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• A TES model for MG participation in energy transactions in distribution systems. • A local energy pricing scheme based on reputation scores and loss reduction indices. • Ranking the suppliers based on a reputation index considering their past performance. • A reliability support service to improve the reliability in distribution network. • A local pricing scheme for the reliability support service. This paper proposes a novel framework for a distribution level transactive energy system in order to facilitate energy transaction among microgrids while improving efficiency and reliability of distribution system. The proposed market mechanism simultaneously considers competition among participants, distribution network reliability and operation conditions. To improve the reliability of supply, a reputation system is proposed, which ranks energy suppliers according to a reputation index based on their long term energy transaction history. A demand-oriented approach is utilized for extracting local energy prices. The local energy pricing scheme is based on combination of reputation scores, loss reduction indices and demand-side offering prices. A secondary market is proposed to use the capacity of energy suppliers for reliability support service in distribution network. The local pricing scheme for the reliability market is based on outage scenarios and customer interruption penalties. It is shown that the proposed model enforces energy suppliers to honor their generation commitments and prevents them from greedy behavior in the market. The energy market mechanism improves the reliability of supply and intensifies competition among participants. This mechanism directly reduces active power losses in distribution network and indirectly improves nodal voltage and branch loading profile. Moreover, utilizing the capacity of microgrids in improving the reliability of network, postpones network reinforcement investments needed for keeping the service continuity indices in acceptable range. [ABSTRACT FROM AUTHOR]