A new push for transparency in muniland
SEC Commissioner Elisse Walter spoke at the SIFMA Municipal Bond Summit yesterday, and her message came across loud and clear. She said that despite enormous advances in technology, decentralized muniland trading is still too hard to understand from the outside. She said that although 75% of municipal bonds are held by retail investors through direct ownership, money market funds, mutual funds and closed end funds, retail investors are still “afforded second class treatment.”
Walter led a two-year effort to assess the hurdles that retail investors face in the municipal bond market. The SEC held three field hearings on the municipal market over the last two years, and Walter said one thing that struck her were the retail investors who said that they couldn’t get pricing for their municipal bonds. Walter seems dedicated to fixing that problem. Transparent bond pricing – the bedrock of a stable and fair market – has been unavailable to investors for decades in muniland.
Walter’s statements echoed the findings of the SEC muni report (summarized by the law firm Bingham):
The report finds that “the secondary market for municipal securities is relatively opaque.” Pre-trade bid and ask quotes are not readily available. Market participants have sought greater insight into the value of municipal securities as they rely less on rating agencies or on bond insurance and other credit enhancements. The Report finds that lack of price transparency inhibits retail customers in assessing the fairness of prices offered by dealers. Further, the lack of price transparency undermines the ability of dealers to meet fair pricing obligations.
This is the core problem of the muni market. In summary, the report says that retail investors can’t get price quotes, and they don’t know if the prices that they are offered by dealers are fair.
Here are the specific steps being advocated by SEC Commissioner Walter (summarized by the law firm Bingham):
- Improve pre-trade price transparency by amending Regulation ATS to require alternative trading systems (ATS’s) with material transaction or dollar volume in municipal securities to make publicly available best bid and offer prices and responses to “bids wanted” auctions on a delayed and non-attributable basis
- Improve pre-trade price transparency by the MSRB requiring broker’s brokers to make public best bid and offer prices on electronic networks and to publish responses to “bid wanted” auctions on a delayed and non-attributable basis
- Improve post-trade price transparency by the MSRB requiring municipal bond dealers to report “yield spread” information to its RTRS, in addition to existing interest rate, price, and yield data.
If you made it through the jargon, you just read the blueprint for a new, reinvigorated municipal bond market. Commissioner Walter appears to have a ready partner in Lynnette Kelly, executive director of the Municipal Securities Rulemaking Board, who is responsible for implementing many of these improvements once there are approved by the SEC and the MSRB’s board.
These are not easy changes to put in place in a market that has long been dark with closed information channels. But stay tuned. Light is on the way to muniland.