The Securities Industry and Financial Markets Association said in a comment letter this week that it supports a proposal by the Municipal Securities Rulemaking Board to develop a centralized system for the collection and dissemination of critical market information about variable-rate demand obligations that would increase the amount of data available to market participants.
Under the proposal, remarketing agents would submit information about VRDOs to the MSRB through the board's Real-Time Transaction Reporting system, or a newly created system, by the end of the day that the interest rate is reset. The MSRB tentatively plans to display the information through the board's Electronic Municipal Market Access, or EMMA, system.
Specifically, remarketing agents would have to submit more than 10 pieces of information, including Cusip numbers, the name of the remarketing agent, the date of the interest rate reset and the interest rate for the next reset period, among other things. The board is also proposing that it receive notification of any interest rate conversion, including the date of the conversion and the new interest rate mode, by the end of the day on which the conversion occurs.
The system would be identical to one the board is considering for auction-rate securities, but comes as many ARS have been redeemed by issuers or converted to other types of municipal securities, greatly reducing the amount of information that would be available if the board sought only to increase ARS transparency.
In its comment letter, SIFMA noted that most reset information the board proposes to collect and disseminate - such as the length of the interest rate reset period or the length of the notification period - does not change on each reset date. As with the board's ARS proposal, SIFMA recommended that remarketing agents be allowed to establish a template at the time of a new issue when interest rates are first reset, to set up reset information that is relatively static.
At the time of each interest rate reset, the remarketing agent would submit the Cusip number, date of interest rate reset, and the interest rate for the next period. And at the time of a conversion to a new mode, the remarketing agent would then amend the template with the conversion information.
SIFMA also suggested that the MSRB discuss reporting preferences with issuers, noting that reporting the interest rate for the reset period is a departure from the current practice under Rule G-14 of price reporting VRDOs in dollar amounts.
"It is our understanding that a number of issuers prefer dollar amount publication of VRDO transactions rather than interest rate reporting, and we therefore recommend that you discuss this issue with representatives of issuers," the letter said.
Currently, VRDO and auction-rate securities are reported at the end of the day at par, or the face value of the security, and the information does not include yields or clearing rates. Both types of debt are considered short-term securities under the MSRB's Rule G-14 on transaction reporting and are not subject to requirements under RTRS that trades be reported within 15 minutes of execution or that the trade data for customer transactions include both a dollar price and yield.
VRDOs, like auction-rate securities, are long-term securities with short-term interest rates that are reset periodically through programs operated by dealers on behalf of the issuers of the securities. But a distinguishing characteristic of VRDOs is the existence of a "put" or "tender" feature that allows holders to liquidate their positions at par on a periodic basis.
Through the put or tender feature, holders seeking to liquidate a position can put the securities back to the issuer through the remarketing agent after a specific amount of advance notice. If the remarketing agent is unable to find a purchaser for a VRDO, a liquidity facility, such as a letter of credit or standby purchase agreement, provides a guarantee against a failed remarketing to ensure that the holder of the VRDO is able to liquidate its position at a price of par.
