The Bond Market Association is working with the Depository Trust Co. to develop a revolutionary new system that will take information from underwriters about new municipal bond issues and then electronically disseminate that information on a real-time basis to information vendors and other participants in the muni market, TBMA and DTC officials said yesterday.
The new system is expected to make trade confirmations, clearing, and reporting easier, faster, more efficient, and more accurate, said Leslie Norwood, TBMA's vice president and assistant general counsel, and Peter Inguanta, a director of DTC, a subsidiary of Depository Trust and Clearing Corp.
"We are trying to revolutionize new-issue information dissemination," Norwood said. "It's a big deal. Some people are equating this project to the move from physical delivery to book entry" of muni bonds.
"This is an important development for the industry," agreed Christopher Taylor, executive director of the Municipal Securities Rulemaking Board. "This goes up on the charts as one of the more significant developments in this industry. We applaud TBMA and DTC for doing it. We're pleased that they have reached this agreement."
"In order to make any systems processing work efficiently, you need this to happen," Taylor said. "This will allow further improvements and evolution in trade processing and trading down the road."
TBMA plans to hold a seminar on the project Wednesday, Dec. 14, from 4:00 p.m. Eastern Standard Time to 5:00 p.m. EST at its headquarters office at 360 Madison Ave. in New York City. TBMA and DTC officials will describe the project to broker-dealers and other bond market participants, update them on its status, and discuss the next steps that need to be taken.
The new-issue information dissemination system, which TBMA began pushing DTC to develop earlier this year and which ties into a huge DTC project to re-engineer its computer systems for securities underwriting and corporate actions processing for the financial services industry overall, is expected to be put into operation during the second quarter of 2007, Norwood and Inguanta said.
The system will improve new-issue data collection and dissemination for municipal, corporate, and securitized bonds, as well as equities. But the impetus for improving new-issue information dissemination rose out of the muni market.
"Historically, there have been difficulties getting new-issue information out to the marketplace," Norwood said. Lead underwriters on transactions use a variety of methods - hand delivery, faxes, and emails - to get the information to DTC and to any number of information vendors. They must each key the data into their respective systems.
But there is no uniform centralized way of collecting or disseminating the information and dealers sometimes obtain varying data for new bonds at different times.
"The industry at large has to deal with so much information on deals that are being priced at any given point and time," Inguanta explained. "This information only becomes available as the deals are being priced. In the bond market specifically, these deals are priced intra-day and it's very difficult to move that information around during the day, whereas equity deals are priced typically at the close of business and by the next morning everybody has that information."
"The debt markets are very different and it's a lot more difficult to get that information out there," Inguanta said.
"If every player does not have all of the same basic information about new bonds at the same time, the systems can't work well," Taylor said.
Taylor drew a "crude analogy" to grocery shopping. "If you walk into a supermarket and you want to buy an item, you want to see the item's description and you want to know how fresh it is," he said.
The lack of timely and uniform new-issue muni bond information has created problems for dealers who must now report to the MSRB pricing and other muni bond information on a real-time basis - within 15 minutes after each trade occurs. It also has created difficulties for dealer compliance with the MSRB's Rule G-34, which the board amended last January to require dealers to disseminate new-issue information on the first day of trading "in a manner reasonably designed to reach market participants that trade the issue."
TBMA approached DTC about these new-issue information difficulties earlier this year and in September sent the organization a formal letter asking for a new system. The request coincided with DTC's effort to overhaul its underwriting and corporate actions systems, a five-and-a-half-year-old project affecting all of the financial services markets.
"We are literally writing a brand new Web-based system in underwriting that will enhance the functionality, streamline the process, and help dealers comply with industry regulations," Inguanta said.
"DTC is doing this across markets, but it was the municipals that came up with this new-issue information dissemination request originally," Norwood said.
Under the new system, muni underwriters will feed new-issue information electronically to the DTC starting before the issue is priced to the date that it settles. DTC will move the information through to information vendors, dealers, and other market participants at the same time on a real-time basis, so that they can put it into their master databases and use it to confirm, clear, and report trades in a timely and accurate fashion.
"We will have to ask for rule changes form the regulators down the road," Norwood said. TBMA will at some point ask the MSRB to modify its Rule G-34 to require underwriters to disseminate new-issue information through the new system.
