required to report all municipal securities transactions within 15 minutes. 7

8. MSRB’s Objectives for Real-Time Reporting • To have the operational details function as smoothly as possible for dealers. • To collect real-time trade data at the lowest possible cost to dealers. • To maintain consistency with current municipal operations and related markets (e.g., corporate bond reporting). 8

9. Basics of Real-Time Reporting • RTTM/RTRS – Two new systems -- the automated comparison system and the regulatory reporting system -- will dovetail so that one submission will serve for real-time street-side comparison and regulatory reporting. • ISO-15022 – This international standard file format will serve for comparison and reporting. • RTTM Web – A web interface will be available for real-time submissions and corrections. 9

10. Schedule • Operational overview and specifications-April 2003. • Draft dissemination plan and proposed rule changes for comments mid-2003. • Dealer testing late 2003. • RTTM available to NSCC participants 4th quarter 2003; RTRS operational mid-2004. 10

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12. Operational Overview 12

13. Topics • Prospective reporting rule • General features of real-time reporting • Matching and regulatory reporting • Business aspects of real-time reporting • Reporting procedures • Technical and operations aspects 13

14. Prospective Reporting Rule • MSRB plans to require dealers to report all transactions in municipal securities within 15 minutes of the time of execution • Each party to a comparison-eligible inter-dealer transaction will be required to submit, within 15 minutes, all information required for automated comparison to occur in the Real-time Trade Matching system (RTTM) 14

15. General Features of Real-Time Reporting • Trade input will be formatted as messages with interactive feedback • All trade messages go first to FICC’s Participant Access Network for timestamp, format checking and routing • To report a customer trade: • The dealer sends an “Instruction” message to RTRS • RTRS sends an acknowledgement or error message to dealer • If there is an error, the dealer sends a Modify message or a Cancel message plus new Instruction to RTRS FICC = Fixed Income Clearing Corporation (DTCC subsidiary) RTRS = MSRB’s Real-time Transaction Reporting System 15

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17. General Features of Real-Time Reporting (continued) • For inter-dealer trades, a single initial record will serve for comparison and regulatory reporting • The NSCC participant will submit the initial record • RTTM will pass the the initial record’s data to RTRS 17

18. General Features (continued) • This approach results from the “dovetailing” of the new automated comparison system (RTTM) and the new regulatory reporting system (RTRS) • Dealers will use the single record to satisfy two MSRB requirements: • Rule G-12(f) – automated comparison • Rule G-14 – transaction reporting 18

19. Preview of the Next Slides • The following slides show: • Each participant submitting a trade instruction to FICC • FICC acknowledging the instructions • FICC advising each party of the contra party’s instruction • FICC sending copies of both instructions to MSRB 19

20. Member Firm 1. MT 515/Instruct Trade Submission FICC 20

21. Member Firm 1. MT 515/Instruct 2. MT 515/Instruct Trade Submission FICC MSRB 21

22. Contra Member Member Firm 3. MT 509/Ack 4. MT 518/Advisory 1. MT 515/Instruct 5. MT 515/Instruct 2. MT 515/Instruct Trade Submission FICC MSRB 22

23. Contra Member Member Firm 3. MT 509/Ack 4. MT 518/Advisory 1. MT 515/Instruct 5. MT 515/Instruct 2. MT 515/Instruct 6. MT 515/Instruct Trade Submission FICC MSRB 23

24. Acknowledgement of Street Trades • RTTM acknowledgement will serve as acknowledgement for regulatory purposes also, if no regulatory errors found by RTRS • If RTTM matches two sides, reprices the trade, or deletes an unmatched side, it will notify RTRS,which will track these changes for regulatory purposes • If RTRS finds errors, it will notify the participant and the effecting dealer 24

25. Preview of the Next Slide • The next slide shows that, after FICC matches two sides of a trade: • FICC advises each participant of the match • FICC advises MSRB of the match 25

26. Member Firm Contra Member 9. MT 509/MATCH 10. MT 509/MATCH 11. MT 515/Match 12. MT 515/Match Trade Submission FICC MSRB 26

27. If RTTM… Rejects your side submitted for matching Accepts and acknowledges your side Then RTRS… Will not send you any message Will not acknowledge an error-free side, but… will send a you a message if your side is late or has errors Actions of Two Systems (Street Trades) 27

28. If RTTM… Has sent your trade to settlement and purged it, then receives your modification of regulatory data, finds no format errors in your message, and therefore forwards it to RTRS Then RTRS… Will acknowledge an error-free side, or Will send a you a message if your side is late or has regulatory errors Actions of Two Systems (Customer Trades) 28

29. Business Aspects of Real-time Reporting Street and Customer Trades 29

30. Trades that Must Be Reported • Customer trades • Trades in any issue that has a CUSIP assigned by Standard & Poor’s • Inter-dealer trades • All street trades that are eligible for comparison. This includes same-day and next-day trades. 30

31. Inter-Dealer Trades that Must Be Reported • Principal trades between a clearing broker/participant and its correspondent will continue to be compared and reported using a single record (required by rules G-12 and G-14) • The same is true for trades between two correspondents of one clearing broker (required by rules G-12 and G-14) • MSRB will require regulatory reporting of “transactions” between an NSCC participant and its fully disclosed introducing broker - similar to an NASD TRACE automatic give-up (AGU). Procedures described below. 31

32. Inter-dealer Trade Exceptions • Per NSCC rules, trades in when-issued short-term notes are not eligible for comparison • Therefore, they are not subject to regulatory reporting to the MSRB 32

33. Dealer Capacity as Agent or Principal • The dealer will report whether it did a street trade as the agent for a customer or as a principal • In bilateral trades, dealer reports only its own capacity • In unilateral* trades, the dealer reports its own and the contra party’s capacity • A new field is available in the RTTM message format • Brokers’ broker trades will be reported as “principal” trades *“Unilateral” trades and reporting procedures for dealer capacity are described below. 33

34. Time of Trade • In the real-time environment, report the time of trade to the second • Trade date and time are in the same SWIFT field but will be stored separately • The input format for trade date and time is: YYYYMMDDHHMMSS • For time of trade on syndicate allocations, see the note on the next slide 34

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36. Correspondent of a Correspondent • As currently, every trade must include the identity of the dealer that effected the trade • Usually, this is the NSCC participant or its direct correspondent • In some cases, the dealer that effects the trade is a correspondent of a direct correspondent • In such cases, all three dealers’ IDs must be reported 36

37. NSCC participant: Direct correspondent of participant: Effecting broker (correspondent of of ABCD): 0123 ABCD WXYZ Correspondent of a Correspondent – Example of One Side 37

38. Special Price Trades • NASD Regulation has asked that reports of muni trades, like corporate trade reports, indicate “special prices” • A special price is an execution price impacted by a special trade condition, such as trading a bond with interest when it is currently trading flat by market convention • “Special Price” does not impact comparison and subsequent settlement Note: “Special Price” is a different term than “Special Trade,” which is used in FITS to indicate trading conditions as part of the contract 38

39. Special Prices (Continued) • If trading at a special price, enter a reason code: R001 Special price because traded flat R002 Settlement other than Regular Way impacted price R003 Multiple reasons for special price R004 Other “Other” might include, for example, a transfer from an accumulation account to a UIT • Weighted Price trades must also be reported, using the “Type of Price” field 39

40. Other Aspects of the 15-Minute Reporting Requirement • Firms will need to obtain, within 15 minutes: • CUSIP numbers for new issues • Pertinent price information for RW calculation • Allocated syndicate trades need to be reported quickly (see note on next slide) • Corrections to incorrectly reported data are required as soon as possible 40

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42. Transaction Reporting Procedures 42

43. Reporting Dealer Capacity • In the real-time environment, dealers must report the capacity of the effecting dealer in every trade • Inter-dealer trades may be done as principal or as agent for a customer 43

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45. Examples Showing Capacity A C2 IV C1 45

46. Inter-Dealer Regulatory Only (IDRO) Report • As noted, a new regulatory only report (like an NASD AGU) will be required for sales from a clearing broker’s inventory. In this case: • The sale is done by a fully disclosed introducing broker, as agent • No principal position passes to the introducing broker • Comparison is not required. The IDRO report is not processed by RTTM. It is used for regulatory purposes only, that is, audit trail construction. • Examples follow: charts III and IIIb (also IIIa, in Appendix B). Note: Iia is not an IDRO; it requires comparison. 46

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48. Examples Showing Agency Trades & IDROs 48

49. IDRO (continued) • An IDRO is reported as a unilateral submission • Either the clearing broker or its correspondent may report the IDRO • For the IDRO shown in example III, report as though it was a street trade: Dealer Capacity Type B principal sold E agent bought • Also report a customer sale by Dealer E as agent 49

50. IDRO (continued) • The dealer that submits the IDRO unilaterally will have accurate information about both sides and will report the capacity of both sides. • If necessary, the dealer that did not originally submit the report may correct its side’s details. 50