WASHINGTON - The Municipal Securities Rulemaking Board plans to "get into the ballgame" and encourage federal regulators to address liquidity concerns in the municipal market as part of their response to the credit crisis, MSRB chairman Ron Stack said yesterday.
|Ron Stack |
The MSRB's burgeoning effort to try to influence officials at the Treasury Department and Federal Reserve stems from the "tremendous liquidity problems" facing state and local governments that have been forced to either pay much higher interest rates to access the capital markets or delay bond sales altogether because of the higher rates, said Stack, who spoke with reporters on a teleconference yesterday about the board's three-day meeting late last week."Because of the severe liquidity crisis, highly rated municipal governments are unable to meet their borrowing needs at a reasonable cost, and it is taxpayers who ultimately bear that expense," said Stack, who is managing director and head of public finance at Barclays Capital in New York. "We will try to be a collector of the options ... and then present the facts and the data and what we feel is the impact in an unbiased and objective way ... then allow the federal policy decision makers to make their policy choices with the information."
The board laid out its case in letters to regulators earlier this month, which Stack said received "very good" responses, but declined to release copies of them or say which regulators received them.
Late last month, California Gov. Arnold Schwarzenegger informed the Treasury that his state was temporarily unable to borrow in the short-term markets and was considering asking for a federal loan. Though the state subsequently was able to raise money in the short-term market at higher than normal rates, some lawmakers have warned the Fed and the Treasury that states and localities still need help.
"The overwhelming consensus is that local and state governments and investor confidence require solutions at the federal level," Stack said yesterday.
But Christopher "Kit" Taylor, the former executive director at the MSRB, said that the move to enhance communications with federal officials marks a new role for the board, which was created solely to regulate broker-dealers. He said the MSRB would inevitably end up advocating for specific positions other than for the protection of investors, "which is what they were supposed to do, according to Congress."
"If federal regulators wanted the information, they could just get it directly from the broker-dealers themselves," Taylor said.
A bond attorney said that while it makes sense for the board to communicate to a broad audience, "if there's some mission creep or an attempt to back-door a revision to the Tower Amendment, I think they're going to find that there's some resistance in the industry," said the attorney. The reference was to the 1975 amendment to the to the Securities Exchange Act of 1934, which bars the Securities and Exchange Commission and the MSRB from requiring municipal issuers to directly or indirectly file documents with them before issuing municipal securities.
"We have new circumstances that may require a new role for the MSRB, but where is the public debate about that?" the attorney asked. "Or is it going to be decided by their self-selected board of directors?"
In a statement yesterday afternoon, Stack said: "Communication about the market with our fellow regulators that is based on facts and information is squarely within our mandate of protecting investors and promoting a fair and efficient market. The board is not going to advocate for particular firms or for any segment of the marketplace, but to not discuss the current market environment with other regulators would be a dereliction of duty and represent a very myopic view of our mission."
Meanwhile, the board also agreed to soon request SEC approval to develop a pilot continuing-disclosure component to its Electronic Municipal Market Access system. MSRB executive director Lynnette Hotchkiss, who was also on the teleconference, said that the board will request a three- to six-month pilot period in response to comments that there be a trial period before issuers are required to file their continuing disclosures to EMMA. The pilot will be followed by full operation of EMMA sometime next summer.
Also, this week or next, the board plans to file with the SEC a proposal to begin collecting and disseminating interest rate information associated with auction-rate securities and variable-rate demand obligations, in a move to enhance the transparency of the short-term market.
Beginning Jan. 30, the MSRB plans to propose collecting interest rate information along with the identity of the program dealer or remarketing agent as well as the minimum denomination and the length of time the interest rate applies. It plans to collect additional data on the auctions and remarketings in later phases of the system.
Currently, there is no source of comprehensive same-day information about auction-rate securities available to non-market professionals - even information as basic as the clearing rates set through the auction process.
"We believe that transparency enhances market fairness as well as helps in terms of any difficulties in unclogging credit issues," Stack said. "The more information the market has, the more efficiently the market can operate."
Some market participants have been pushing for the board to establish the transparency system more quickly, arguing that the ARS and VRDO system is unlikely to improve the liquidity problems in those markets until it includes comprehensive data in a manner that replicates the disclosure provided by the Treasury for its auctions.
The Treasury disclosures include such information as the bid-to-cover ratio, which represents the amount of bonds that were bid compared to the total amount of securities in the particular auction. Joseph Fichera, senior managing director and chief executive officer of Saber Partners LLC, said that until a permanent transparency system is up and running, the MSRB should encourage issuers and other market participants to voluntarily release the data through a temporary site. He noted that the board began talking about the transparency system over a year ago.
"Transparency delayed is transparency denied," Fichera added. "The technology is available to make this information easy and accessible. It's just bewildering that it is taking until 2009 to implement anything or even to tell market participants what they will implement."
Taylor was equally pointed.
"If the information isn't available until the later part of 2009, it's too late," he said. "It's almost too late now."
Taylor added that because there are only roughly six large investment banks, "this is not something that needs a full-blown computer system for the information to get out there."
"They're all running auctions, [so] how difficult is it to get a handwritten printout of that information and then have someone transcribe it?" he said. "How difficult is it to say, 'Please send me an excel spreadsheet with all of that data on it every day you do an auction?' "