As the auction-rate securities market continues to stall, the Municipal Securities Rulemaking Board reiterated last week that it plans to request public comment soon on draft changes to its rules that will boost the transparency of that market.
MSRB executive director Lynnette Hotchkiss said Friday that the board plans to ask for public comment on the proposal in the next two or three weeks, after the staff finishes the changes and the board has a chance to approve them.
Though some press accounts last week indicated that the move comes in light of the widespread failure of auctions, the changes have been in the works since October and until recently were a relatively low-profile project on the board's crowded agenda for the year.
The proposal has not been rushed through in light of the auction-rate securities turmoil because there is no simple solution, sources have said.
It also remains unclear exactly what types of additional disclosures the board will seek comment on, Hotchkiss said.
The staff has internally looked at altering its Rule G-34 on CUSIP numbers and new-issue requirements to require dealers to report auction-rate reset rates and other information to the MSRB, but additional rules could be affected after market participants have a chance to comment on the proposal.
Currently, the prices of such transactions are only reported at par, without their yields or reset rates.
Rule G-34 requires, among other things, that underwriters apply for CUSIP numbers on a new issue and disseminate information about the new issue to the market. Since the rule deals with security-level information dissemination, the staff believe it may be the most appropriate rule for the ARS transparency requirements since reset rates and bidding information relate to the security rather than to individual trades, which in turn concern Rule G-14 on real-time transaction reporting.
Hotchkiss emphasized that whatever the board's proposal, it may change significantly after the 30-day comment period, after which the board must again approve any changes, and submit them to the Securities and Exchange Commission before they are implemented.
The $325 billion to $360 billion auction-rate securities market consists of floating-rate instruments whose interest or dividend rate is periodically reset by an auction. During the auction, investors indicate whether they want to hold, purchase, or sell the securities at specified rates to broker-dealers, who then submit the bids to an auction agent. The auction agent determines the clearing rate, which is the lowest rate that will result in the sale of all of the securities being auctioned.
About four weeks ago, the auctions began to fail when the rate resets moved progressively higher as investors began to shy away from holding the securities, which are typically backed by bond insurance that is now seen as tainted. As the bond insurers have suffered downgrades, investors have become uncomfortable with the safety of the attached guarantee.
