WASHINGTON -- Dealers that fail to report timely and accurate municipal bond transaction information to clearing agents not only violate MSRB rules, but also risk being "hammered" by securities regulators and lawmakers who want such data made public, an MSRB official said.

Christopher Taylor, executive director of the Municipal Securities Rulemaking Board, issued the warning at a meeting with securities firm officials in New York City on Monday.

"This is a big deal," said Taylor. "It's very important to the municipal securities market."

"If you're not getting your trades in in a timely and accurate fashion, that's going to make you violate [the MSRB's] uniform practice rules," he said.

"But much more serious is that you will be violating [MSRB] rules requiring public dissemination of data. And that is such a high priority with Congress, the [Securities and Exchange Commission], and even with our board, that I will tell you, you will be much more hammered by the regulators for that."

During the meeting it was revealed that some dealers are not reporting their side of dealer-to-dealer transactions to clearing agents and that a certain percentage of bond deals between dealers and institutional investors are not being reported by either side.

"That's not going to be allowed to continue to happen," Taylor told the group. "We're going to get all of the trade information at the board and we're going to know who is playing by the rules and who is not."

The MSRB is scheduled to begin a four-phase pilot program in January that is aimed at collecting figures on bond transactions for public dissemination and creating a surveillance and audit trail for securities regulators. The SEC approved an amendment to MSRB Rule G-14 last month that requires the reporting of information on dealer-to-dealer bond transactions under the first phase of the program.

MSRB officials told dealer representatives and clearing agents on Monday that the purpose of the meeting was to emphasize the importance of improving their reporting of bond transaction data to ensure the success of the pilot program and an industry-wide move to T plus 3, a three-day clearance and settlement process. All securities markets must move to the T plus 3 system next June.

At the meeting, MSRB officials said they are concerned that the so-called comparison rate for dealer-to-dealer trades is only about 78%. That means that for about 22% of interdealer trades, the information that each dealer submits to a clearing agent does not compare or match.

"That's not good enough for transaction reporting, and it's certainly not good enough for T plus 3," said July Somerville, the MSRB's uniform practice specialist. "Something has got to be done in order to move that comparison rate closer to 100%."

MSRB officials and Walter Robertson, the National Association of Securities Dealers' compliance director, said that the NASD has sent letters to the top officials of some 200 municipal broker-dealers whose comparison rates are less than 90% for dealer-to-dealer bond transactions. The letters urge them to take action to improve their comparison rates.

The National Securities Clearing Corp., which operates an automated clearing system for most dealer-to-dealer transactions, has been sending the NASD report cards for individual firm comparison rates. The NASD is prepared to levy sanctions against firms if the comparison rates are not improved, Taylor said at the meeting.

In a question-and-answer session at the meeting, an official of one dealer firm told Taylor that his firm does not typically report information about interdealer bond transactions to a clearing agent. The firm waits for the other dealer in the transaction to report the information to the clearing agent. His firm then confirms that the deal was done when the clearing organization sends out a form showing that both sides of the transaction failed to report the same information.

"I've got news for you. You've got a big problem," Taylor told the dealer firm official. "You're supposed to be submitting information to your clearing agency or to the National Securities Clearing Corp. If you're not, trust me, you are in big violation of the law right now."

Taylor said firms have been required to submit transaction data to clearing agents or the National Securities Clearing Corp. under rules that have been in effect for almost 10 years.

Somerville told the group that the comparison rate for trades between dealers and institutional investors is only 82% three days after the trade. That rate -- which means there is no match in the information that the dealers and institutional investors submit to clearing agents in about 20% of such transactions -- is too low and must also be improved, she said.

The MSRB expects to propose a rule next year that will require dealers to submit data for these transactions next year under its pilot program. MSRB officials said at the meeting that they will probably publish "a concept paper" next spring that proposes how to proceed with this phase of the pilot program and seeks comments on the proposals.

Somerville also said that the MSRB has found a number of transactions between dealers and institutional investors are never reported even though the bonds show up in a depository.

"How can your comparison rate be good if you're not even putting your trades into the system?" she asked the dealers at the meeting.

MSRB and NASD officials said they will probably put into effect a report card system to get firms to improve their comparison rates for these transactions.

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