Muniland’s multi-purpose plumbing

March 31, 2014


There has been a lot of reporting about the more than 90 retail-size trades made in the $3.5 billion Puerto Rico general obligation bond that was issued March 11. The official statement for the deal says that transactions may not be done in amounts below $100,000 unless Puerto Rico is raised to investment-grade from junk.

I’m not sure if dealers were knowingly breaking the rules, too lazy to read the bond’s documents or thought that regulators would not be paying attention when they executed the trades. It could have been small regional dealers executing the illegal trades or maybe even the brokerage operation of one of the underwriters. Dealer identities on trades are never made public, so there is no way of knowing.

Municipal Market Advisors first spotted the illegal trades on March 13 and Thomson Reuters’ Rick Cahill was the first to publicly comment on the need for regulators to start paying attention and halt the retail-size trades.

Among the reporting and twitter chatter I noticed that there is not a clear understanding of how the plumbing of muniland trade reporting works and how other vital securities transactions systems tie into the trade reporting system. There is confusion about how trades were modified or cancelled. I pulled some of the documentation of the MSRB and National Securities Clearing Corporation so everyone can get a better look at muniland’s plumbing.

Most market participants first send their trade reports to the National Securities Clearing Corporation (NSCC) Real Time Trade Matching (RTTM) system. This clearinghouse queues the trade messages, checks for errors and timestamps the message bundles. NSCC is responsible for accurately matching the trade reports from dealers on both sides of the trade in preparation for cash and securities ownership to be exchanged during settlement.

After the RTTM system completes its processing, it sends a trade report message to the MSRB Real Time Trade Reporting System (RTRS) for display on the EMMA web system. Trade reports received at MSRB’s RTRS are distributed via data feeds to Thomson Reuters Municipal Market Data, Bloomberg and other market data vendors for processing and display in their systems.

The five largest municipal dealers, which do about 50 percent of muniland trades, have a direct connection to the NSCC RTTM system, as shown in the diagram above. Medium dealers, if they are members of NSCC, also directly-connect to the system. Smaller dealers are typically correspondents to a clearing firm that processes their trades at the NSCC (shown as “Participant A” above).

Dealers can also directly report their trades to MSRB’s RTRS system, but there are numerous advantages to the NSCC RTTM system. It’s easier in securities processing to have one “golden copy” of a trade that reflects all the changes made over time, rather than different versions of a trade flowing through different systems.

Once a trade is reported into muniland’s plumbing, it becomes part of the fixed income securities processing system. There is always a record of a trade message it as it passes numerous modifications and cancellations. This is especially critical because large sums of money are changing hands.

There was some discussion that the MSRB was erasing trades and trying to protect dealers who were making undersized Puerto Rico trades. MSRB has stated publicly that trades may be erased from the public EMMA site, but it and dealer regulator FINRA maintain an internal record of all trades, modifications and cancellations. Of course there is a permanent record of the trade at the NSCC RTTM.

Once you understand how trade reporting relates to securities transaction processing, it’s easier to understand that trades are never truly “erased”.

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