The Bond Dealers of America (BDA) deploys a variety of advocacy and grassroots tools to influence the policy-making process and promote a more efficient fixed-income market. Regulatory authorities in Washington, D.C. recognize the BDA as an authority on technical issues and market trends. Through a variety of events and forums, our members have the opportunity to meet regulators and legislators to discuss market and business challenges. Our federal Political Action Committee (PAC) supports legislators who work to advance policies that improve the fixed income markets.
Federal Policy Focus 2023
Capitol Hill and Municipal Bonds in 2023
Following a Congress in which trillions of dollars was spent of infrastructure including an expansion of private activity bonds, expectations have been lowered heading into the 118th Congress for additional action on key municipal bond provisions.
Following a hotly contested midterm elections, Republicans have taken over the House (albeit with a razor thin majority), and Democrats retained control of the Senate likely setting up 2 years of gridlock in Washington heading into the 2024 presidential election cycle. While gridlock has some positives for muni’s ie…the tax exemption remains far off the chopping block, can any offensive efforts to advance muni legislation be successful?
Congressional Outlook for Munis
As noted, Congress has been on somewhat of a spending spree since the beginning of COVID in 2020. This included the bipartisan infrastructure package known as the Infrastructure Investment and Jobs Act (IIJA) as well the much-slimmed Build Back Better package renamed as the Inflation Reduction Act (IRA). While the IIJA did include a PAB expansion, the IRA did nothing to further munis as well included a corporate minimum tax of 15% that some believe could negatively impact the municipal bond tax-exemption with some corporations having to pay tax on their muni holdings.
The BDA alongside the Public Finance Network has spent considerable time and effort to grow bipartisan support of munis including the expansion of the House Municipal Finance Caucus and these efforts are beginning to show results.
Restoration of Advance Refundings Gains Steam
A longstanding priority of the BDA and following an advocacy push, legislation has been introduced in both Chamber of Congress that includes robust bipartisan support to restore tax-exempt advance refundings.
The Investing in our Communities Act was introduced this Spring by Representatives David Kustoff (D-TN) of the House Ways and Means Committee and Dutch Ruppersberger (D-MD) Co-Chair of the House Municipal Finance Caucus.
On the Senate side, Roger Wicker (R-MS) and Debbie Stabenow (D-MI) reintroduced the LOCAL Infrastructure Act and are accompanied by 16 bipartisan co-sponsors, a high water mark in support in the upper chamber.
Having support of a sitting Member of the Ways and Means Committee sponsor this legislation and having robust support in the Senate cannot be understated, however, many hurdles need to be cleared for passage. It should be noted that Majority staff in the House have softened their stance on the legislation but noted that there is no immediate push to pass the this year, instead look towards the end of this Congress next year.
We also fully expected other key provisions to be introduced in the coming months including legislation to raise the bank qualified debt limit to $30 million tied to inflation by Rep. Terri Sewell (D-AL) and continue working to find a Republican counterpart for this effort.
While we expect odds of advancement of these key bills this Congress remain low, having support on key House Committees is invaluable for the longer term efforts of the muni community.
The BDA is planning to have multiple DC fly-ins throughout 2023 focusing on these legislative issues as well regulatory issues at the MSRB, FINRA, and the SEC the first of which is scheduled for June 22nd, 2023.
Debt Ceiling Negotiations and SLGS
Following this weeks announcement that Treasury projects the debt ceiling X-date to be as early as June 1st, Secretary Yellen today announced that the agency will be implementing a further round of extraordinary measures, this time closing the State and Local Government Securities (SLGS) non-marketable Treasury window.
The press release can be viewed here.
House Passes Debt Bill-DOA in Senate
Following rounds of concession from House Republican Leadership, the House passed legislation that lifts the debt ceiling while implementing broad reaching spending cuts–a non-starter for both the Democratic controlled Senate and Biden Administration who continue to demand a clean debt ceiling bill.
While both sides are using their positions as negotiation tactics, at this juncture the immense gulf between party positions is alarming. It seems that a narrow compromise will likely be met with few spending cuts and likely the clawing back of unspent federal COVID funds, however at this juncture it is premature to to make this assumption.
The BDA believes compromise will be found, however expect that Congress will yet again wait until the 11th hour to find compromise and avoid default.
SEC proposed Rule Best Execution
The SEC in December voted to approve a proposed new SEC Rule Best Execution which would impose a best execution standard on securities trades including fixed income. The new rule would be in addition to existing best execution rules at the MSRB and FINRA. Dealers would be required to be in compliance with all three as appropriate.
The proposed rule would require dealers to produce written supervisory procedures around their best execution requirements. Dealers would be required to survey “material liquidity sources” to ensure they execute customer trades at the best available price. Certain trades, including all principal and riskless principal trades, would be subject to heightened compliance standards including documenting how the firm determined best execution. Trades with institutional customers would be partly exempt from the Rule, although institutional customers are not defined in the proposal.
On March 31 BDA filed a comment letter with the SEC in opposition to the proposal. In the letter we ask the SEC to abandon the initiative because it is unnecessary, overly restrictive, and needlessly expensive. If the SEC moves forward with the proposal, we asked that it be amended to make it more workable with the following changes:
- Remove riskless principal trades from the definition of conflicted trade.
- Define institutional investor to encompass existing definitions in FINRA and MSRB rules and clarify the scope and focus of the institutional investor exemption in the context of fixed income.
- Make it clear that last look and internalizing fixed income trades to the benefit of customers would not violate Regulation Best Execution or cause a trade to be treated as “conflicted.”
- For conflicted trades, eliminate the requirement to survey a broader range of markets beyond material potential liquidity sources and to separately document the best execution analysis for every trade.
- Eliminate the requirement to provide annual best execution reports to firms’ boards of directors.
- Permit dealers to use the introducing broker partial exemption when its executing broker is affiliated.
BDA’s comment letter is available here.
One Minute Trade Reporting
Both FINRA and the MSRB have issued coordinated proposals to reduce the trade reporting deadlines for the TRACE and RTRS systems from the current “as soon as practicable but no later than 15 minutes” to just one minute.
Both the FINRA and MSRB proposals feature significant analyses of trade reporting speeds. The MSRB proposal states that 77 percent of municipal trades are already reported within one minute, and the FINRA proposal states that 82 percent of TRACE-eligible trades are reported within one minute. Both proposals suggest that moving all trades to a one-minute standard is doable and cost-effective while requesting comment on possible problems and issues.
BDA provided comments to both agencies in October. We told MSRB and FINRA that “there are good reasons why dealers are not already reporting 100 percent of trades within one minute despite both Rules explicitly or effectively requiring trade reporting ‘as soon as practicable.’” We cite a number of situational reasons why some trades cannot be reported within one minute, including, for example, if that firm has never traded that bond before or for trades entered manually. We asked both agencies to withdraw their proposals. Short of that we said “If the MSRB and FINRA decide to move forward with one-minute reporting despite the predictable negative outcomes, we recommend significant changes to the Proposals, including maintaining 15-minute reporting for trades executed by telephone, manually inputted into RTRS or TRACE, cleared through third-party clearing firms, allocated to a dually registered RIA’s sub-accounts, or trades that require a dealer to populate their security record before reporting.”
The comments received by both agencies were overwhelmingly opposed to the proposal. We will continue to press the MSRB and FINRA on their trade reporting initiative.
FINRA Rule 4210
FINRA’s proposed Covered Agency Transaction (CAT) amendment to their Rule 4210 on margin is currently in Commission review in response to a petition BDA and BDA member Brean Capital files earlier this year. In a Commission review, each commissioner’s office must conduct a review of the proposal. The review cannot be delegated to SEC division staff. At the conclusion of the review, the SEC will decide whether to sustain their January 2022 decision to approve the amendment, currently stayed pending the outcome of the review, or to reject the proposal. There is no deadline for Commission action.
The proposed amendment would require FINRA-member dealers to collect customer variation margin on most sales of new-issue agency MBS or take a comparable capital charge when the market moves against a customer position.
In a statement we filed in response to the review, BDA told the SEC that “Maintaining the stay is imperative given the many and immediate harms that the Proposed Rule Change would have on market participants.” We also told the Commission that they “should deny the 2021 Proposed Rule Change and continue to deny effectiveness to SR-FINRA-2015-036, insofar as that Rule would subject forward-settling transactions in federal government mortgage backed securities (“Agency MBS”) to margin requirements.”
In an additional, expected action, FINRA recently extended the deadline for compliance with the 2016 changes to Rule 4210, already approved by the Commission, to October 24, 2023.
FINRA’s proposal that is the subject of the Commission review is available here.
The BDA filing is available here.
Financial Data Transparency Act
Congress in 2022 enacted the Financial Data Transparency Act (FDTA) as part of the National Defense Authorization Act. The law includes provisions that will require municipal issuers and certain others to make information disclosures in “machine readable” format. The SEC is charged with developing a “taxonomy” around the design of the reporting scheme that tracks issuer accounting and disclosures. There is a four-year implementation period for the FDTA involving a rulemaking initiative and an implementation period. The SEC at a recent conference on municipal disclosure informed the market that the process has begun internally at the SEC.
In addition to issuer financial disclosures, the FDTA requires that certain information reporting by dealers must also be in machine readable format. This could include, for example, VRDO remarketing reports to the MSRB’s SHORT system under MSRB Rule G-34. BDA is closely monitoring the SEC’s activities around the FDTA and will engage as appropriate.
FINRA proposes changes to TRACE reporting for Delayed Treasury Spot Trades
FINRA late last year proposed changes to their TRACE reporting rules for Delayed Treasury Spot Trades (DTSTs), corporate bond trades where a spread to Treasuries is agreed to by both parties to the trade early in the day but where the dollar price is established and actual execution takes place later in the day at an agreed upon time. Under the proposal dealers would be required to report to TRACE trade details, including the spread to Treasuries and the reference security, at the time the spread is agreed to and report the dollar price later in the day when it is established.
In our letter to FINRA on the proposal, BDA opposed the change “because it would create a cumbersome and expensive mechanism for trade reporting and because FINRA has not appropriately scoped the full effects of the proposal, relying instead on estimates of the volume of trades that would be affected.” We told FINRA that a large majority of trade reporting is conducted by OMS vendors and that those vendors system architecture does not currently support reporting trades before they are fully executed with a known dollar price. Adapting systems to accommodate the rule change would be expensive and time consuming.
We also critiqued FINRA’s economic analysis of the proposal on the basis that it uses speculative assumptions about the volume of trades that would be affected by the rule changes. Instead of moving forward with the current proposal we asked FINRA to consider a rule change where DTSTs would continue to be reported when all trade terms including the dollar price are known, but those trade reports would be flagged as DTSTs and would include the time that the spread to Treasuries was established.
We also raised the issue of the DTST proposal in the context of a previous FINRA proposal to shorten the TRACE trade reporting time from 15 minutes after execution to one minute. “If FINRA adopts both one-minute trade reporting and dual reporting for DTST trades as proposed in the Notice, we ask that the proposals be adopted separately with a long period of time between the effective dates of both amendments in order to ensure firms are fully prepared to comply with both,” we said.
We plan to maintain our advocacy around this proposal.
SEC Rule 15c2-11
On December 16, 2021 the SEC issued a staff No-Action letter related to SEC Rule 15c2-11. The No-Action letter for the first time specified that quotations for fixed income securities are subject to SEC Rule 15c2-11, a decades old rule previously assumed to apply to over-the-counter equities.
SEC Rule 15c2-11 requires dealers to review issuer financial information prior to publishing quotes to “quotation mediums” for over-the-counter securities. 2020 amendments to the Rule specify that the issuer financial information must also be publicly accessible.
On November 30, 2022 the SEC issued a third staff no-action letter related to applying Rule 15c2-11 to fixed income quotations. Under the revised approach, the no-action letter that applied to bond quotations in 2022 will effectively remain in place for 2023 and 2024. The principal change is that dealers can continue to publish quotations for 144A securities as long as the issuer’s financial are available to potential buyers; they do not have to be available publicly.
BDA has been working with SIFMA on this issue. There is currently a joint BDA-SIFMA working group focused on identifying and addressing key compliance questions associated with applying 15c2-11 to fixed income quotations.
FINRA Corporate Reference Database
BDA in February filed a comment letter with the SEC raising concerns over a FINRA proposal to establish a Corporate Bond New Issue Reference Data Service. BDA told the SEC “we are especially concerned about the costs and burdens the Proposal would place on mid-size and regional broker-dealers and about FINRA’s weak accounting for costs FINRA itself would incur around implementing the Proposal.”
FINRA in 2019 proposed to establish and operate a Corporate Bond New Issue Reference Data Service, a database of corporate bond new issues. The proposal arose from a recommendation to establish a corporate bond reference database from the SEC’s now idle Fixed Income Market Structure Advisory Committee. Under the proposal underwriters would be required to submit to FINRA 32 descriptive data fields for the new corporate deals they underwrite. FINRA would repackage and sell the data via subscriptions.
BDA told the SEC “Throughout the rulemaking process around the Proposal, FINRA has failed to provide robust cost estimates either for expenses that would be incurred by firms themselves or costs that would be incurred by FINRA.” “We urge the Commission withhold further support of the Proposal until the SEC and the public have a full accounting of the project’s costs,” we told the SEC.
The SEC approved the FINRA proposal under delegated authority in December 2019. Since then the FINRA proposal has gone into “Commission review” with the approval stayed. Bloomberg has also challenged the FINRA proposal in litigation. Recently the DC Circuit Court ruled in that case “the Commission failed to respond adequately to Bloomberg’s concerns about the cost of building and maintaining the program and the extent to which those costs – which could conceivably amount to millions, or tens of millions of dollars – will be borne by market participants.”
FINRA’s proposal as approved by the SEC is available here. The request for comment we responded to today is available here. BDA’s comment letter is available here.