The Securities Industry and Financial Markets Association and Wells Fargo Brokerage Services LLC are asking for a delay until April of the transparency system for debt with short-term interest ratesthat the Municipal Securities Rulemaking Board has proposed starting Jan. 30.
In comment letters sent to the Securities and Exchange Commission, SIFMA and Wells Fargo both argued for an April launch date of the system, dubbed SHORT, for Short-term Obligation Rate Transparency, rather than Jan. 30. Information submitted through SHORT will be displayed on EMMA, which also is expected to serve as a free portal for primary and secondary market disclosures and trading data.
The board plans to launch SHORT in three phases next year, beginning with basic reset information for auction-rate securities and variable-rate demand obligations. When complete, it is expected to provide price transparency, bidding information, and program documents for ARS and VRDOs. Currently, there is no publicly available source of comprehensive same-day information about either type of security.
But because the board released system specifications just two weeks ago, on Dec. 16, the Jan. 30 launch date is "unrealistic," SIFMA said, noting that virtually all broker-dealers have year-end "system freezes" when no operational system changes can be made as annual maintenance is performed on their systems.
During that time, many technology and operations personnel take scheduled time off. Other key personnel, including legal and compliance professionals, who will be needed to implement the new regulatory requirements, will be gone, too.
In addition, the past year has been "historic" in terms of stresses on the markets, challenging economic conditions, systemic market failures, and the collapse of large firms that has prompted many operational and technological issues beyond those that would occur in a normal development cycle, wrote Leslie Norwood, managing director and associate general counsel of SIFMA. "All of which are demanding the immediate attention of the same firm personnel that would need to be redirected to implement this new requirement," she said.
Specifically, SIFMA is asking for proposed changes to the MSRB's Rule G-34 on Cusip numbers and new-issue requirements that would mandate SHORT be delayed until the later of either April 1 or 90 days after the final rule is approved by the SEC.
Meanwhile, Jeffrey Schuh, vice president and chief compliance officer of Wells Fargo Brokerage Services, wrote that his firm is the remarketing agent for nearly 500 VRDOs, most of which reset on Wednesdays.
Though it is most efficient to use an automated transmission process for such a large volume of remarketings, the firm relies on vendor-provided systems for each remarketing. Its vendors have yet to provide estimates for how long it will take to identity required system changes needed to support the SHORT system, including additional data elements and submission functionality.
"In light of these constraints and unknowns, we are doubtful that an automated solution can be designed, thoroughly tested, and implemented prior to the proposed implementation date, even if the rule changes contained in the proposal were finalized and adopted today," Schuh wrote.
SEC officials could not be immediately reached for comment last week. Jennifer Galloway, chief communications officer for the MSRB, said that the 15-member board has received the letters and will review and discuss them.
In addition to its concerns about timing, SIFMA noted that broker-dealers do not have control over all of the ARS data points being requested, particularly in multi-program dealer auctions where individual broker-dealers receive the auction information from auction agents.
SIFMA believes there should be an acknowledgement in Rule G-34 that the broker-dealer is only responsible for forwarding the information it has received from the auction agent, and that it is not responsible for the accuracy of that data because it may not even have access to the necessary information for determining certain required data points.
SIFMA also said it should not be responsible for reporting maximum and minimum rates for VRDO remarketings. Maximum rates are not standardized and, when set by formula, would be unduly burdensome for a broker-dealer acting as a remarketing agent to calculate daily or weekly, particularly even when prevailing rates remain low as they are now.
SIFMA also said the proposed inclusion of minimum rates is "superfluous" and "should be eliminated" because an informal survey of its members found no evidence of such rates on VRDOs.