In the News: Recent Developments

July 12, 2010

MSRB Files Change on ARS, VRDO Transparency

By Andrew Ackerman

Dealers would have to submit bidding information for auction-rate securities in a set of individual data points rather than in document form under changes the Municipal Securities RulemakinDg Board submitted Friday on a proposed expansion of its transparency system for ARS and variable-rate demand obligations.

Under the amended proposal, which the board submitted to the Securities and Exchange Commission, dealers also will have five business days, rather than the originally proposed one business day, to commit their best efforts at submitting a new or amended version of documents for VRDO liquidity facilities such as standby bond purchase agreements and letters of credit.

The five-day turnaround for such documents mirrors the board’s deadline for submitting advance refunding documents, MSRB officials noted.

The revised proposal comes in response to comments the board received to a March filing with the SEC. The proposal now is expected to be subject to an additional 21-day comment period upon publication in the Federal Register, which could occur as early as this week.

The proposal is designed to expand the board’s Short-Term Obligation Rate Transparency System, or SHORT, to include bidding information and documents for ARS, as well as remarketing data and documents for VRDOs. The board is asking to expand the system within nine months of commission approval and with no fewer than 60 days of advance notice to the muni market.

Currently, SHORT collects only basic reset information for these securities. Though the ARS market collapsed in early 2008, there are roughly $70 billion of municipal ARS still outstanding that have consistently failing auctions. There are more than $400 billion of outstanding VRDOs.

By seeking to require dealers to submit ARS bidding information as a set of individual data points, the board is responding to arguments raised by Joseph Fichera, senior managing director and chief executive officer of Saber Partners in New York, as well as the Securities Industry and Financial Markets Association.

In its SEC filing, the board noted that Fichera and the industry group said this method would “better facilitate data analysis and the computation of statistics, such as a bid-to-cover ratio, that would provide meaningful information about the demand for specific ARS.”

In its March proposal that would have allowed dealers to submit documents, the board, ironically, was bowing to SIFMA, which originally argued it would be too costly and time-consuming to extract bidding information and submit it in individual data fields, as proposed in draft rule changes floated last year.

However, SIFMA reversed itself this year and said it was no longer certain having dealers submit a document containing auction information would minimize its members’ burdens.

Meanwhile, the board said that dealers would have to report the identities of the VRDO tender agent and the par volume of unremarketed variable-rate bonds that are held by the liquidity-providing banks. Though SIFMA warned that it may be difficult for dealers to know this information, the MSRB said they would have to report what they are aware of at the time of the interest-rate reset.

The board said it would stick with a 90-day implementation date for dealers to submit program documents for existing ARS and VRDOs.

Though the Investment Company Institute had recommended a 30-day turnaround, the board said 90 days is more practical, “given the large number of documents that would need to be submitted to the MSRB and the fact that, for outstanding issues, dealers may need time to request documents from third parties.”

The board also revised an element of the proposal that would require dealers to disclose if they receive bids from issuers or conduit borrowers on their own ARS.

To reflect the fact that some self-bids may be submitted by dealers that do not serve as the program dealer, the MSRB would require such third-party dealers to notify the program dealer that they are acting on behalf of the borrower.

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