MSRB: Use EMMA for Derivatives

WASHINGTON - The Municipal Securities Rulemaking Board has a disclosure system and fair-dealing rule that should be considered in any regulatory regime established for derivatives, the MSRB told Treasury Secretary Timothy Geithner last week.

In a three-page letter sent to Geithner Thursday but not publicly released until Friday, the MSRB also said that while derivatives disclosure is not required, "many investors" consider it to be "material" to their investment decisions.

These investors, the board said, have recommended that issuers use EMMA, the board's central repository, to disclose material derivatives information to the market. Information generally is considered to be material if it is something an investor would want to know before purchasing securities.

"EMMA already accepts voluntary issuer disclosure concerning derivative transactions through its continuing disclosure system," wrote MSRB chairman Ronald Stack, who signed the letter. "While municipal derivatives disclosure is not mandated, many investors consider it material to their investment decisions and have recommended that issuers use EMMA as a means to disseminate such disclosure to all investors."

In an interview, MSRB associate general counsel Margaret Henry said the board is trying to emphasize to federal officials that municipal derivatives should be subject to the same comprehensive regulatory framework developed for swaps and other types of derivative financial products.

The MSRB made that point in a Feb. 6 letter sent to the chairmen and ranking members of the Senate Banking and House Financial Services committees.

The board told the lawmakers in that letter that any new regulatory regime should subject unregulated market intermediaries, such as swap advisers, to the same professional qualifications, pay-to-play restrictions, and fair-dealing standards that are in place for dealers.

The MSRB letter to Geithner was sent just a few days after the administration proposed legislation to regulate over-the-counter derivatives. Under the legislation, federal regulators would write business conduct rules that would require the disclosure of the material terms and risks of derivative transactions.

The board's letter to Geithner, Henry said, points out that the MSRB's fair-dealing rule could be applied to dealers involved in muni derivatives and could require them to make those kinds of disclosures if the derivative is integral to a bond deal. An example would be a synthetic fixed-rate swap with underlying variable-rate demand obligations.

"It's not enough to just explain to the issuer how the VRDO works," she said. "You also need to explain to the issuer how the derivative works because they wouldn't have done the VRDO without the derivative. They're all wrapped up together."

The letter also says that the board has "long emphasized to municipal market participants the importance of understanding derivatives and their risks, and of holding derivatives players to the same standards as those in the municipal bond market."

This is a reference to comments made by several previous chairmen and board members who jawboned issuers and other market participants about the need to understand these products and disclose information about them.

Though some industry officials criticized those previous chairmen for saying anything about derivatives because the board had no jurisdiction over these projects, a board spokeswoman said Friday that the board's letter to Geithner is consistent with what board members have said for years.

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