Wall Street bond dealers may be cutting their commitment to trading municipal securities as regulations have increased transparency, according to preliminary findings of an industry-backed study.
Rules imposed in 2005 have improved the efficiency of the $3.7 trillion muni-bond market by requiring dealers to disclose trade data to regulators within 15 minutes, said Erik Sirri, a former U.S. Securities and Exchange Commission regulator who is studying the market. The changes have cut borrowing costs for states and cities, Sirri said today at a municipal-finance conference at Brandeis University in Waltham, Massachusetts.
Yet fewer dealers are involved in transactions than previously, which may reduce the market’s liquidity, he said.
“You may just see dealers stepping back from the market,” said Sirri, a teacher at Babson College in Wellesley, Massachusetts, and a former SEC director of trading and markets. He said low interest rates may also make it “not worth it for the dealers.”
The Municipal Securities Rulemaking Board in 2005 began requiring so-called real-time pricing, which requires dealers to release trade data within 15 minutes of a transaction, down from 24 hours previously. Last year, the industry’s self-regulatory organization in Alexandria, Virginia, hired Sirri to study transaction data it collects and makes public on its website.
Speaking at the meeting in the Brandeis International Business School, Sirri said his comments were based on his initial findings. He said the full report would be ready in about a month.
A Federal Reserve report in March showed that Wall Street securities firms had cut their inventories of state and local-government bonds by 21 percent last year to $31.5 billion, the lowest level since 2004. The companies act as intermediaries for buyers and sellers, using their capital to warehouse any extra bonds to resell later. That can spur both profits and losses when markets are volatile, while providing liquidity.