Confirmations

Confirmations

There are very specific rules that must be followed that standardise the process of firms dealing with other firms and with customers. MSRB and FINRA requirements are extremely similar.

When it comes to debt (the only thing MSRB covers), MSRB Rule G-15 requires showing the dollar amount and the percentage of the dealer’s markup or markdown from the prevailing market price on the confirmations. FINRA Rule 2232 instead requires showing the reference price, cost/proceeds, and the price difference. In the modern world, both now barely require similar markup or markdown disclosures.

Customer confirmations are written documents that must be sent to all clients; they cannot be refused. Even in TICs where not all of the tenants might get the mail, at least one must get the mail, because one client in each account must always get confirmations. The confirmations will include;

• Name, address, and telephone number of the firm executing the transaction.
• The name of the customer, the owner of the account.
• Whether the transaction is a buy or a sell.
• Whether the transaction is long or short (not generally used in MSRB confirmations)
• The number of securities
• The description of the securities involved, or the name and symbol (for FINRA)
• The par value of any securities (not generally useful for FINRA equity confirmations)
• CUSIP number for any security that has one.
• The trade date, the settlement date, and the time of the trade execution
• Yield and dollar price (yield is not used for equity)
• The taxable nature of the investment, if the income is subject to AMT
• Whether the transaction was done in an agency capacity or a principal capacity.
• Total dollar amount of the transaction.
• Any accrued interest (not used on FINRA equity)
• If any of the bonds are insured (primarily MSRB)
• Source and amount of compensation, whether commission or markup/markdown

As stated earlier, the primary difference between MSRB and FINRA confirmation statement requirements is how the pricing of the bonds would be displayed. There are several

For MSRB zero-coupon bonds maturing in more than 2 years, the par value and accrued interest do not need to be shown. Confirmations must show the maturity value; however, and that the interest rate is 0%, as zero-coupon bonds are so named.

For MSRB OID (original issue discount) bonds, that fact must be included on the customer’s confirmation as well, and it will include a statement of the IPO price in dollars. If munis are trading without interest, when they are expected to be semi-annual, the confirmation will state the bond is trading “flat”, and generally occurs with an issuer in bankruptcy or at least default on the debt. Firms that receive a concession, a discount, for their own purchase to resell to a customer, that concession must be expressed on the confirmation in dollar amount.

Yield basis means showing the cost on the basis of a yield. The calculations create 2 dollar values. The lower dollar value is what is shown on any confirmations. Dollar price basis means showing the cost in dollars. When calculations are based on dollars, the math results in 2 yields. The 2 yields would most likely be yield to maturity, or basis, along with the current yield, or yield to call on the first call date, if a callable bond. Again, the client will receive a confirmation with the lower of the two yields.

A helpful guide to the yield that will be shown.

• For a par bond, simply the dollar price is used, as par bonds don’t have yield confusion. All are the same.
• For a discount bond, the yield would be YTM
• For a premium bond, that is not callable the yield would be YTM
• For a premium bond that is callable, the yield given is whichever is worst: YTM or YTC is used as “Yield to Worst”.
• For a bond that has already been called, YTC is used

Additional information

The previously discussed information is required on all confirmations; some may not be, depending on whether we are discussing the differences between FINRA and MSRB. There may be additional information, depending on specific circumstances.

• For new issues, the dated date must be disclosed if it will affect the price.
• They will disclose the first coupon payment date if it affects the security.
• How the security is issued, whether physically or in book entry form.
• If there is any callability on the bond. Details do not have to be there, only that there is a feature and details are available by request.
• If the municipal dealer is acting as agent for both the customer and the other side of the trade, potential conflict of interest. The dealer must either directly disclose the name of the other party or state that they will do so upon request.
• The denominations of the bonds are different from expected bonds.

Replacing confirmations

Confirmations are paper and can be lost. Clients can request a copy. Firms must have policies in place to maintain copies. If the trade occurred in the past 30 calendar days, the copy must be supplied within 5 business days from the request. If the transaction is older than 30 calendar days, the firm has 15 business days from the request to get a copy.

Municipal fund securities (529)

These are basically mutual funds. They aren’t, because they are issued by municipalities, but again, that is the definition of municipal fund securities; a security that would be defined as an investment company, if it weren’t exempt from that law because it is issued by a municipal entity.

Confirmations for these are far simpler; the total amount of money involved and the total number of shares involved. Doesn’t matter if it is a buy or a sell of the municipal fund security. Also, must identify the securities purchased so the customer can identify theirs from other purchasers of the issue. They will not include the other things like par value, or accrued interest, or maturity dates. Any customer investing in a 529 must get quarterly statements on the account. The statement will show contributions, withdrawals, and the value at the start and end of the period.