MSRB report shows dealer numbers sliding

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WASHINGTON — The municipal market saw a 5.1% decrease in the number of MSRB-registered dealers in 2018, which the Bond Dealers of America said is caused by an increase in regulation costs that have caused some firms to get out of munis.

The data came from a Municipal Securities Rulemaking Board report released Wednesday. However, the report also noted that the number of dealers that executed a substantial amount of business — 25,000 trades or more per year — rose from 39 in 2017 to 43 in 2018.

From 2017 to 2018, 57 new dealers also registered with the MSRB, accounting for about 680,000 trades and $44.3 billion in trading activity during that time.

“Our analysis shows that many of those dealers exiting the market did not have a significant presence in the market and traded infrequently,” stated MSRB Director of Research Marcelo Vieira in a press release. “However, new dealers registered with the MSRB accounted for significant trade activity over the last two years.”

In the report, the MSRB said some causes for the decline in registered dealers was a consolidation of broker-dealers and dealers exiting the municipal securities business.

Increased regulatory costs are behind consolidation, causing firms to get out of the business all together, go out of business or merge with another firm, said Mike Nicholas, BDA CEO.

“Increased regulatory costs, which in most cases result in shrinking margins, have made it uneconomic to stay in business,” Nicholas said.

In a BDA member survey released in April, the group said its members have spent an average of more than $17 million on regulatory costs since the beginning of the 2008 credit crisis.

Specifically regional and smaller firms have a harder time footing the cost because they have fewer compliance and legal staff, Nicholas said.

“There’s a disproportionate burden on middle market, regional and small firms from a steady increase in regulation in an already heavily regulated market,” Nicholas said.

Nicholas believes in the end, fewer dealers contribute to less competition, higher costs, and in the end, it ultimately hurts the issuer.

The BDA applauds the MSRB for looking at regulation and continuing to review its rules and said costs need to be factored in as well, Nicholas said.

“There needs to be a continual focus and a continual look at regulation of the municipal market at ensuring that there’s an adequate cost-benefit analysis done for regulation of the municipal market to ensure that regulation is not the principal reason firms are getting out of the business,” he said.

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Securities law SEC regulations Enforcement actions MSRB BDA Washington DC