MSRB Proposes Amendments to Rule on Municipal Security "Close-Out" Procedures
The MSRB proposed amendments to MSRB Rule G-12 on uniform practice regarding close-out procedures for municipal securities. In the filing, the MSRB stated that it believed the amendments would "ultimately benefit customers by providing greater certainty that their fully-paid-for securities are in fact owned in their account, not allocated to a firm short, and would benefit dealers by reducing the risks and costs associated with interdealer fails."
Specifically, the proposed amendments would:
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"significantly compress the timing" of close-out procedures by permitting a close-out notice to be issued the day after the purchaser's original settlement date;
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reduce the period of time by which the purchasing dealer must complete a close-out on an open transaction to 20 calendar days;
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decrease the current allowable execution time frame from 11 days to four days after electronic notification;
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require a purchasing dealer notifying the selling dealer of an intent to close-out inter-dealer fail transactions, to continue to prompt the Depository Trust & Clearing Corporation to "exit" the position from continuous net settlement ("CNS") and hold the two parties responsible for effecting the close-out; and
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"retire" the MSRB Manual on Close-Out Procedures.
The MSRB proposal has yet to be published by the SEC, and comments are expected to be required within 45 days of the date of its publication in the Federal Register. The MSRB indicated that following adoption of this proposal, the MSRB would allow a 90-calendar day grace period to resolve any outstanding interdealer fails.
Commentary
Given recent developments in market infrastructure, current MSRB guidelines on delivery failures are outdated. The MSRB proposes to convert Rule G-12(h) from a set of optional guidelines to mandatory procedures that would apply to delivery failures in the interdealer market for municipal securities. Two leading industry trade groups, the Bond Dealers of America and SIFMA, support the proposal in general and, in particular, also wish to make the rules mandatory. However, these trade groups did raise concerns about details of the initial proposal set forth in a regulatory notice. Their concerns were echoed by other commenters as well.
Related Articles
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The MSRB solicited comments on proposed draft amendments to MSRB Rule G-12 ("Uniform Practice"). The amendments would update the close-out procedures provided under Rule G-12(h), and require specifically that municipal securities transactions be closed out no later than 30 calendar days after the settlement date.
