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Municipal Bonds:
Raising the bar on best execution
in a $3.7 trillion market
The!official!central!repositary!for!disclosures!by!municipal!issuers.!
A!central!source!of!historical!price!information!on!municipal!bond!trades,!giving!the!
public!free!access!through!its!web!site!to!data!going!back!to!2006.!!!
Since!2012,!dealers!have!been!required!to!report!all!trades!within!15!minutes,!which!
then!appear!on!EMMA.!!New!features!on!EMMA!allow!investors!to!compare!trade!
histories!on!bonds!with!comparable!features.!!!
In!response!to!the!2012!SEC!study!and!its!recommendations,!a!consortium!of!dealers!
announced!in!2012!the!formation!of!Municipal!Bond!Information!Services!(MBIS).!3!!The!
consortium!said!it!planned!to!launch!a!"suite!of!products!designed!to!enhance!preItrade!
price!transparency!and!postItrade!operational!practices!for!the!municipal!bond!
marketplace."!
MBIS!offers!two!data!feeds.!!The!first!is!aggregated!bid!and!offer!data,!which!is!available!
intraIday!and!refreshed!every!5!minutes.!!This!service!includes!an!endIofIday!bulk!feed.!!
The!second!is!a!Comparable!Securities!Service!designed!to!help!market!participates!
make!judgments!about!the!pricing!of!less!liquid!securities.!!MBIS!data!has!been!cited!in!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!Report!on!Municipal!Securities!Market,!Securities!and!Exchange!Commission,!July!31,!2012.!
!"Statement!on!Making!the!Municipal!Securities!Market!More!Transparent,!Liquid!and!Fair,"!Commissioner!Luis!A!Aguilar,!
U.S.!Securities!and!Exchange!Commission,!Feb.!13,!2015.!
3!Founders!include!Associated!Bond!Brokers,!Butler!Muni,!Hartfield!Titus!&!Donnelly,!Regional!Brokers!Inc.,!RW!Smith!and!
Associates,!Stark!Municipal!Brokers,!Sentinel!Brokers!Company,!Tradeweb,!Tradition!Asiel!Securities!and!Tullett!Prebon.!!
See!site:!http://www.mbis.com.!
1
2
!Bryant!Park!Financial!Communications!2015!
articles!appearing!in!The$Bond$Buyer,$the!leading!publication!for!the!municipal!securities!
market,!and!in!other!financial!media.!!
Defining 'Reasonable Diligence'
More!than!a!year!ago,!the!MSRB!proposed!a!new!best!execution!requirement!as!part!of!
the!next!phase!of!its!efforts!to!promote!market!transparency.!!The!approval!of!the!
proposed!amendments!to!Rule!GI18!was!followed!by!a!lengthy!comment!period!as!the!
MRSB!heard!from!the!industry!about!its!concerns!and!coordinated!with!FINRA!on!the!
details!of!implementation.!!!
On!November!20,!2015,!the!MSRB!issued!guidelines!on!the!standard,!which!will!become!
effective!on!March!21,!2016.4!!!The!amended!Rule!GI18!requires!dealers!to!exercise!
"reasonable!diligence"!to!determine!the!best!market!in!the!security!it!seeks!to!trade!on!
behalf!of!a!customer.!!Then!dealers!must!buy!or!sell!securities!in!that!market!so!that!the!
resulting!price!to!the!customer!"is!as!favorable!as!possible!under!prevailing!market!
conditions."!!
The!new!standard!will!not!apply!to!investors!with!at!least!$50!million!in!assets!as!long!as!
they!affirm!that!they!meet!the!MSRB!definition!of!"sophisticated!municipal!market!
professionals,"!or!SMMPs.!!It!also!does!not!apply!to!interIdealer!trades,!but!customer!
trades!cleared!through!another!dealer!are!covered!by!the!standard.!
MSRB!defines!"reasonable!diligence"!in!terms!of!process!and!dealers'!policies.!!MSRB!
guidance!says!that!the!factors!dealers!should!consider!in!adhering!to!the!standard!
include!but!are!not!limited!to:!
!
The!character!of!the!market!for!the!security!!(e.g.,!price,!volatility,!and!relative!
liquidity)!
The!size!and!type!of!transaction!
The!number!of!markets!checked!
The!information!reviewed!to!determine!the!current!market!for!the!subject!security!
or!similar!securities!
The!accessibility!of!quotations!
The!terms!and!conditions!of!the!customers!inquiry!or!order,!including!any!bids!or!
offers!that!result!in!the!transaction,!as!communicated!to!the!dealer!
MSRB!also!instructs!dealers!to!establish!policies!spelling!out!how!they!meet!the!
standards.!!The!Board!suggests!that!existing!standards!in!the!corporate!bond!market!
should!inform!the!language!of!these!policies.!
'Reasonable Diligence' and Electronic Platforms
Much!of!MSRB's!19!pages!of!guidance!on!Rule!GI18!II!issued!in!November!2015!II!relates!
to!dealers'!use!of!electronic!Alternative!Trading!Systems!and!"broker's!brokers"!(defined!
by!MSRB!Rule!43)!to!meet!their!obligation!for!"reasonable!diligence."!!The!guidance!
noted!that!there!is!"no!categorical!requirement"!that!a!dealer!collect!quotes!from!an!ATS!
platform!or!use!a!"broker's!broker."!But!the!guidance!makes!this!point:!
As!the!availability!of!electronic!systems!that!facilitate!trading!in!municipal!securities!increases,!dealers!
need!to!determine!whether!these!systems!might!provide!benefits!to!their!customer!order!flow,!
particularly!retail!order!flow,!and!help!ensure!they!are!meeting!their!obligations!under!Rule!GI18(a)!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
4
!MSRB,!" Implementation!Guidance!on!MSRB!Rule!GI18,!on!Best!Execution,"!Nov.!20,!2015.!
!Bryant!Park!Financial!Communications!2015!
with!respect!to!ascertaining!the!best!market!for!their!customer!transactions.!!Similarly,!preItrade!
transparency,!such!as!through!electronic!trading!platforms,!is!also!increasing!in!the!municipal!securities!
market,!and!dealers!need!to!periodically!analyze!and!determine!whether!incorporating!pricing!
information!available!from!these!systems!should!be!incorporated!into!their!bestIexecution!policies!and!
procedures.!
The!MSRB!acknowledges!that!a!wide!range!of!trading!systems,!pricing!platforms!and!
quote!aggregation!sites!operate!in!the!municipal!securities!market:!
Some!systems,!including!autoIexecution!systems,!both!display!prices!and!provide!execution!
functionality,!while!other!systems!display!prices!but!provide!no!execution!functionality.!!Still!other!
systems,!such!as!requestIforIquotation!systems,!may!provide!indications!of!interest!but!not!display!
prices!or!provide!execution!functionality.!
The!three!leading!ATS!platforms!for!municipal!bonds!are!TMC,%KCG%BondPoint!and!
Tradeweb.!!(See!profiles!on!Page!5.)!!They!are!used!by!dealers!to!trade!with!one!
another!as!well!as!to!provide!trading!access!to!the!retail!market!through!
workstations!and!other!types!of!services!used!by!financial!advisors.!!In!addition!to!
ATS!platforms,!the!municipal!market!uses!bulletin!boardIlike!services!such!as!
fabkom.com!that!allow!dealers!to!post!quotes!and!solicit!bids.5!!
Another!feature!of!the!market!are!the!many!retail!sites!operated!by!dealers!or!groups!
of!dealers!to!attract!and!aggregate!orders!from!individuals.!!Examples!include!
municipalbonds.com,!thebondcenter.com!and!bond!underwriter.!com.!
Spread Disclosures
Regulators!are!also!pressing!dealers!to!disclose!markups!and!markdowns!in!transactions!
with!retail!customers.!!!Under!a!proposed!change!to!MSRB!Rule!GI15,!a!dealer!who!
purchases!or!sells!bonds!from!for!its!own!account!would!have!to!disclose!the!markup!or!
markdown!on!the!costumer's!confirmation!under!three!conditions:!
! It!executes!a!transaction!on!the!same!side!of!the!market!as!the!customer!
! The!transaction!is!greater!than!or!equal!to!the!size!of!the!customer's!
! And!the!dealer!transaction!occurs!within!a!twoIhour!window!of!either!side!of!the!
customer!transaction.!
The!customer's!confirmation!would!disclose!the!difference!between!price!to!the!
customer!and!the!prevailing!market!price!for!the!security.!!This!would!be!expressed!as!
dollar!amount!and!as!a!percentage!of!the!principal!amount!of!the!customer!transaction.!!
A!hyperlink!to!relevant!price!information!in!EMMA!or!TRACE!would!also!be!included!in!
the!confirmation.!!The!MSRB!has!indicated!it!would!limit!the!proposed!rule!to!secondary!
market!trading.!
SIFMA,!in!a!letter!to!the!MSRB!and!FINRA!on!Dec.!11,!2015,!the!last!day!for!comment!on!
the!proposal,!urged!that!the!disclosure!standard!be!limited!to!riskless!principal!
transactions!involving!customers.!!It!also!favored!a!twoIhour!window!for!capturing!
contemporaneous!reference!trades!for!confirmations,!rather!than!a!sameIday!standard!
proposed!by!FINRA.!!In!general!comments,!SIFMA!urged!regulators!not!to!finalize!the!
rule!until!they!had!weighed!expected!benefits!of!the!disclosures!against!the!high!costs!of!
implementation!and!the!potential!impact!on!market!liquidity.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
5!In!September!2015,!Bloomberg!reported!that!one!of!the!trading!sites!operated!by!a!"broker's!broker"!II!
MuniBrokers.com!II!was!under!scrutiny!by!the!Justice!Department!for!anticompetitive!practices!in!secondary!trading.!!The!
site,!owned!by!Hartfield,!Titus!&!Donnelly!LLC,!was!reported!to!have!been!the!target!of!a!complaint!that!firms!using!the!
site!had!agreed,!or!were!being!asked!to!agree,!to!boycott!competing!services.!!!A!day!later,!news!reports!said!the!inquiry!
had!been!closed!with!no!action!taken.!
!Bryant!Park!Financial!Communications!2015!
TMC Bonds
KCG BondPoint
Tradeweb Direct
Pre-Trade Analytics
!Bryant!Park!Financial!Communications!2015!
Leadership
Bill Vulpis is Managing Director and
Head of BondPoint:.
Tradeweb is majority-owned by
Thomson Reuters and 11 dealers. Its
headquarters are at 1177 Avenue of
the Americas.
Market Share: Facilitates 1 in 5 of all
municipal bond trades, according to
the Tradeweb site. That statistic is
attributed to MSRB data.
Clients: Reports it has more than
2,100 Liquidity Takers on its network,
defined as financial advisors, traders
and buy side investment
professionals. The site says there are
more than 200 Liquidity Providers,
defined as dealers and buy-side
investment professionals. Provided
quotes on 40,438 unique municipal
securities, as of 10 am on Dec. 7,
2015, according to the Tradeweb site.
Products and services
Services are delivered through
Tradeweb Direct workstation.
Includes analytical tools, trading
history report and research, and a
suite of compliance and monitoring
tools. Notes the site: "Automated preand post-trade analysis capabilities
support best execution efforts by
indicating if bond offerings are fairly
priced and whether customers
executions fall out of line with the
firms pre-set tolerance levels."
Tradeweb Direct Muni Ticker service
is available on the The Bond Buyer
site.
Leadership
John Cahalane is Managing Director
and Head of Tradeweb Direct.
Banks,
14%
Individuals, 42%
Mutual
Funds,
28%
The!market!is!predominantly!retail,!with!
individuals!accounting!for!70%!of!holdings!
directly!or!through!mutual!funds.!!Retail!
investors!are!drawn!to!these!issues'!taxIexempt!
status!and!their!security!relative!to!corporate!
bonds.!!In!selling!these!securities,!advisors!focus!
on!the!taxIequivalent!yield!of!municipal!issues!
relative!to!corporate!bonds.!
Because!tax!exemptions!are!usually!applicable!
only!to!obligations!in!specific!states!or!
SIFMA Q2 2015 Data
jurisdictions,!the!market!is!highly!regional!in!
character.!!Municipal!bond!mutual!funds!reflect!this!regional!nature.!!Of!1,055!municipal!
bond!mutual!funds!available!on!Fidelity's!site,!282!are!singleIstate!funds.!!!A!third!of!the!
singleIstate!funds!on!the!site!are!focused!on!taxIexempt!issues!of!California!entities.!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!A!highly!readable!guide!to!the!categories!of!municipal!securities!can!be!found!on!Fidelity's!site!at:!
!http://www.fidelity.com/fixedIincomeIbonds/individualIbonds/municipalIbonds.!
6
!Bryant!Park!Financial!Communications!2015!
Municipal!bonds!are!largely!a!buyIandIold!market!in!which!issues!trade!infrequently!and!
in!small!lots.!!In!2014,!the!MRSB!released!a!study!that!looked!at!trade!data!covering!43!
million!secondary!principal!transactions!in!more!than!a!million!distinct!securities!from!
2003!through!2010.!7!!The!research,!which!included!a!period!marked!by!the!credit!crisis!
and!the!implementation!of!real!time!trade!reporting,!found!that:!
!
50%!of!all!trades!in!the!municipal!market!had!a!value!at!or!below!$25,000!
Only!5%!of!trades!had!a!value!equal!to!or!in!excess!of!$490,000!
50%!of!all!municipal!securities!traded!an!average!of!2.4!times!or!fewer!each!year!
Monthly!trade!data!compiled!by!SIFMA!showed!that!in!November!2015!82%!of!all!
municipal!bond!transactions!were!under!$100,000!and!13%!were!between!$101,001!to!
$500,000!in!the!month.!!
Trading!volume!in!the!municipal!securities!market!declined!after!the!credit!crisis!as!the!
worries!about!the!fiscal!condition!of!issuers!and!with!low!yields!reduced!investor!
demand.!!(See!chart,!below.)!!Volumes!have!yet!to!return!to!the!highs!seen!in!the!summer!!
Trade Breakdown
November 2015
$700,000
Source; SIFMA
$600,000
Monthly(volume,(par(value(in($million(
$500,000
Interdealer
Trades
39%
$400,000
$300,000
Customer
Bought
42%
$200,000
$100,000
Customer Sold
19%
Ju
l-0
Ja 8
n09
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Ja 9
n10
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Ja 0
n11
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Ja 1
n12
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n15
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$0
2012
400.0
350.0
2013
2014
2015
2011
300.0
250.0
200.0
150.0
100.0
50.0
0.0
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
7!See!"Report!on!Secondary!Market!Trading!in!the!Municipal!Securities!Market,"!Eric!R.!Sirri,!Babson!College,!July!2014.!!
This!report!was!commissioned!by!the!MSRB!and!is!available!on!its!site.!
!Bryant!Park!Financial!Communications!2015!
of!2007.!!But!issuance!has!picked!up!in!2015!and!seems!on!track!to!exceed!levels!last!
seen!in!2012.!!Moreover,!mutual!fund!net!flows!have!recovered!from!a!midIyear!slump,!
with!more!than!$6!billion!of!net!new!money!going!into!portfolios!so!far!in!the!fourth!
quarter!of!2015.!
Conclusion
Regulators'!imposition!of!new!bestIexecution!standards!and!additional!disclosure!
requirements!is!remaking!the!municipal!securities!market.!!The!changes!mean!that!
market!participants!will!likely!step!up!adoption!of!electronic!trading!and!the!purchase!of!
processing!and!monitoring!services!in!2016!as!they!adjust!their!compliance!and!
oversight!to!meet!the!new!standards.!!Larger!broker!dealers!and!advisor!networks!that!
are!able!to!spread!these!costs!over!a!sizable!franchise!will!reap!competitive!advantages!
as!a!result!of!this!change.!
At!the!same!time,!an!improving!fiscal!picture!for!states!and!cities,!plus!the!prospect!of!
higher!yields,!could!help!reinvigorate!the!municipal!securities!market!in!2016.!!High!
levels!of!volatility!in!the!equities!markets!may!also!drive!more!interest!in!this!fixedI
income!sector.!!
As!Morningstar!noted!in!a!Dec.!10,!2015!commentary:!
Despite!a!few!negative!headlines!(Puerto!Rico,!Illinois,!and!Chicago,!to!name!a!few),!the!
municipal!market!has!recovered!nicely!since!the!2008!crash!and!largely!remains!
healthy...!California,!for!example,!topped!the!short!list!of![flagging]!states!following!the!
crash,!but!budget!cuts!and!tax!hikes!helped!the!state!get!its!finances!in!line,!making!it!a!
highIprofile!success!story.!
The!taxIexempt!market!has!seen!an!imbalance!between!supply!and!demand!in!recent!
months,!the!report!suggests,!adding,!"that!tailwind!has!helped!municipal!bonds!and!
funds!perform!well,!even!in!the!face!of!potentially!rising!interest!rates."!!A!sign!of!the!
imbalance!was!the!narrowing!of!discounts!on!municipal!bond!closedIend!funds,!from!an!
average!of!7%!at!the!end!of!2014!to!6%!as!of!November!2015,!the!fund!researcher!notes.!!!
Though!longerIduration!municipal!bond!mutual!funds!will!see!a!slight!outflow!in!2015,!
portfolios!in!Morningstar's!intermediate!national!category!had!attracted!$10.75!billion!in!
net!flows!through!the!end!of!October!and!looked!set!to!end!the!year!on!a!strong!note.!
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!Bryant!Park!Financial!Communications!2015!