Citigroup Inc., the second-largest U.S. municipal-bond underwriter last year, says applying the Dodd-Frank law regulating Wall Street to the market for state and local debt would raise costs for borrowers.
Municipal securities dealers such as Citigroup make it easier for investors to trade in the $3.7 trillion municipal market, cutting state and local borrowing costs, Citigroup’s Howard Marsh, a managing director, said in the Jan. 27 filing with the Federal Deposit Insurance Corp. The agency is writing rules to implement the 2010 law. While an exemption to limits on banks trading for their own accounts under the so-called Volcker Rule would apply to some types of municipal bonds, such as general-obligation debt, it wouldn’t apply to others.
The proposed application “would arbitrarily, unfairly and unnecessarily harm state and local governments and their constituents by raising costs in a significant segment of the municipal market,” Marsh wrote. “Without the liquidity provided by municipal securities dealers, municipal issuers would undoubtedly experience an increase in their financing costs.”
Citigroup asked that all types of municipal securities, including tender-option bond programs, be exempt from Dodd-Frank restrictions under the Volcker rule. Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, declined to comment on the filing, which was also sent to other regulatory agencies.
Barring Proprietary Trading
Under the rule, named for former Federal Reserve Chairman Paul Volcker, federally insured banks would be barred from proprietary trading. The measure may be applied to purchases of bonds from customers that are held by the institution until a buyer is found.
Applying the rule to that type of activity has raised concern among banks and some government officials that it may hurt the municipal-debt market by curbing banks’ ability to trade so-called revenue bonds, which are backed by fees or other assets, rather than a general credit pledge. Such agency debt hasn’t been exempted.
The Municipal Securities Rulemaking Board, an industry self-regulating organization that governs the muni market, asked regulators to exempt all such debt from the Volcker proposal on proprietary trading, the board said in a statement. Expanding the exemption will help prevent a “bifurcation” of the market, the board said in a letter sent to the U.S. Comptroller of the Currency, the Securities and Exchange Commission, the Fed and the FDIC.
Citigroup followed only New York-based JPMorgan Chase & Co. in terms of the value of municipal debt it underwrote last year, according to data compiled by Thomson Reuters Corp.