The Municipal Securities Rulemaking Board has issued a technical notice reminding dealers of the different types of yields they must disclose on trade confirmations for Build America Bonds with structures designed to attract investors in corporate securities.
The guidance on the MSRB's Rule G-15 on customer confirmations comes as many BABs include certain redemption provisions that are common in the corporate market, such as mandatory pro rata sinking funds, in which investors are required to tender an equal percentage of their bond holdings when the issuer calls for sinking fund retirement of the bonds.
The board noted that BABs also are frequently being priced to the average life of the bonds rather than to maturity, which is more common in the muni market. Because the average life of the bond is usually shorter than its maturity, such pricing typically will result in a lower yield, especially if the sinking fund is structured on a mandatory pro rata basis.
Specifically, the board reminded dealers that for transactions with a yield calculated on the bonds' average life, Rule G-15 requires the trade confirmation to display that yield as well as the lower of either the yield to maturity or the "in-whole" yield. The in-whole yield is based on an issuer's option to redeem all of the bonds at once prior to their maturity.
Rule G-15 generally requires that at or before the completion of a transaction with a customer, the dealer provide a written confirmation that includes certain key disclosures, such as the bonds' source of credit, call features, prices, and yields.
The board also reminded dealers that for BABs bought or sold on the basis of yield-to-maturity, the yield-to-call or yield-to-put date, the confirmation must include the yield at which the transaction was effected as well as a dollar price computed to the lower of an in-whole call or maturity.
Similarly, for transactions bought or sold on the basis of a dollar price - a percentage of the par rather than a specified yield - the confirmation must include the dollar price at which the transaction was bought or sold with a yield computed to the lower of an in-whole call or maturity, the board said.
Finally, the MSRB noted that sinking funds, which typically entail partial calls, do not represent in-whole call features, so the rule does not require dealers to compute yield or dollar price to a sinking fund call date, or to compute a "yield to average life" using multiple sinking fund dates.
However, the board said that dealers should know that if a computed yield otherwise required by the rule is different than the yield at which the transaction was bought or sold, G-15 requires that both be shown on the confirmation.
"Therefore, when a transaction is effected on the basis of 'yield to average life,' such yield must be displayed on a customer confirmation," the MSRB said.