WASHINGTON — The Municipal Securities Rulemaking Board released education guides Thursday aimed at helping municipal bond investors and issuers understand municipal market indices, yield curves and muni benchmark data.
The materials come two months after the MSRB announced it launched a broad review of muni indexes as part of an effort to improve the transparency of indexes. That review followed allegations of widespread manipulation by major banks of the London Interbank Offered Rate, or Libor.
"In the wake of allegations of manipulation in the LIBOR rate-setting process, the MSRB is using its unique position in the market to enhance understanding of the methodologies, mechanics and functions of municipal market indices," Lynnette Kelly, MSRB executive director, said in a media release. "We look forward to continuing to work with providers of market indices, yield curves and benchmarks to promote transparency in the municipal market."
New materials include the seven-page guide "Understanding Municipal Market Indices, Yield Curves and Benchmarks," which explains that issuers can use market data as a "baseline" to help establish fair prices and yields for new-issue bonds.
Yield curves, benchmarks and indices can help market participants follow broad market trends and evaluate market performance over time and performance of a specific bond or bonds with similar characteristics, said the guide.
The document explains that indices measure changes in yields. They are typically created with data from municipal bonds with similar characteristics, such as issue size, credit ratings, maturity dates or geographic location. Indices may be an average of prices or yields, or may be calculated using more-sophisticated formulas, the document said. In addition, some indices may be calculated using traders' estimates rather than actual quoted yields and prices.
There are explanations of benchmarks, which are reference points for interest rates, prices or indexes, and yield curves, which represent a set of interest rates for a series of maturity dates.
The guide provides overviews of various indicators, including Barclays' municipal bond index, Bloomberg's valuation benchmark municipal curve, indices produced by The Bond Buyer and Standard & Poor's and data provided by Thomson Reuters Municipal Market Data, Municipal Market Advisors, Interactive Data Corp., and the Securities Industry and Financial Markets Association.
A second document called "Libor and the Municipal Market" details how Libor is calculated and explains that state and local governments typically use Libor in connection with interest-rate swaps.
The document warns that Libor-based swaps expose issuers to "basis risk" — the risk posed by unpredictable changes in the relationship between tax-exempt interest rates and taxable interest rates. It notes that issuers could have been affected if Libor was manipulated by banks, as has been alleged by regulators.
In August, the MSRB met with staff from muni market data providers Bloomberg, Interactive Data Corp., Markit, Municipal Market Data, Municipal Market Advisors, S&P, Thomson Reuters, The Bond Buyer and the Securities Industry and Financial Markets Association.
The board said the purpose of the meeting was to determine how the MSRB can work with providers to improve market participants' understanding of market data.
