WASHINGTON - The Municipal Securities Rulemaking Board has published an issue brief on the regulatory framework for muni market swaps and other derivatives, drawing concern from issuers and dealers who view this as the responsibility of the Commodity Futures Trading Commission, which establishes derivatives rules.

The MSRB paper, published Monday, was intended to “help all market participants understand the regulatory framework for swaps and other derivatives under the Dodd-Frank Act,” according to the document, as well as to highlight where that framework intersects with the MSRB’s regulatory framework for municipal advisors.”

The board's interest in swaps follows the passage of the tax law changes enacted late last year, which banned advance refunding deals after 2017 and prompted issuers and their bankers to search for alternatives, including forwards and interest rate swaps. While the paper discusses the MSRB’s municipal advisory rules, some groups said they believe the brief is a questionable use of MSRB resources.

The four-page paper dedicates much of its space to explaining how the 2010 Dodd-Frank Act authorized the regulation of previously mostly unregulated over-the-counter derivatives market. It notes that the law gave the Commodity Futures Trading Commission and the Securities and Exchange Commission regulatory authority over swaps and security-based swaps, respectively, and that the CFTC is the primary regulator of the derivative products most common in the muni market.

Muni issuers are “special entities” under CFTC rules which require swap dealers and major swap participants (MSPs) to have a reasonable basis to believe that the special entity has a qualified independent representative (QIR) or a fiduciary capable of evaluating the transaction.

Swaps intersect to some degree with MSRB's muni advisor regulatory regime, which was authorized by Dodd-Frank. The act imposed a fiduciary duty on individuals and firms who give bond-related advice to municipal entities. It also authorized the MSRB to protect municipal issuers, entities and obligated persons.

A QIR that advises issuers on swaps transactions often will be a municipal advisor that is subject to registration with the SEC and the MSRB.

Certain swap dealers are exempted from registering as MAs and certain commodity trading advisors are excluded from the definition of “municipal advisor” under the SEC’s municipal advisor registration rule. Firms that are not exempted are subject to MSRB rules, including its fair-dealing rule and restrictions on political contributions, gifts, and the required disclosure of conflicts of interest.

Emily Brock
GFOA's Emily Brock.

“Importantly, most, if not all, QIRs are subject to a robust regulatory regime, either under CFTC, SEC and/or MSRB rules, affording meaningful protections to the municipalities that hire them,” the MSRB said in the paper.

But both the Government Finance Officers Association and the Securities Industry and Financial Markets Association raised concerns about the MSRB speaking up on this issue.

“While we understand that the motivation behind the document is to clarify any misunderstandings about the regulatory framework, we note (as the paper does) that the regulatory framework of the derivatives space has been assigned per Dodd-Frank to the CFTC,” said Emily Brock, director of the GFOA’s federal liaison center. “As we have said before in prior communication, the GFOA supports useful, comprehensive and accessible education efforts from the MSRB that are within the scope of their statutory mandate. A swap is often tied to the issuance of municipal bonds, but all parties and activities provided by those professionals are regulated by the CFTC. Therefore, we are not certain of the purpose of the document itself.”

Leslie Norwood, a managing director and associate general counsel at SIFMA, said that the MSRB has no jurisdiction over derivatives transactions.

“We find it curious and concerning that the MSRB is utilizing its resources to draft legal summaries of regulatory paradigms outside of its jurisdiction,” Norwood said.

The MSRB said it communicated with other regulators and thought it was important to explain the relevant regulations.

“It’s important that market participants have the resources they need to understand the meaningful protections the regulatory framework CFTC, SEC and MSRB rules provide for municipalities engaging in municipal derivatives transactions," said MSRB President Lynnette Kelly. “Because of the crossover nature of municipal derivatives regulation, we communicated with the SEC and the CFTC, and consulted with industry trade groups about our issue brief.”

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