Dealers now back US auction-rate disclosure

September 2, 2009

msrb-logo    WASHINGTON, Sept 1 (Reuters) – More than a year after the auction-rate securities market seized up, a leading organization representing U.S. bond dealers has reversed course and decided to support plans to disclose more data about the bonds’ auctions.
   The Regional Bond dealers Association, which had initially opposed the new reporting rule because it said the auction-rate market was dying, said it now supports the rule because some bonds may remain outstanding for years.
   When the Municipal Securities Rulemaking Board first proposed making the auctions more transparent, “We argued that the ARS market was a dying sector and we questioned the wisdom of creating a reporting and dissemination system to support a product that has no future,” the Regional Bond Dealers Association said in a letter released Tuesday.
   But the group said that auction-rates, long-term bonds with interest rates reset periodically at auction, may remain outstanding for many years yet and the public should have information about them.
   At the same time, the MSRB would also include more data on variable-rate demand obligations in the disclosure system, which the bond dealers’ group said “justifies the MSRB’s development of the system.”
   When investment banks stopped participating in auctions in 2008, the bonds reset to often sky high default “penalty rates.” Many issuers scrambled to redeem, convert or buy the bonds to avoid those rates, which could reach 10 percent or more.
   But the crisis opened up a largely closed world and the quasi-governmental board that writes the rules for the municipal bond market began pushing for more information about when auctions occurred, who participated, and why they failed.
   Despite the market’s freeze — the RBDA noted in its letter that no new auction-rates were issued in 2008 or 2009 — not all issuers took back their debt. Some penalty rates were close to zero, the group said and “in those cases, there is little incentive for issuers to take any actions to convert or redeem their securities.” Other issuers were simply unable to refinance.
   The MSRB has already posted some information about auction-rates and variable-rates, which also have fluctuating interest rates but are backed by credit enhancements, on its Electronic Municipal Marketplace Access website and is now considering including details such as the identities of the variable-rate bonds’ liquidity providers. (Reporting by Lisa Lambert’ Editing by Leslie Adler) ((; +1-202-898-8328; Reuters Messaging:
Tuesday, 01 September 2009 22:19:26RTRS [nN01392954] {C}ENDS

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