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MSRB Proposes New System for VRDOs

WASHINGTON - The Municipal Securities Rulemaking Board is proposing a centralized system for the collection and dissemination of critical market information about variable-rate demand obligations that would increase the amount of VRDO data available to market participants.

The board described the proposed system in a notice Friday and asked market participants to comment on it by June 30.

The VRDO system would be identical to one the MSRB is considering for auction-rate securities, but comes as many ARS have been redeemed by issuers or converted into other types of municipal securities, greatly reducing the amount of information that would be available if the board sought only to increase ARS transparency.

"While we were thinking about the auction-rate market, the board thought it made sense to look at the entire short-term market as we develop models for increased transparency," said MSRB executive director Lynnette Hotchkiss.

As with the ARS system that was proposed March 17, the timing of the VRDO system's launch will depend on comments from market participants and the board's conversations with the Securities and Exchange Commission, which must approve both systems.

Currently, VRDO and auction-rate transactions 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 the Real-Time Transaction Reporting System that trades be reported within 15 minutes of execution or that the trade data for customer transactions include both a dollar price and yield.

When the board proposed changes to G-14 in 2003, broker-dealers complained that special trade processing methodologies for short-term variable-rate securities would make it difficult if not impossible to meet the 15-minute and price-yield reporting requirements. In response, the MSRB included special provisions in the final version of G-14 that allowed dealers to both report trades at end-of-day instead of 15 minutes and report customer transactions in VRDOs without yield.

Under the proposal, remarketing agents would submit information about VRDOs to the board through the RTRS 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, but would like comments on how the information should be submitted and displayed, Hotchkiss said.

Specifically, remarketing agents would have to submit: Cusip numbers; the name of the remarketing agent; the date of the interest rate reset; the interest rate for the next reset period; the length of the interest rate reset period; the length of the notification period; whether the interest rate is "set by formula" or "set by remarketing agent"; minimum and maximum rates, if any; minimum denomination; type of liquidity facility or facilities; and the expiration date of each liquidity facility.

The MSRB also is proposing that it receive notification of any interest rate conversion - including the date of the conversion and the new interest rate mode. The board proposed requiring such information by the end of the day on which the interest rate conversion occurs.

In its notice, the MSRB asked market participants to estimate the current and anticipated volume of VRDOs that are bought by retail customers. The board also asked whether market participants agreed with the list of information that the board asked to collect and disseminate, among other things.

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, the MSRB said in a notice it released Friday.

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 specified 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.

 

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