TBMA Balks At MSRB's Pricing Plans

Group Concerned About Liquidity

"Although we do not oppose the move to next-day transparency, we believe that it should only be undertaken in connection with a more deliberate study of potential liquidity effects from a move to real-time transparency, consistent with the approach taken by the [National Association of Securities Dealers] and endorsed by the commission in the area of corporate bond transparency," TBMA stated in a five-page letter sent late Friday to the Securities and Exchange Commission.

TBMA's warning comes as the MSRB has a proposal pending before the SEC to make available pricing and other data available from the trades of all municipal securities on a next- day basis. The commission must approve the proposal for it to become effective and is currently soliciting public comments on it.

The dealer group's warning also comes as the MSRB is moving forward with plans to put in place a system for real-time price reporting by mid-2004. Dealers would have to report trade data within 15 minutes after the trades occur under that system.

TBMA has been concerned that releasing pricing and other trade data for bonds that trade infrequently will hurt liquidity in the municipal market.

"Our concerns are heightened by the fact that the MSRB has indicated that it intends to issue a concept release by the end of this month outlining a proposal to move from next- day dissemination to real-time dissemination by mid-2004," TBMA told the SEC in the letter, which was signed by John Ramsay, the association's senior vice president and regulatory counsel.

"The relationship between price dissemination and liquidity exists because, particularly in the case of infrequently traded bonds, the willingness of dealers to trade with counterparties depends on the analysis by each dealer of how much risk it is likely to assume in connection with a particular trade, coupled with its ability effectively to manage that risk, either by entering into an offsetting trade with another party or entering into hedging transactions," the letter stated. "For inactively traded bonds, the publication of price information, particularly in block size, may provide information to other market participants that would affect the ability of a holder of the same bonds to sell them without incurring a loss."

"Adverse effects on liquidity could be particularly harmful for retail investors, who rely on the dealer community to provide liquidity on an ongoing basis, and who may have a substantial portion of individual assets allocated to municipal bonds," the association said. The municipal bond market has the highest proportion of direct retail investor participation compared to other fixed-income markets, according to Federal Reserve System data.

"Institutional investors holding complex, `story,' or high-yield bonds also may be legitimately concerned that quick dissemination will impact the price at which they are able to dispose of particular bonds, perhaps in circumstances in which legal requirements compel them to dispose of bonds that have fallen in credit quality," TBMA told the SEC.

The association also urged a go-slow approach to the board's proposal to no longer disclose, on a next-day basis, the specific size of trades of more than $1 million. Those trades would simply be reported as over $1 million.

"We support this concept, but we believe that further review is necessary to determine whether the $1 million limit is the appropriate one, or whether the same limit should apply to all municipal bonds," TBMA said. Ramsay noted that the NASD's price transparency program for corporate bonds does not disclose specific sizes of trades over $5 million.

However, Kevin Olson, the sponsor of a Web site that posts muni bond pricing data, told the SEC that he is opposed to the MSRB's proposal to no longer post the specific size of trades over $1 million in its daily reports. Olson also urged that the MSRB be required to identify the dealers on each trade and to issue daily reports correcting any errors in the trade data.

TBMA has been raising liquidity concerns about next-day price reporting for months. The association has set up a broad-based task force to study the liquidity issue. The group held its first meeting in early April, just three days before the MSRB proposed moving to next-day trade reporting for all muni securities trades. Currently, the MSRB only reports trade data on a next-day basis for municipal securities that traded two or more times the previous day.

But thus far, the regulators and MSRB officials have not been overly sympathetic to the association's concerns.

The board and TBMA made a commitment to the SEC in late 1994 that they would move toward real-time price reporting in the municipal securities market in return for the commission's shelving of a proposal that would have required dealers to disclose of markups on riskless principal transactions. These are transactions in which dealers buy and sell bonds almost simultaneously so that there is little risk they would be hurt by sudden market changes.

The MSRB's and industry's failure to thus far put that system in place led former SEC chairman Harvey Pitt to publicly pressure them last year to move faster to improve price transparency.

At TBMA's annual meeting last month, MSRB chairman Hill Feinberg said federal regulators "are very adamant" about moving to real-time price reporting. "It's coming, you can't fight the tape," he said. The SEC wants investors to have this information so that they can better gauge what they are buying, he said.