The Securities Industry and Financial Markets Association on Friday shared details on its proposed execution-with-diligence standard for municipal trading.
The proposal follows the industry group’s initial proposal to the self-regulatory organization Municipal Securities Rulemaking Board (MSRB) in June 2013 that an execution-with-diligence standard be applied to trades in municipal securities, which is a higher standard for dealers to meet than what is currently in place, according to SIFMA.
A working group of SIFMA members developed the standard following the release of the 165-page July 2012 SEC Report on the Municipal Securities Market. The industry group says an “overwhelming majority of members of SIFMA’s Municipal Securities Division” approved it.
“SIFMA’s proposal moves the industry forward in a robust way that further enhances standards so that customers receive fair and reasonable prices,” said David Cohen, managing director and associate general counsel of the industry group, in a statement. “The proposal recognizes the unique characteristics of the municipal market and would strengthen regulation in a manner consistent with the way the market operates.”
Because muni bonds are not traded on a central exchange and do not have a central aggregator of quotes, the execution standard in the municipal market “cannot mirror that for equities,” SIFMA says. “The municipal securities market also has fundamental differences from other debt markets, including its diverse and fragmented nature, small securities trade sizes and far less frequent trading than corporate bonds.”
In general, SIFMA says that it supports efforts that would improve trade-execution standards. Since there is not one path for dealers to take for execution with diligence, the industry group says, its members have proposed a principles-based rule.
The SIFMA proposal resembles the approach taken by the Financial Industry Regulatory Authority, an independent regulatory body, to corporate fixed-income securities. It seeks to define the muni bond market as one that includes brokers, dealers and municipal securities dealers known to trade particular securities, and it would require periodic review of trading counterparties, a new regulatory requirement.
For the proposal, SIFMA says it is encouraging the MSRB to amend its Rule G-18 to reflect an “execution-with-diligence” concept of execution. The industry group also is asking the MSRB to consider “the short-term and long-term costs and potential benefit of any rulemaking before formally proposing any changes.”