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.
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: