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Auction Rate Securites

Municipal Securities Dealers

September 22, 2008

MSRB Clarifies Reporting Obligations for Auction Rate Securities Buybacks

MSRB Notice 2008-36 (Sept. 2, 2008) The Municipal Securities Rulemaking Board (MSRB) issued a notice reminding dealers that buybacks of customer positions in municipal auction rate securities (ARS) at a stated price must be reported to the MSRB’s Real-Time Transaction Reporting System (RTRS), pursuant to MSRB Rule G-14 (Reports of Sales or Purchases). The MSRB also clarified that dealers do not need to include the M9c0 “away from market – other reason” special condition indicator on trade reports of ARS buybacks, noting that this indicator is used when a trade report contains information that may be misleading to users. The MSRB stated that it “does not believe that trade reports of ARS buybacks would provide misleading information relating to the market value of ARS because the price at which ARS buybacks are executed has been publicly announced.” The reminder followed announcements that several major municipal securities dealers agreed with federal and state regulators to buy back illiquid ARS from their customers following the collapse of the ARS market in February 2008. See, e.g., Bloomberg Law Reports® – Securities Law, SEC and New York Attorney General Settle Auction Rate Securities Claims (Aug. 18, 2008).

Generally, ARS are municipal bonds, preferred stocks and other financial instruments with variable interest rates or yields that are periodically reset through auctions. In these auctions, issuers accept bids with successively higher interest rates until all of the securities are sold. The interest rate at which the last of the securities is sold is called the “clearing rate,” and applies to all of the securities in an offering until the next auction occurs. If there are insufficient bids to establish a clearing rate, however, the auction is said to “fail,” leaving ARS holders with illiquid positions. To prevent such failures and preserve liquidity, firms managing ARS auctions can intervene by making “supporting” bids. In February 2008, major ARS dealers discontinued their longstanding practice of supporting ARS auctions in this manner. This led to a large number of failed auctions and left tens of thousands of investors holding highly illiquid ARS . Beginning in August 2008, several municipal securities dealers agreed to buy back these illiquid ARS from their customers to settle claims by federal and state regulators that the dealers mislead customers about the liquidity of the ARS market prior to its collapse.

The MSRB stated that, following these settlements, it received questions from dealers about whether they must report buybacks to the RTRS . The MSRB therefore issued this notice to clarify that dealers must do so. In its notice, the MSRB also cautioned users of price transparency reports produced from the RTRS that ARS buybacks may cause a higher than normal volume of trade reports in ARS . The MSRB explained that users should not regard this increased volume as an indication that the market for ARS has fully recovered from its collapse in February 2008, and that the prices at which dealers buy back their customers’ ARS “may not reflect the actual market value” of those securities.

Source: Bloomberg News 9/22/08 

 

RW Smith believes the information shown herein was obtained from a reliable source, but makes no representation and no guarantee as to its accuracy or completeness. RWS shall not be responsible for the consequences of your use of the information. Securities identified may be subject to additional call features, sinking funds, project features, or other factors that may affect market value. You must do your own independent research prior to submitting any bid.

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