As we move into 2013, it is becoming increasingly clear that the U.S. public policy spotlight will continue to shine brightly on the municipal securities market. Regulators, legislators and market participants are already jockeying for position across a range of issues in 2013 that are shaping the complexion and vitality of the muni marketplace. Among the notable issues to track this year:
Ramifications of Recent SEC Leadership Changes
As we finished 2012 and entered 2013, there were a number of major changes in the SEC leadership. Most recently, Mary Jo White was named by the Obama Administration to serve as chairman, and, if confirmed, she'll succeed Elisse Walter, who has been a vocal advocate at the agency for evolving disclosure practices in the municipal markets. While Ms. White is regarded as a tough prosecutor, it is unclear what her imprint will be for the municipal markets. In particular, it will be very telling to see how Ms. White champions any of the SEC's 2012 recommendations to improve disclosure and pre and post-trade transparency in the municipal securities market, or how the Commission finalizes the Volcker Rule, which seeks to eliminate proprietary trading by banks.
Defining the Muni Advisor
Expect the SEC to clarify its definition of "municipal advisors" during the first half of 2013. Based on comments from SEC representatives, the actions of legislators and continuing advocacy from key muni industry groups, we are hopeful that the revised definition will cast a narrower, more clearly defined net.
The MSRB and Market Transparency
The MSRB is poised to make serious progress advancing market transparency. Not only is the agency re-examining its entire rule book, but it is also seeking initial comments related to the planned development of a new central transparency platform as contemplated under the MSRB's Long-Range Plan for Market Transparency Products. In terms of new rules, the MSRB has indicated a new proposal for a "best execution" rule at some point this year. We are curious to see the details of such a proposal and how participants respond to it.
Tax Reform & the Muni Markets
Although 2013 started out positively for the municipal markets when the American Taxpayer Relief Act of 2012 didn't include any provisions to eliminate, or cap, the tax exempt status of municipal debt, there's concern that this issue could be revisited at some point in 2013 - either as part of the negotiations related to across-the-board spending cuts known as "sequestration" now scheduled to take effect beginning March 1, 2013 -- or as part of a larger, long-term overhaul of the tax code. Sequestration is also an ongoing concern for Build America Bond (BAB) holders, as it could result in cuts to reimbursement payments to municipal issuers of BABs and those cuts could be higher than the 5.3% estimated by the Center on Budget and Policy Priorities for this year. Some market participants have also speculated that cuts in the direct-pay BAB subsidy rate could trigger special redemption provisions, resulting in bondholder recovery rates below current market prices.
January Market Observations
As previously mentioned, the passage of the American Taxpayer Relief Act helped stabilize the muni market in January, which outperformed UST for several weeks. The tone of the market has been relatively positive this month - muni funds have seen consecutive weeks of over $1 billion in net inflows and MSRB trade volume has been above the 30-day average of 40,000 trades per day. In terms of performance, however, January was mixed. Gains during the first half of the month were lost during the second half. 10-year muni yields increased slightly by 4 basis points versus while 30-year muni yields are flat (muni yields are MMD Aaa). Ratings changes this month have been met with little fanfare as it appears they were expected by the market. For example, the Moody's downgrade of Assured Guaranty in mid-January has not had any noticeable impact, and the moves by S&P in late January to downgrade Illinois (from A to A-minus) or upgrade California (from A-minus to A) did not reverberate loudly either.
The regulatory environment for municipal securities remains fluid and the actions taken by regulators, legislators and market participants over the coming months have potential to not only impact investors in 2013 but for many years to come.
Andrew Kramer is senior director, corporate
development & investor relations for Interactive Data.