MSRB looks to level reserves following market volatility

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The Municipal Securities Rulemaking Board plans to draw down its reserves over the next year following higher than expected muni issuance due to the market conditions created by the coronavirus pandemic.

In a report released Thursday morning, the MSRB said the low interest rates that resulted from COVID-19 caused high levels of municipal issuance and high levels of market activity, resulting in its fiscal year 2020 revenue significantly outperforming projections and driving up its reserves.

“Maintaining appropriate levels of reserves that balance our need to plan for market uncertainty with our commitment to careful stewardship of industry funding is a priority of the board,” said MSRB Chief Financial Officer Nanette Lawson and Chair Ed Sisk. “We recognize that we have work to do to advance this priority in FY 2021, and this Board is committed to doing it.”

MSRB CFO Nanette Lawson said 77% of its FY 2021 revenue comes from market-based fees.

The FY 2021 budget shows projections for reserves remaining above target through FY 2023. The gap is narrowing, the MSRB said.

The MSRB began putting together its budget in the spring. A few months later, there was a high level of underwriting, Lawson said. About 77% of the MSRB’s FY 2021 revenue is projected to be market-based fees, Lawson said.

“Underwriting, transaction, technology fees are inherently unpredictable,” Lawson said. “That’s why reserves can be off. We’ve budgeted bond volume higher than we did in the past because we don’t want to understate what might happen."

The MSRB is considering making changes to fees charged to broker-dealers to offset those reserves, Lawson said.

In 2019, the MSRB reduced rates temporarily for broker-deals from April 1 to Sept. 30. That move caused the MSRB to forgo about $5.2 million in revenue. MAs’ professional fees increased over two years to $750 from $500 in FY 2020 and to $1,000 in FY 2021. That was done to create more equity in fees between MAs and broker-dealers, the MSRB said.

MA professional fees are expected to increase to $3 million from about $2.27 million in FY 2021’s budget. Underwriting fees are expected to grow to $11 million from a budgeted $9.9 million the year prior.

In FY 2019, dealer fees accounted for more than 80% of the MSRB’s revenue.

“The MSRB is committed to continuing to diversify its revenue sources and to ensuring that the MSRB has a sustainable financial model that will enable it to continue to fulfill its statutory mandate and meet the unique responsibilities of being the self-regulatory organization for the municipal securities market,” the MSRB said.

The board projects a $309,173 operating deficit. FY 2021 expenses are budgeted at $41.5 million, a 1.7% decrease from the prior year.

About $10 million of reserves will be used for a multi-year investment to modernize the MSRB’s EMMA system. This week, the board finished migrating all of its market transparency systems to the cloud.

Board compensation is also budgeted to decrease. Board and executive leadership expenses are expected to decrease slightly to $3.6 million from $4.7 million. The MSRB board is shrinking to 17 members from 21 in FY 2021. Changes to decrease the board size were approved in August.

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