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Thomson Revises Guidelines

CHICAGO — Thomson Reuters will use revised criteria next year to distinguish short-term cash-flow transactions from long-term issues in its municipal league tables amid complaints that a broker-dealer influenced its senior manager rankings by offering issuers lower rates to push out maturities on short-term deals.

Under the firm’s long-standing criteria, all transactions having a final maturity of at least 396 days beyond the date at which interest accrual begins fall under the category of long-term issuance for municipal league table rankings in the database managed by Thomson Reuters’ SDC Platinum.

The firm plans to revise its criteria so that securities maturing under two years with a designation as revenue anticipation notes, tax anticipation notes, or tax and revenue anticipation notes will be counted as short-term for ranking purposes, according to a Thomson Reuters published notice.

Municipal sources said the changes stem from complaints Thomson Reuters’ municipal league table managers received following Los Angeles’ $1.2 billion Tran sale on June 29, which was led by JPMorgan and counted towards the firm’s senior manager rankings on long-term issuance.

The Los Angeles notes are dated July 12. A $182 million tranche maturing in February 2012 captured a 0.28% rate, a $121 million March maturity captured a 0.31% rate, a $302 million April maturity captured a 0.33% maturity, and an August maturity for $600 million captured a lower 0.23% rate. The city’s past note sales traditionally have included tranches with May and June maturities and have not previously gone out past a year.

The final maturity put the deal into the category of long-term issuance and it was counted in the volume that helped put JPMorgan in the number one spot at the close of the third quarter, according to Thomson Reuters’ senior manager league tables on all long-term issuance.

JPMorgan ranked first among senior managers on long-term issuance at the close of the third quarter, with 257 deals totaling nearly $25 billion. It was followed by Citi with 250 deals worth $24.9 billion, Bank of America Merrill Lynch with 225 worth $23.1 billion, Morgan Stanley with 225 deals totaling $14.4 billion, and RBC Capital Markets with 390 deals valued at $9.9 billion, according to Thomson Reuters “AT1” senior manager rankings.

“For us, it was the best deal. We got a lower rate for the taxpayers,” said Los Angeles’ chief of debt management, Natalie Brill.

JPMorgan told the city that the maturity extension was beneficial since its past May and June maturities traditionally had drawn less investor interest because of city charter rules that impose restrictions on revenue flow after April. Brill declined to comment on the motives behind JPMorgan’s willingness to offer the city a lower rate than it received on the shorter maturities.

JPMorgan declined to comment.

A handful of JPMorgan’s competitors complained to Thomson Reuters that the firm had gamed the system on the Los Angeles deal and another transaction by a California-based issuer. Some sources suggested that JPMorgan initially held the Los Angeles securities, unable to sell them, but others have said they were placed with investors.

Thomson Reuters referenced their public notice on the planned changes and declined to comment any further for the story.

Several sources said the firm received numerous angry complaints and its own staff was upset that broker-dealers would try to “game” the ranking system, potentially damaging the integrity of a product considered the standard in the municipal industry.

The notice outlining the changes said the firm had seen several recent deals that had met long-term tenor criteria while featuring multiple short-term financing characteristics. Seeking to assure the market of the transparency and objectivity of its criteria, Thomson Reuters conducted a survey of banking firms and legal and financial advisory firms for their feedback on how best to address concerns through revised criteria.

The firm asked market participants whether it should classify all note offerings as short-term, or limit changes to various forms of revenue and tax anticipation securities, whether the existence of short-term ratings should automatically classify a transaction as short-term for league table purposes, and whether a 396-day threshold was appropriate.

The firm received mixed responses, with little consensus. The notice reports that it was generally agreed that a “note” designation should not by itself result in a deal’s classification as short-term and that rating agency criteria was too broad to apply as a determining factor.

After its review of market responses and its own internal discussions, officials settled on revised criteria that will apply next year.

Current criteria counting all serial or term transactions with a minimum life of at least 396 days as long-term will remain in place for the remainder of the year.

Beginning in January, any transactions not designed as Rans, Tans, or Trans having a final maturity of less than or equal to 397 days will be classified as short-term transactions. That brings the criteria in alignment with money market fund regulations. 

Any transactions with the Ran, Tan, or Tran designation with a maturity of less than two full years will fall into the category of short-term rankings for league table rankings. Under the change, the Los Angeles note sale would not have counted as long-term issuance.

“The above changes would be implemented retroactively across all historical transactions following the publication/distribution of final 2011 league tables,” the notice reads. “Given that the above policy amendment reflects a change to future criteria which would otherwise be proposed in a yearend league table criteria review, we will accept market comment on the intended framework throughout the rest of the year, with the expectation of re-confirming the policy in the context of our customary yearend policy discussions.”

The revisions have drawn mixed reactions, depending on where participants’ interests lie. Brill said she doesn’t like the change. “The change is not good for the city because there will be no incentive for a bank to offer the city a lower rate next year. League table competition is good for us and the taxpayers,” Brill said.

One public finance banking source called the changes a “step in the right direction to address a potential loophole” and praised Thomson Reuters for addressing the issue.

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