Muni Sweeps: Muni CDS

By Cate Long
June 2, 2011

Lisa Pollack of Markit in London posted via Twitpic this table of DTCC data on municipal credit default swaps. Since California is the biggest muniland issuer it’s not a big surprise that it leads with the greatest number of contracts outstanding.

The market is cleaved into two pieces

The Municipal Securities Rulemaking Board has issued a critical new rule for muniland. The rule, known as G-23, prohibits a dealer, such as JP Morgan or Goldman Sachs, from advising a municipal entity and then switching hats to act as the underwriter. Do you see the massive conflict that this could have posed?

The dealer, acting as an “adviser,” could have set up the municipality to structure a bond that had more expensive fees than a straight bond, and then jump over to being the underwriter to collect the higher underwriting fee. If a dealer is acting in a dual role, who is looking out for the issuer’s interest? Previously the dealer was only required to make a disclosure that the dual role could be a conflict.

I really welcome the new rule and congratulate the MSRB for resisting the dealers’ weak arguments that small issuers would be disadvantaged. Generally, it’s the small issuers that are most often preyed upon — see my post from yesterday on Pennsylvania’s muni swaps repository.

MSRBMSRB Adopts Dealer Role-Switching Prohibition

Dow Jones: Muni Bond Board Forbids Advisers To Also Act As Underwriters

Reuters: U.S. muni board divides advisor, underwriter roles

SIFMA: SIFMA Comments to SEC on Proposed Amendments to Rule G-23

Muni market pop

Following the lead of the big daddy of the bond market, U.S. Treasuries, municipal bonds moved up yesterday. From the Bond Buyer:

The muni market finally awoke from an eight-day slumber.

Municipal bond yields declined as many as four basis points Wednesday as the Treasury market rallied to fresh 2011 highs on weak U.S. jobs and manufacturing data. In the prior eight sessions, benchmark muni yields had moved no more than a single basis point.

“We were responding to tremendous movement in Treasuries,” a trader in New York said. “If we hadn’t moved, it would have suggested we weren’t in good shape. But we did.”

Intermediate muni bond yields fell two to three basis points and tax-exempts maturing beyond 2036 fell four basis points, according to Municipal Market Data. Short-term munis held steady.

Mini sweeps

Reuters: China must consider selling municipal bonds -c.bank

Governing.com: States, Counties Spar Over Medicaid ‘Flexibility’

Reuters: Big investors urge hedge funds to open up

Reuters: Tax-free debt issuers stick to the sidelines

Wall Street Journal: Wells Capital Manager Is Cautious on Muni Rally

Los Angeles Times:Q&A: After the muni bond market’s rally, now what?

Reuters: Junk funds lure buyers, unlike broader market

WaPo: District to tax-wary investors: We have plenty of bonds!

Bond Buyer: Default Looms for Florida Bridge Agency Stuck With Skeleton Crew

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/