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BPFC Briefing Muni MKT 12 15 PDF
BPFC Briefing Muni MKT 12 15 PDF
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! Municipal Bonds:
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! Raising the bar on best execution
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! in a $3.7 trillion market
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! December 15, 2016
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1001 Avenue of the Americas
! Suite 1218
! New York, NY 10018
Tel: (212) 719-7535
www.bryantparkfc.com
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Municipal Bond Market Briefing 2
EMMA's Birth
The!Municipal!Securities!Rulemaking!Board,!the!industry's!selfIregulatory!organization,!
took!a!significant!step!toward!improving!the!market's!transparency!in!2009,!setting!up!
the!Electronic!Municipal!Market!Access!system!(EMMA®)!under!authority!granted!by!
the!SEC.!!EMMA!has!two!mandates!as:
! The!official!central!repositary!for!disclosures!by!municipal!issuers.!
! A!central!source!of!historical!price!information!on!municipal!bond!trades,!giving!the!
public!free!access!through!its!web!site!to!data!going!back!to!2006.!!!
Since!2012,!dealers!have!been!required!to!report!all!trades!within!15!minutes,!which!
then!appear!on!EMMA.!!New!features!on!EMMA!allow!investors!to!compare!trade!
histories!on!bonds!with!comparable!features.!!!
In!response!to!the!2012!SEC!study!and!its!recommendations,!a!consortium!of!dealers!
announced!in!2012!the!formation!of!Municipal!Bond!Information!Services!(MBIS).!3!!The!
consortium!said!it!planned!to!launch!a!"suite!of!products!designed!to!enhance!preItrade!
price!transparency!and!postItrade!operational!practices!for!the!municipal!bond!
marketplace."!
MBIS!offers!two!data!feeds.!!The!first!is!aggregated!bid!and!offer!data,!which!is!available!
intraIday!and!refreshed!every!5!minutes.!!This!service!includes!an!endIofIday!bulk!feed.!!
The!second!is!a!Comparable!Securities!Service!designed!to!help!market!participates!
make!judgments!about!the!pricing!of!less!liquid!securities.!!MBIS!data!has!been!cited!in!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
1!Report!on!Municipal!Securities!Market,!Securities!and!Exchange!Commission,!July!31,!2012.!
2!"Statement!on!Making!the!Municipal!Securities!Market!More!Transparent,!Liquid!and!Fair,"!Commissioner!Luis!A!Aguilar,!
U.S.!Securities!and!Exchange!Commission,!Feb.!13,!2015.!
3!Founders!include!Associated!Bond!Brokers,!Butler!Muni,!Hartfield!Titus!&!Donnelly,!Regional!Brokers!Inc.,!RW!Smith!and!
Associates,!Stark!Municipal!Brokers,!Sentinel!Brokers!Company,!Tradeweb,!Tradition!Asiel!Securities!and!Tullett!Prebon.!!
See!site:!http://www.mbis.com.!
©!Bryant!Park!Financial!Communications!2015!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Municipal Bond Market Briefing 3
articles!appearing!in!The$Bond$Buyer,$the!leading!publication!for!the!municipal!securities!
market,!and!in!other!financial!media.!!
©!Bryant!Park!Financial!Communications!2015!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Municipal Bond Market Briefing 4
with!respect!to!ascertaining!the!best!market!for!their!customer!transactions.!!Similarly,!preItrade!
transparency,!such!as!through!electronic!trading!platforms,!is!also!increasing!in!the!municipal!securities!
market,!and!dealers!need!to!periodically!analyze!and!determine!whether!incorporating!pricing!
information!available!from!these!systems!should!be!incorporated!into!their!bestIexecution!policies!and!
procedures.!
The!MSRB!acknowledges!that!a!wide!range!of!trading!systems,!pricing!platforms!and!
quote!aggregation!sites!operate!in!the!municipal!securities!market:!
Some!systems,!including!autoIexecution!systems,!both!display!prices!and!provide!execution!
functionality,!while!other!systems!display!prices!but!provide!no!execution!functionality.!!Still!other!
systems,!such!as!requestIforIquotation!systems,!may!provide!indications!of!interest!but!not!display!
prices!or!provide!execution!functionality.!
The!three!leading!ATS!platforms!for!municipal!bonds!are!TMC,%KCG%BondPoint!and!
Tradeweb.!!(See!profiles!on!Page!5.)!!They!are!used!by!dealers!to!trade!with!one!
another!as!well!as!to!provide!trading!access!to!the!retail!market!through!
workstations!and!other!types!of!services!used!by!financial!advisors.!!In!addition!to!
ATS!platforms,!the!municipal!market!uses!bulletin!boardIlike!services!such!as!
fabkom.com!that!allow!dealers!to!post!quotes!and!solicit!bids.5!!
Another!feature!of!the!market!are!the!many!retail!sites!operated!by!dealers!or!groups!
of!dealers!to!attract!and!aggregate!orders!from!individuals.!!Examples!include!
municipalbonds.com,!thebondcenter.com!and!bond!underwriter.!com.!
Spread Disclosures
Regulators!are!also!pressing!dealers!to!disclose!markups!and!markdowns!in!transactions!
with!retail!customers.!!!Under!a!proposed!change!to!MSRB!Rule!GI15,!a!dealer!who!
purchases!or!sells!bonds!from!for!its!own!account!would!have!to!disclose!the!markup!or!
markdown!on!the!costumer's!confirmation!under!three!conditions:!
! It!executes!a!transaction!on!the!same!side!of!the!market!as!the!customer!
! The!transaction!is!greater!than!or!equal!to!the!size!of!the!customer's!
! And!the!dealer!transaction!occurs!within!a!twoIhour!window!of!either!side!of!the!
customer!transaction.!
The!customer's!confirmation!would!disclose!the!difference!between!price!to!the!
customer!and!the!prevailing!market!price!for!the!security.!!This!would!be!expressed!as!
dollar!amount!and!as!a!percentage!of!the!principal!amount!of!the!customer!transaction.!!
A!hyperlink!to!relevant!price!information!in!EMMA!or!TRACE!would!also!be!included!in!
the!confirmation.!!The!MSRB!has!indicated!it!would!limit!the!proposed!rule!to!secondary!
market!trading.!
SIFMA,!in!a!letter!to!the!MSRB!and!FINRA!on!Dec.!11,!2015,!the!last!day!for!comment!on!
the!proposal,!urged!that!the!disclosure!standard!be!limited!to!riskless!principal!
transactions!involving!customers.!!It!also!favored!a!twoIhour!window!for!capturing!
contemporaneous!reference!trades!for!confirmations,!rather!than!a!sameIday!standard!
proposed!by!FINRA.!!In!general!comments,!SIFMA!urged!regulators!not!to!finalize!the!
rule!until!they!had!weighed!expected!benefits!of!the!disclosures!against!the!high!costs!of!
implementation!and!the!potential!impact!on!market!liquidity.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
5!In!September!2015,!Bloomberg!reported!that!one!of!the!trading!sites!operated!by!a!"broker's!broker"!II!
MuniBrokers.com!II!was!under!scrutiny!by!the!Justice!Department!for!anticompetitive!practices!in!secondary!trading.!!The!
site,!owned!by!Hartfield,!Titus!&!Donnelly!LLC,!was!reported!to!have!been!the!target!of!a!complaint!that!firms!using!the!
site!had!agreed,!or!were!being!asked!to!agree,!to!boycott!competing!services.!!!A!day!later,!news!reports!said!the!inquiry!
had!been!closed!with!no!action!taken.!
©!Bryant!Park!Financial!Communications!2015!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Municipal Bond Market Briefing 5
©!Bryant!Park!Financial!Communications!2015!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Municipal Bond Market Briefing 6
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
6!A!highly!readable!guide!to!the!categories!of!municipal!securities!can!be!found!on!Fidelity's!site!at:!
!http://www.fidelity.com/fixedIincomeIbonds/individualIbonds/municipalIbonds.!
©!Bryant!Park!Financial!Communications!2015!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Municipal Bond Market Briefing 7
Municipal!bonds!are!largely!a!buyIandIold!market!in!which!issues!trade!infrequently!and!
in!small!lots.!!In!2014,!the!MRSB!released!a!study!that!looked!at!trade!data!covering!43!
million!secondary!principal!transactions!in!more!than!a!million!distinct!securities!from!
2003!through!2010.!7!!The!research,!which!included!a!period!marked!by!the!credit!crisis!
and!the!implementation!of!real!time!trade!reporting,!found!that:!
! 50%!of!all!trades!in!the!municipal!market!had!a!value!at!or!below!$25,000!
! Only!5%!of!trades!had!a!value!equal!to!or!in!excess!of!$490,000!
! 50%!of!all!municipal!securities!traded!an!average!of!2.4!times!or!fewer!each!year!
Monthly!trade!data!compiled!by!SIFMA!showed!that!in!November!2015!82%!of!all!
municipal!bond!transactions!were!under!$100,000!and!13%!were!between!$101,001!to!
$500,000!in!the!month.!!
Trading!volume!in!the!municipal!securities!market!declined!after!the!credit!crisis!as!the!
worries!about!the!fiscal!condition!of!issuers!and!with!low!yields!reduced!investor!
demand.!!(See!chart,!below.)!!Volumes!have!yet!to!return!to!the!highs!seen!in!the!summer!!
$600,000
Monthly(volume,(par(value(in($million(
$500,000
Interdealer
$400,000 Trades Customer
39% Bought
$300,000 42%
$200,000
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2013 2014 2015
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7!See!"Report!on!Secondary!Market!Trading!in!the!Municipal!Securities!Market,"!Eric!R.!Sirri,!Babson!College,!July!2014.!!
This!report!was!commissioned!by!the!MSRB!and!is!available!on!its!site.!
©!Bryant!Park!Financial!Communications!2015!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Municipal Bond Market Briefing 8
of!2007.!!But!issuance!has!picked!up!in!2015!and!seems!on!track!to!exceed!levels!last!
seen!in!2012.!!Moreover,!mutual!fund!net!flows!have!recovered!from!a!midIyear!slump,!
with!more!than!$6!billion!of!net!new!money!going!into!portfolios!so!far!in!the!fourth!
quarter!of!2015.!
Conclusion
Regulators'!imposition!of!new!bestIexecution!standards!and!additional!disclosure!
requirements!is!remaking!the!municipal!securities!market.!!The!changes!mean!that!
market!participants!will!likely!step!up!adoption!of!electronic!trading!and!the!purchase!of!
processing!and!monitoring!services!in!2016!as!they!adjust!their!compliance!and!
oversight!to!meet!the!new!standards.!!Larger!broker!dealers!and!advisor!networks!that!
are!able!to!spread!these!costs!over!a!sizable!franchise!will!reap!competitive!advantages!
as!a!result!of!this!change.!
At!the!same!time,!an!improving!fiscal!picture!for!states!and!cities,!plus!the!prospect!of!
higher!yields,!could!help!reinvigorate!the!municipal!securities!market!in!2016.!!High!
levels!of!volatility!in!the!equities!markets!may!also!drive!more!interest!in!this!fixedI
income!sector.!!
As!Morningstar!noted!in!a!Dec.!10,!2015!commentary:!
Despite!a!few!negative!headlines!(Puerto!Rico,!Illinois,!and!Chicago,!to!name!a!few),!the!
municipal!market!has!recovered!nicely!since!the!2008!crash!and!largely!remains!
healthy...!California,!for!example,!topped!the!short!list!of![flagging]!states!following!the!
crash,!but!budget!cuts!and!tax!hikes!helped!the!state!get!its!finances!in!line,!making!it!a!
highIprofile!success!story.!
The!taxIexempt!market!has!seen!an!imbalance!between!supply!and!demand!in!recent!
months,!the!report!suggests,!adding,!"that!tailwind!has!helped!municipal!bonds!and!
funds!perform!well,!even!in!the!face!of!potentially!rising!interest!rates."!!A!sign!of!the!
imbalance!was!the!narrowing!of!discounts!on!municipal!bond!closedIend!funds,!from!an!
average!of!7%!at!the!end!of!2014!to!6%!as!of!November!2015,!the!fund!researcher!notes.!!!
Though!longerIduration!municipal!bond!mutual!funds!will!see!a!slight!outflow!in!2015,!
portfolios!in!Morningstar's!intermediate!national!category!had!attracted!$10.75!billion!in!
net!flows!through!the!end!of!October!and!looked!set!to!end!the!year!on!a!strong!note.!
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©!Bryant!Park!Financial!Communications!2015!