WASHINGTON — Municipal issuers strongly support the Municipal Securities Rulemaking Board's proposal to require dealers to immediately discontinue temporarily masking the exact par value of large muni bond trades on EMMA, while dealer and institutional investor groups oppose it and recommend alternatives.
The groups squared off in comment letters submitted to the MSRB Monday and Friday.
Currently, muni bond trades of more than $1 million are designated "1MM+" on EMMA until five business days after execution. The board implemented this practice in 2004 after dealers warned that reporting the exact size of large, block trades would deter such trades and impair liquidity in the market. They claimed reporting the exact size would reveal information about the dealer involved in the trade and its inventory, as well as information about the institutional investor, which could then be used by other dealers to trade against the dealer's position.
But the MSRB proposed eliminating the practice in early June, after the General Accountability Office issued a report concluding individual investors have less trade price information than institutional investors. The GAO said institutional investors typically figure out the amount of large trades by talking to broker-dealers.
The Government Finance Officers Association applauded the MSRB's proposal in a one-page letter, signed by Susan Gaffney, director of its federal liaison center.
"We believe the need for issuers — and the market — to see the exact par value of the transaction is important, and that this type of transparency should be adopted by the MSRB," the letter said
"An additional benefit to posting this complete information will be to unmask what some believe to be the case — that large trades are priced more favorably than smaller trades," GFOA said.
The letter noted some concerns have been raised about the impact of the proposal, but said "the MSRB should look to developing appropriate guidance to address those concerns rather than using the masking of pricing information as a means to this end."
New York-based Benchmark Solutions, a financial services technology company created to provide price transparency for the fixed-income market, also supported the proposal, saying in a two-page letter signed by chief executive Jim Toffey, "We believe all investors should have equal access to market transactions."
But in a six-page letter sent to the board, the Securities Industry and Financial Markets Association said, "Neither the MSRB nor the GAO have made a compelling case for eliminating the 1MM+ mask entirely" and that the same concerns "that motivated the board adopt the mask in 2004 persist today," particularly for munis that trade infrequently.
The letter, signed by Michael Decker, SIFMA's managing director and co-head of municipal securities, recommended the MSRB permit the temporary masking of trades with a par value of more than $5 million, as an alternative. This higher par value "would represent a tiny fraction of market activity and thus would not threaten transparency," SIFMA said.
While 1,505, or 3.6%, of 41,241 secondary market trades were over the $1 million par amount in 2011, only 2.3% of muni transactions were above the $2 million par amount that year, SIFMA said, citing MSRB data. It also noted that the Financial Industry Regulatory Authority masks the size of certain corporate bond trades.
The Investment Company Institute also worried the proposal could hurt market liquidity and recommended the MSRB consider phasing in changes over time instead of immediately eliminating the current temporary large trade price masking practice. This would "give the MSRB time to evaluate any effects on market liquidity," the group said in a three-page letter signed by Dorothy Donahue, the ICI's deputy general counsel for securities regulation.
Bond Dealers of America also worried the proposal could cause institutional customers to alter their trading practices and be disruptive the market. In a one-page letter, CEO Michael Nicholas urged the MSRB to carefully weigh the input from these investors, "to be sure that increased transparency does not come with the cost of unintended and unnecessary consequences."