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.
Here are some of the widely used indices in muniland:
Bond Buyer 20
Bloomberg Municipal Bond Yields
Municipal Market Advisors AAA Median
Thomson-Reuters Municipal Market Data
Sifma Swap Index
Standard & Poor’s Composite Yield Table
The indices about which we know perhaps the least, though, are tied to Markit’s municipal credit default swaps. They describe their CDS pricing process generally like this:
Markit receives contributed CDS data from market makers from their official books and records. This data then undergoes a rigorous cleaning process where we test for stale, flat curves, outliers and inconsistent data. If a contribution fails any one of these tests, we discard it. By insisting on the highest standards, we ensure superior data quality for an accurate mark-to-market and market surveillance.