May 14th started a one-year countdown to the implementation of the Mark-up Disclosure Rule and the implementation of the PMP Waterfall approach for fixed income in 2018. If your firm hasnt started working on a process and solution, you are already behind.
In our conversations with industry participants we have learned that many large firms havent begun to focus on a solution and some smaller firms believe they can do it manually. Its no small undertaking, and regardless of their approach, all firms need about 12 months to evaluate their options, develop their solution, test and implement them. Unfortunately, there are not 12 months until the rule goes live. On July 12th the industry received additional guidance from the regulators by way of a coordinated release of FAQs by both the MSRB and FINRA to assist in understanding the nuances of the rule, thus further narrowing the development and implementation window.
Its a complicated rule to satisfy. To recap, in February of 2016, the Financial Industry Regulatory Authoritys Board of Governors approved a proposal designed to help retail customers understand and compare transaction costs in fixed-income securities. The mark-up disclosure rule requires firms to disclose on the customer confirmation the firms mark-ups and mark-downs based on a Prevailing Market Price (PMP) on bonds bought and sold to retail customers on the same day that they are bought or sold for the firms own account. The rule offers guidance on how firms should determine a PMP, establishing a multi-step waterfall approach in establishing the value. While the regulation only applies to retail trades done on the same trading day as firm principal trades, many firms are choosing to disclose markups and mark-downs on all retail transactions to ensure consistent reporting on client confirms.
Firms should be asking themselves:
How do we…
…get to and justify this number?
…get this number in real-time in the trade record?
…explain what the number represents?
…avoid errors on customer confirmations?
There are many steps to solving the PMP puzzle, and at a high level this list would include at least the following:
In an ideal world, firms would have 24 months to thoughtfully plan and implement a PMP solution. Now firms are faced with basically doing 18 months of work in less than 12.
Tony Miscimarra is a Managing Director, BondWave