The MSRB made a second request for comment on draft provisions concerning minimum denominations, particularly Draft MSRB Rule G-49 regarding transactions below the minimum denomination of an issue of municipal securities. Draft MSRB Rule G-49 would apply to below-minimum denomination customer and inter-dealer transactions, and would supplement MSRB Rule G-15(f).

Draft MSRB Rule G-49 includes the following provisions:

  • Minimum Increments: In response to concerns raised during the first request for comment and the policy originally underlying the prohibition against trading with a customer in a below-minimum denomination position in MSRB Rule G-15(f), the MSRB proposed to eliminate the initially proposed "condition that a dealer's sale to a customer(s) must be consistent with any restrictions in the issuer's authorizing documents regarding increment amounts ('minimum increment condition')."
  • Liquidation Statement: The MSRB also proposed to eliminate the previously published requirement that "a dealer, prior to effecting a sale to a customer in a below-minimum denomination position, confirm by obtaining a liquidation statement from a person other than the dealer's customer, such as another dealer, from which the below-minimum denomination position was purchased, that the position is from a customer that fully and completely liquidated its below-minimum denomination position." However, the MSRB proposed to retain the requirement that "a dealer confirm, before selling a below-minimum denomination position to its customer, that the selling customer has fully liquidated its position when the dealer buys from its customer and then sells to another of its customers."
  • Limitations Applicable to Inter-Dealer Transactions: The MSRB stated that "a new safeguard would be needed to substitute for the liquidation statement in order to avoid, in inter-dealer transactions, the creation of additional below-minimum denomination positions that subsequently may be placed with customers." To address the issue, MSRB Draft Rule G-49(c) would prohibit "a dealer, in an inter-dealer trade, from selling less than all of a below-minimum denomination position that such dealer acquired either from a customer that fully liquidated its below-minimum denomination position or from another dealer."
  • Customer Account Records/Disclosure: Draft MSRB Rule G-49 would also provide that:
    • a dealer effecting a purchase from or a sale to a customer must determine its customer's position in the subject security based upon the account records in the dealer's possession or upon a written statement provided to the dealer by its customer;
    • in sales to customers in compliance with certain exceptions set forth, the dealer is required to give or send to the customer a written statement informing the customer that the quantity of securities being sold is below the minimum denomination for the issue and this may adversely affect the liquidity of the customer's position unless the customer has other securities from the issue that can be combined to reach the minimum denomination of the issue; and
    • the written statement may be included in the customer's confirmation or provided on a separate document.

Comments on the minimum denomination draft provisions must be submitted by October 18, 2016.

Commentary

Is the compliance burden of tracking minimum increments really worth the rule's benefits (to the extent any such benefits exist)?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.