MuniLand

Another tool to make people more comfortable

 

After the launch of the MSRB’s new price discovery tool on EMMA I chatted with Executive Director Lynnette Kelly about it and other transparency initiatives. Kelly led the launch of the EMMA website in 2008 and she has continued to champion its expansion to increase transparency in the municipal market. Kelly said that the new and better EMMA was “another tool to make people more comfortable owning municipal bonds.”

It’s astonishing how much transparency muniland has today compared to the pre-EMMA days. Back then, finding offering documents for new bond issues meant searching through a diffuse set of document libraries and waiting for a hard copy to be mailed. Trade data was available, but it was in a very crude, unusable form for retail investors. EMMA is much more than bond documents. Here is the official description:

The Electronic Municipal Market Access system, or EMMA®, is the official repository for information on virtually all municipal bonds. EMMA provides free public access to official disclosures, trade data, credit ratings and educational materials and other information about the municipal securities market.

EMMA provides investors with key information about municipal securities and is presented in a manner specifically tailored for retail, non-professional investors who may not be experts in financial or investing matters.

Big data improvements at the MSRB

The fine folks at the Municipal Securities Rulemaking Board, led by director of product management Justin Pica, have launched some fantastic improvements for the MSRB’s market data and bond document platform EMMA.

Navigate to the three new major functions on the site with a CUSIP ID:

1. The ability to see trades for a specific security aggregated for one day with trade count, total par traded and high and low price and yield (top right box).

2. Chart trade prices (lower left box).

3. The price discovery tool allows an investor to compare up to five similar securities from comparable issuers with similar terms and credit quality (lower left box).

The SEC’s new municipal adviser rule is not confusing

Governing.com ran a story titled “Why’s the SEC’s New Municipal Advisor Rule So Confusing?” Actually the new rule, although not yet finalized, is not confusing. There are resources for muniland participants to understand how it will be implemented and what responsibilities muni advisors have towards their clients. In fact, I have never seen a better rollout for a new regulatory effort.

Here is a roadmap:

As directed by Congress in the 2010 Dodd Frank legislation, the SEC published the definition of a municipal adviser last September. Over 1,100 municipal advisers have registered with the SEC and MSRB (registrations here including a downloadable list). Reuters detailed what happened last January:

After it was signed in 2010, the Dodd-Frank law ignited a fight over exactly who counts as a municipal adviser. The dispute lasted until the SEC approved a final definition in September, which allowed the MSRB to begin drafting regulations.

Cheers to the MSRB

The Municipal Securities Rulemaking Board made a wonderful regulatory push when it issued its proposed rule for the conduct of municipal advisers. Municipal advisers are professionals who are supposed to help state and local governments structure their borrowing and investment activities in the most economically efficient way.

In the past, advisers did not always place the interest of their government clients ahead of all other interests and they had undisclosed conflicts of interest. Basically, local governments could be treated as “muppets” by advisers without any restraint from the law.

In the Dodd-Frank Reform Act, Congress created a new law to protect municipalities and gave new authority to the MSRB to create rules to regulate the activities of municipal advisers. To put the law into effect, the MSRB issued Proposed Rule G-42, and said:

Diluting the MSRB

Muniland’s overseer, the Municipal Securities Rulemaking Board, has a big job keeping the $3.7 trillion municipal bond market in order. The MSRB was first authorized by Congress in 1975 and mandated to have 5 securities firms, 5 bank dealers and 5 public members. It was nonetheless dominated by the views of bank and dealer members, rarely undertaking investor protection initiatives. There was minimal oversight of municipal bond trading and underwriting practices as dealer banks were steering the ship.

After some gruesome muniland disasters like this one detailed by Bloomberg, Congress added law within the Dodd-Frank bill for the MSRB:

Joseph Ambrosini says the deal looked so easy. JPMorgan Chase & Co. bankers told him there was really no risk. All he had to do was sign a public financing contract, and the bank would give $280,000 to his school district in New Castle, Pennsylvania.

Muniland, meet your issuers

 

Bloomberg’s Joe Mysak, whom I consider the king of muniland, had a delightful stream of consciousness via Twitter today about how little information he had to report from when he was a muni reporter in the 1990s. In one tweet he laments the lack of access to preliminary official statements for bond offerings. To get one, “you basically had to rely on spies,” he says.

Thankfully, those days are over. Official statements are in the public domain via a giant file cabinet called EMMA, which is maintained by the Municipal Securities Rulemaking Board. It’s muniland’s equivalent to the SEC’s Edgar system for corporate securities (actually it’s even more advanced).

Muniland’s regulator hard at work

I heard an economics editor give an amusing response the other day when asked if the U.S. has “free” markets. She responded that, since all markets are regulated, that, pretty much, yes. I had to chuckle because municipal bond markets, although regulated reasonably-well on the primary side when bonds are issued, have minimal supervision or regulation on the secondary or trading side after bonds have been issued. It’s difficult to have confidence that investors are always protected when you read stories about abuses like excessive mark-ups, for example.

Listening to a press call with the MSRB (the municipal market’s overseer), after its quarterly meeting on Friday, I felt a jolt of enthusiasm. The board has been spending a lot of effort untangling the thorny issues that must be addressed to bring more transparency into primary and secondary municipal bond markets. Here is the MSRB’s priority list (my comments in parentheses):

Trade Reporting Concept Release: To support the MSRB’s ongoing commitment to increasing transparency in the municipal market related to pricing of municipal securities, the Board agreed to publish the second concept release in a series of releases on the MSRB’s existing transaction reporting system. The new concept release will seek public comment on improving the quality and usefulness of available post-trade information and the appropriate standards for the collection and dissemination of pre-trade information on the MSRB’s Electronic Municipal Market Access (EMMA®) website. (I can’t wait to see the details)

Building a new municipal bond market

When FIX – the industry electronic trading standard – was fleshed out for fixed income in 2003, municipal bonds were incorporated. I got a fresh look at FIX at the FIX Protocol Americas Trading Conference this week. All the major muniland alternative trading systems (ATS)  including Bonddesk, MuniCenter and Tradeweb, as well as the major dealers are already FIX compliant for the latest 4.4 version.

The SEC has tasked the Municipal Securities Rulemaking Board (MSRB) with several new pre-trade transparency initiatives. They are considering two projects:

1) Determining the “prevailing market price” for a municipal security.

Make way for new muniland disclosure and market structure

The SEC released its long-awaited report on muniland disclosure and price transparency yesterday. Ten years from now, every retail investor will want to say a word of thanks to Commissioner Elisse Walter, even if only half her recommendations on transparency and investor protection are implemented. Unfortunately, her term as SEC commissioner expires June 5, 2013, which leaves her less than a year to get the ball rolling on her proposals.

The report is composed of two primary areas: The first part concerns better disclosures by municipal bond issuers about their finances, and the second addresses the market structure for trading municipal bonds. It’s the second part that contains the really game-changing parts of the report.

On disclosure, the report recommends institutional changes, such as the requirement that muniland participants adopt the standards of the Government Accounting Standards Board and make timely and audited financial disclosures. The report recommends that conduit borrowers (think non-public entities like non-profit hospitals and private colleges) be subject to the same registration and disclosure standards as corporate securities and barred from using exemptions that municipal issuers rely on. Conduit issuers happen to have the highest incidence of defaults, and investors need the greatest level of disclosure for these securities.

Examining muniland’s indices after the Libor scandal

The muni market’s overseer, the Municipal Securities Rulemaking Board (MSRB), is taking aggressive action to survey muniland indices following the Libor scandal. The board is asking index providers to disclose more about how certain indices are developed. The MSRB has no direct authority to regulate indices because, as with Libor, they are maintained by private companies and are outside of the board’s legislative mandate to regulate dealers. Alan Polsky, the current chairman of the MSRB, said in a press call that the board did not believe that there was any wrongdoing in this corner of the market, but that increasing transparency would enhance investor confidence. Here’s what he stated in a press release:

“Like other regulators, the MSRB is concerned about the transparency surrounding the development of market indices,” said MSRB Chair Alan Polsky. “We plan to review indices used by the municipal market – and develop educational materials about their use – to ensure that the market operates fairly and transparently.”

This is exceptionally good news because the municipal markets generally lag behind the equity markets in the transparency of their indices. You could easily calculate the value of the Dow Jones industrial average yourself, because information on all of the Dow’s components are publicly available. The same can’t be said for the Bond Buyer 20 index.

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