MSRB to Propose Automated Clearing For Institutional, Interdealer Trades

WASHINGTON - The Municipal Securities Rulemaking Board is expected to propose a rule this week that would generally require that interdealer and institutional trades be cleared and settled within automated systems.

The move is unlikely to draw broad opposition since the vast majority of interdealer and so-called "delivery versus payment" and "receipt versus payment" customer transactions - which are largely non-retail transactions - are already processed within automated clearance and settlement systems operated by clearing corporations and depositories.

Nevertheless, says the MSRB, the draft rule could require significant changes in clearance and settlement practices by some smaller dealers who continue to process their transactions outside of automated systems.

Such dealers have been able to do so through exemptions built into the board's clearance and settlement rules G-12 and G-15. Those exemptions would be eliminated under the new rule, which is open for comment until Dec. 15.

The MSRB's proposal comes as an influential worldwide panel, the Group of 30, moves towards developing broad international standards for clearance and settlement. According to the MSRB, the talks have focused attention in both the corporate and municipal securities markets on automated clearance and settlement.

"With 50% of new bond volume coming in book-entry only, virtually everybody in the municipal bond community has been forced to at least have systems in place to do electronic clearance and settlement," said Christopher Taylor, the MSRB's executive director. "The cost difference is so large between physical securities [and book-entry] that everybody goes electronic as much as possible now."

Mr. Taylor said that when the MSRB imposed its first round of automated clearance and settlement standards in the mid-1980s, "it was very controversial for this industry.

"But the industry in the last five to seven years has gone from an industry largely unelectronic to one even more electronic than most other segments of the securities industry," he said.

"I would say that most people will not be affected" by the proposal, said Dominick Antonelli, chairman of the Public Securities Association's operations and compliance committee and chief operating officer of Roosevelt & Cross Inc. in New York. He added, "the majority of deals are done that way now," referring to automated clearance and settlement. "I would hope it doesn't hinder some of the dealers who do it that way."

The MSRB's rule would require all dealers in municipal securities to have access to the automated comparison services offered by a clearing corporation. All interdealer transactions would have to be compared through an automated comparison system unless the transaction is ineligible for automated comparison.

All dealers would have to have access to the services of a securities depository which offers automated confirmation and book-entry delivery services for municipal transactions. All interdealer transactions in depository-eligible securities would have to be settled by book-entry delivery.

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