Joe Mysak is a columnist for Bloomberg News. The opinions expressed are his own.

Muni Bond Dealers on Notice About Price Reporting: Joe Mysak

Feb. 18 (Bloomberg) -- Something ugly is going to happen in Muni Land.

You can tell if you put your ear to the ground, like a scout in the old Western movies.

Something's rumbling. How else to explain the notice put out by the Municipal Securities Rulemaking Board last week, a ``Reminder Regarding Accuracy of Information Submitted to the MSRB Transaction Reporting System''?

The ``reminder'' advises that dealers have an obligation to report information on their municipal bond transactions accurately and completely.

``The MSRB cannot contact each dealer with a transaction reporting error or possible error on a daily basis,'' the notice says. ``Dealers should review the customer report edit register and make any necessary corrections to ensure trades are reported accurately with valid formats and values. Failure to do so will affect the accuracy of the information published in price transparency reports as well as the information retained in the surveillance database.''

This sentence is footnoted: ``Transactions reported to the MSRB are made available to the NASD and other regulators for their market surveillance and enforcement activities.''

Accurate Data
The MSRB, the overseer of the municipal market, chooses its words carefully and doesn't use too many of them. This curious ``reminder'' is tantamount to what used to be called a Major Motion Picture Announcement.

The reminder comes just two weeks after the board put out its ``Review of Dealer Pricing Responsibilities,'' in which it advised dealers that they ``must exercise diligence in establishing the market value'' of the bonds they buy from, or sell to, customers.

The bond's price must ``bear a reasonable relationship to the prevailing market price of the security,'' the MSRB said.

In the same release, the MSRB observed that a small number of transactions exhibit wide price disparities, calling them ``sufficiently problematic to require regulatory review.'' The board emphasized the importance of submitting trade data ``in a timely and accurate manner.''

Pay Attention
What happened? Perhaps this is a case of the MSRB saying, No, wait a minute, this time we really mean it.

More likely, the MSRB's tone of urgency reflects heightened regulatory scrutiny. The Securities and Exchange Commission and the National Association of Securities Dealers are, it would seem, paying attention to how municipal bonds trade.

The SEC last week came out with a report on ``Municipal Bond Liquidity,'' and is supposed to come out with another, more reader-friendly study of trading. The market has been waiting for the trading study since early 2003.

Someone, namely the market's regulators, is finally paying attention.

This is a good thing. Maybe, just maybe, the mystery inside of a riddle wrapped in an enigma that is the municipal market will finally be revealed. Are individual investors being cheated? Are the transaction reports rife with clerical error?

Price Disparities
Since the MSRB began its transaction-reporting program back in 1995, anyone could see that wide price disparities were a feature of the market.

What nobody -- except for the regulators -- could see was, whether things were as bad as they sometimes looked. The price reports as they are configured now just show a bunch of numbers. Here's the issuer and its Cusip number and the size of the transaction, here's the price, here's the coupon and maturity, here's the yield.

Such listings are further defined three ways: Purchase from Customer, Sale to Customer, Inter-Dealer. The parties aren't identified.

You don't know if the dealer who bought some bonds at 85 is the same one who later sold them at 95 or 100. Such big gaps in price get you to thinking, if you study the transaction reports. The regulators don't have to ponder such matters. They know who's who, and if any customers are being cheated.

Maybe the National Association of Securities Dealer will tell the rest of us.

Bits and Pieces
The MSRB wants dealers to report trades 15 minutes after the trades take place, to enhance the transparency of the market. The MSRB thinks this can go a long way toward making the market a friendlier place for individual bond buyers.

Many dealers have asked the MSRB, Why are we doing this?

Which is a perfectly reasonable response, if you believe that the municipal market is a club, as it sometimes seems to be, and that the professionals who trade it already know what all the bonds are worth.

The funny thing about the transaction reports, though, is that they aren't comprised of $100,000 blocks. Not at all. You can scroll through page after page of the reports and come across $5,000, $10,000, $20,000 lots of bonds, which in this market qualify as ``odd lots.''

If this market really is a very professional, insiders' club, what are all those crazy little bits and pieces doing there?

Maybe the SEC will tell us.

Last Updated: February 18, 2004 00:02 EST