In the News: Recent Developments

November 28, 2012

Municipal-Bond Regulator to Change Auction Rate Securities Data

By Martin Z. Braun

The regulator of the U.S. municipal- bond market said it’s improving information it discloses about $40 billion in auction-rate securities after a financial adviser said the group was publishing misleading data. [See Saber Partners, LLC Calls for Municipal Market Regulator to Correct Auction Security Market Disclosure on its Web Site]

The Municipal Securities Rulemaking Board said changes to how it computes a ratio comparing the number of bids received in an auction to the amount accepted have been in the works for months. Yesterday, Joseph Fichera, chief executive of New York- based Saber Partners, called on the MSRB to fix the data. He said the published ratio doesn’t accurately capture demand for the securities.

“The ratios suggest there is robust independent investor demand for a given auction security in the auction and the investment appears safe and liquid,” the statement from Fichera said. “The fact is that the ratio is driven largely from a single market maker who can withdraw that support at any time.”

The market for auction-rate securities was worth $330 billion before it collapsed during the credit crisis. Demand faltered and dealers stopped stepping in as buyers of last resort at auctions, sending interest costs soaring. Investors who held the debt were stranded, unable to sell.

About $40 billion of the securities remain outstanding and are offered in hundreds of auctions each month, Fichera said.

The data published by the MSRB doesn’t inform investors how much of the bids come from banks that run the auctions as opposed to individuals, he said. MSRB data show ratios of as much as $4,000 of bids for every $1 of bonds for sale, he said.

The regulator of the $3.7 trillion muni-debt market plans to remove bids by dealers running the auctions and “normalize” ratios so they are like the bid-to-cover ratios in Treasuries sales.

“With some experience and some input, we said we could do a better a job, with a more precise number for our bid-to-cover ratio and that’s what we’re moving to do in the next couple of weeks,” Ernesto Lanza, deputy executive director of the Washington-based MSRB, said in an interview.

The MSRB’s moves were reported earlier by the Bond Buyer. [See MSRB to Change ARS Data As Urged by Advisor]

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