MSRB finds ‘muted’ market impact for markup disclosure rule


The Municipal Securities Rulemaking Board found only a muted market impact to date from May 2018 rule requiring dealers to disclose their compensation for retail customer transactions, commonly known as markup and markdown.

But the analysis released Friday, Mark-up Disclosure and Trading in the Municipal Bond Market, also pointed out that previous research on similar disclosure rules has found “the impact may not be fully manifested until a few years after rule implementation.”

The report was issued in advance of a three-day MSRB board meeting Tuesday through Thursday in which members plan to continue discussions on potential options for leveraging the EMMA website to enhance transparency and educate investors.

The board plans to adopt the agency’s annual budget and will receive an update on recommendations from the U.S. Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee on the industry bond auction process referred to as “pennying.”

Other topics include a discussion of comments received on the requirement for municipal advisors to apply for CUSIP numbers when advising on competitive sales under Rule G-34 and stakeholder feedback on draft interpretive guidance on prearranged trading in connection with primary offerings of municipal securities.

Simon Wu, MSRB

Friday’s analysis, co-authored by MSRB Chief Economist Simon Wu and Director of Research Marcelo Vieira, studied the most recent in a series of transparency disclosure requirements implemented by the MSRB dating back to the requirement for real-time transaction reporting that began in January 2005.

The May 2018 rule implemented amendments to Rule G-15 and Rule G-30 requiring markup disclosure by dealers for certain retail customer transactions in municipal securities with the goal of providing transparency, improving trading execution and expanding investors’ access to information about the cost of buying or selling a municipal security.

“The amendments were aimed specifically at retail investors who historically have had more limited information than professional market participants regarding municipal security pricing and trading mechanisms,” the new report said.

Since the implementation date, “The percentage of retail-sized customer trades with an offsetting trade for the same executing dealer has declined only slightly, to 38.8% from 39.6%,” the report said. “Similarly, transaction costs continued to decline … with a 8.8 basis-point decline in effective spread for retail-sized customer trades.”

MSRB's Marcelo Vieira

Marcelo Vieira, MSRB

However, the authors said, “The magnitude of the decline for retail-sized customer trades was in line with the downward trend exhibited prior to the implementation of the markup disclosure rule as well as the reduction experienced by institutional-sized customer trades during the same period.”

William Oliver, media liaison for the National Federation of Municipal Analysts, said that the latest transparency rule from the MSRB may appear to be the least impactful, but taken together the rules promulgated over the last 15 years have been significant.

“The markup for the smallest trade has declined by almost half,” Oliver said. “So all of the efforts they’ve made over the last 10 or 15 years have really increased transparency.”

Oliver recalled that one of the first transparency rules required trades under $1 million to be reported immediately.

“You could argue that the decline has been steady over time and this is just incremental,” he said. “The larger declines have been pretty significant. It’s really the implementation of the last piece of the transparency effort they have been making for many years and it’s important because it’s a big consumer issue. You know what you pay for ATM fees. You know what you pay for stock transactions.”

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