Smaller firms fear MSRB’s G-14 proposal would be a nightmare

Bonds

In bringing trade reporting times down to 1 minute from the current requirement of 15 minutes, the Municipal Securities Rulemaking Board’s proposal to amend Rule G-14 could have a wide impact on smaller broker dealers and liquidity providers without the resources to automate these transactions.

That’s according to comments the MSRB received as part of its request for comment on a proposed amendment to Rule G-14 on reports of sales or purchases. The nine responses so far largely accuse the board of caring only for the concerns of large institutional investors and not having a view to how trades are executed at many firms.

“My main area of concern involves circumstances where multiple transactions occur simultaneously at firms that have not fully automated their order flow,” Mike Petagna, president at Amuni Financial wrote in his letter. “Although I do believe this amendment has been proposed in good faith, I feel strongly that the small broker-dealers still left in the municipal marketplace will be disproportionately penalized.”

Mark Kim, MSRB CEO said the request for comment would help the Board weigh the costs and benefits of amendments to post-trade transparency.

According to the MSRB, 76.9% of trades in 2021 were reported within one minute and 97.3% were reported in five minutes or less. Petagna believes there is good reason why 23.1% of trades were not reported in the proposed one-minute window such as a lack of automation, necessary human intervention, multiple parties involved in a transaction, firm mandated trader releases, and counterparty discrepancies, among others.

“Perhaps trading that involves retail customers should be segmented from the dealer-to-dealer trading data,” Petagna said. “Dealer-to-dealer and institutional ticketing is a much different experience than what occurs during a retail order and trade.”

John Isaak, senior vice president at Isaak Bond Investments estimates the cost of integrating a Bloomberg TOMS or eTOMS platform, at around $500k per year, a cost far too prohibitive for his firm and many others. 

“This will force many small and medium-sized firms to have to also invest more capital into expensive technology which would stain such companies who are trying to work to increase capital levels to eventually more sophisticated systems,” wrote Darius Lashkari, chief compliance officer at the Investment Placement Group.

“Municipals are often booked en masse and manually,” said Edward Sheedy, fixed income trader at Mid Atlantic Capital Group in his letter. “This rule would result in a huge amount of inefficiencies as traders will have to drop everything they are doing every time a muni order is booked in order to avoid running afoul of this horrendous rule.”

While many of the comments address the problems smaller firms would face in attempting to comply with such a rule, it may not only be small firms affected by the MSRB’s proposal. 

“The largest problem will be for voice trades,” Isaak told the MSRB. “My guess is the larger dealers will even have trouble as they will have to instantaneously have the bond up and price it, take off hedge, if any, select the amount and send a vcon,” he added. “This is just not possible if one is doing multiple trades.”

The strong influence of large firms on how the market deals with trades is also being noted.

“I feel strongly that the trading statistics are skewed by automated trading occurring in certain parts of the market,” wrote Petagna. “For instance, our firm can automatically book trades that execute on a particular ATS due to that platform’s relationship with our clearing firm,” he added. “Even with a very expensive order management system, like Bloomberg TOMS, I believe the proposed amendment would do more harm than good.”

“The large players have you duped as to reporting large transactions: they still control when they want their trades to report and you let them,” commenter Bill Bailey told the MSRB. “Since the large transactions affect the generic scales most people base their trades on, those are the transactions you should be focused on.”

But there are still some arguing that this will be a positive for the visibility it would provide.

“As a fixed income analyst (I evaluate municipal bonds and my company’s customers are the investment houses that manage municipal bond funds), I am strongly in favor of this, as it is important to see all sides of the trades in a particular bond (purchase from customer, inter-dealer, and sale to customer) as soon as possible in order to accurately evaluate bonds,” said William Tuma, regional operations/SME associate director at IHS Markit.

Comments on the MSRB’s request are being collected until Oct. 3, 2022.

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