WASHINGTON -- The Municipal Securities Rulemaking Board's pilot program for improving information on prices is inadequate and should be replaced with a system similar to the one recently adopted for the high yield bond market, Securities and Exchange Commission member Richard Roberts said yesterday.
"While [the MSRB's] proposal would provide useful information for purposes of market surveillance and market analysis, it is not enough, at least in my view. More needs to be done to provide investors with real-time quotation and transaction information," Roberts said in a speech before the Council of Development Finance Agencies, meeting in Pittsburgh.
The MSRB proposed a pilot system last June that would collect and publish information on transactions occurring in the interdealer market. The system would make public each day information on interdealer transactions compared by the National Securities Clearing Corporation for roughly 180 frequently traded issues.
But Roberts said the system is flawed because the information would not be reported on a real-time basis. It would not be available until two days after the trade, he said.
A better alternative would be the new National Association of Securities Dealers program called the Fixed Income Pricing System, or FIPS, which was recently approved by the SEC and is scheduled to go on line in February, Roberts said.
"FIPS is a major first step toward increasing transparency in the high yield market," he said. The system will "collect, process, and disseminate real-time, firm quotations and transaction reports for between 30 and 50 of the most liquid high yield bonds in the market at any time," Roberts said. "[It also] will require transaction reporting in all high yield bonds traded in the over-the-counter market within five minutes after the trades occur."
Roberts said FIPS could be expanded to include municipal securities. or a separate system could be designed for municipals that is patterned after FIPS. "These possibilities appear not only feasible, but also cost effective," he said, noting that he thinks the MSRB has the authority to require brokers and dealers to participate in the system.
The MSRB was scheduled to vote on whether to adopt its pilot program at a quarterly meeting here last week, but MSRB executive director Christopher Taylor was unavailable for comment yesterday on whether the board acted on the proposal.
An NASD spokesman said yesterday that participation in FIPS is mandatory for dealers in the top 35 high yield bonds. "If you are a dealer in the top 35, you have to put a quote in FIPS. You could be penalized [otherwise]. The NASD had a FIPS committee that made an initial cut of the bonds to be included in the group. You don't have to directly do it. You can have a broker's broker put in the quote," the NASD official said.
Roberts said another less attractive approach is to encourage broker's brokers to disseminate last sale information on a timely basis to private services for transmission to their subscribers. "While this approach may be relatively simple to accomplish," he said, "it probably would not provide a reliable, long-term solution."
Roberts said a major problem is that some dealers may be concerned that the use of broker's brokers to disseminate last sale reports could cause their market positions to be identifiable. They could try to circumvent the system by dropping their broker's brokers, he said.
Another alternative is for the SEC to adopt a rule requiring municipal securities brokers and dealers to report last sale information, Roberts said. Or the SEC could require greater transparency through an addition or amendment to MSRB rules, he said.
"Chairman Levitt has emphasized that the commission's first choice would be for the industry to move ahead on its own and not wait for regulators to impose new rules or even new laws," Roberts said. "This appears to be a reasonable course of action. Accordingly, the industry should be thinking about alternative methods for improving transparency in the municipal securities market. I encourage the industry to do so."
