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Kyle Glazier (00:04):
Welcome to another Bond buyer podcast. I’m Kyle Glazier, executive editor of the Bond Buyer, and I’m happy to be joined today by Leslie Norwood, who is head of Municipals at SIFMA. Leslie, thank you for joining us.
Leslie Norwood (00:16):
Thank you very much, Kyle.
Kyle Glazier (00:18):
Yeah, happy to have you here. Well, it’s January. It’s cold. It’s snowing here in dc but it also means that we’ve got a new year ahead of us underway, and there’s actually some things going on. We’ve got some regulatory things happening. We’ve got some legislation apparently moving pretty rapidly on Capitol Hill. Maybe you could tell us a little bit about from the SMA perspective, where are your priorities and the areas you’re watching very closely moving into the rest of the year?
Leslie Norwood (00:56):
Certainly, there’s a lot going on the regulatory front as you’re aware, and particularly with regards to the Securities Exchange Commission. What we’re seeing is a strong focus on fixed income market structure. As you’re aware, the MSRB and FINRA recently filed their 90 TB four filings regarding their change in trade reporting from 15 minutes down to one minute, and that is certainly taking a line share of the time right now in terms of formulating a response. The due date on that is undetermined as it hasn’t published in the Federal Register yet, but we are continuing to take a look at those filings with our members and will certainly respond to the SEC on those proposals. Those proposals pose quite a bit of operational challenges for the broker dealer community, most notably with regards to manual trades and in the FINRA space, structured products and other things that require a significant amount of processing before the trade goes through, so again, putting a lot of effort into that. Also SEC best execution rule, although right now we’re in a waiting game after we submitted our comment letter to the SEC, that also potentially will require a significant amount of work this year, should there be changes to that or potentially a period of implementation.
Kyle Glazier (02:43):
Have you gotten your arms around how this would play, what the interplay would be with this rule and the existing best execution rules, whether be MSRB or finra, or is that something that still needs to be explored?
Leslie Norwood (02:58):
I think that still needs to be explored. Certainly our preference as set forth in our letter is to retain the MS RRP and FINRA rule sets. We spent a significant amount of time with the regulators at the SRO level, getting to a rule and developing guidance that the industry understands and has implemented across the different firms with respect to policies and procedures and supervisory procedures. We certainly feel that unless there’s some significant deficiency that the SEC feels is there, we certainly don’t, but that for some sort of minor reason, it would be a lot of effort and cost to have to go back and redo all of the guidance under a new rule set, even if it was substantially similar. We’d have to take a look again at the policies and procedures at each firm, the supervisory procedures, and it would be a lot of cost and effort to the firms, again, unless there was some sort of substantial rationale, which we don’t believe there is.
Kyle Glazier (04:20):
Gotcha. Another thing we got going on at the MSRB is the advent of their rate card model. I understand that it’s been a source of friction for pretty much all the regulated entities so far. If the comment letters are to be believed, do you plan to continue working with the board on this going forward?
Leslie Norwood (04:41):
We certainly do plan to continue working with the board on their fee structure. We acknowledge that the MSRB for a long time had some structural reserves that we felt in excess, and they have been working to reduce those structural deficits. Of course, we felt that that was largely dealer money and we appreciated that there has been efforts over the years to either rebate the funds which was operationally difficult or to reduce fees so that the structural deficits were smaller. I think that there is a desire for the industry to have a little more transparency from the MSRB with respect to how the MSRB gets to its estimates of volume of trading and underwriting for the next year. I think certainly we have the market participants in the industry at our disposal and additional transparency or meetings with the MSRB on their modeling for that I think is desired and it’s also desired to have more conversations with the MSRB about its budget setting process for the following year before the budget is finalized.
I think it is particularly important in this environment when firms are themselves struggling with budget cutting and that they really have to fit their expense model within their revenues, and there’s really a desire to have our regulator do the same thing instead of necessarily increase their revenues every year to fit their expense model. We appreciate the MSRB as a regulator, particularly with some of its projects, including the retrospective review of the rule book. We do feel that they’re expert in the MSRB rules, but we do ask for some more transparency in those areas and we are working towards that already.
Kyle Glazier (06:52):
Well, as grim as it can be to think about. I’m glad you brought up the cost cutting measures that a number of firms are going through. We’ve obviously even seen a couple of large banks get out of the municipal business over the past few months. Is there a sense on your end that there’s a regulatory component to these struggles, or do you see it as primarily an interest rate driven or economy driven state of affairs?
Leslie Norwood (07:24):
The challenges to the broker dealer community have many different factors, and certainly regulatory costs including examinations and enforcement have an impact. The pace of regulatory change is really mind blowing lately, and these are not small regulatory changes. These are significant regulatory changes costing large amounts of money and staff time. And again, it’s not just the regulatory changes themselves, many which have operational components requiring additional vendor costs or computer system changes, but also, like I said, different policies, procedures, supervisory procedures, because anytime anything goes wrong, it’s also a supervisory violation under G 27 that you really need to spend a significant amount of time with the compliance departments to ensure that the firm is in compliance with the new rules. That is, I would think one of the major issues. Regulatory fees continue to go up, other vendor fees continue to go up, revenues from transactions continue to go down, spreads going down.
Underwriting fees have gone down significantly over the years, so there’s been a lot of that fee compression with the increase in expenses. We’ve also had challenges with regards to capital charges over the years and coming into the Basel three end game response. SIFMA has filed a number of comment letters with regards to those upcoming changes or proposed changes to the capital rules, but we feel those pressures as well have an impact on whether a firm decides to invest its capital in municipal securities or other areas that may be more profitable for the capital at expense.
Kyle Glazier (09:51):
We’re going to pause for a brief break from our sponsor. Right, and we’re back with Leslie Norwood of sma. Maybe we can pivot a little bit. We’ve got some legislation apparently moving pretty rapidly on Capitol Hill right now, driven of course by the need to pass these spending bills or, well, it seems like we’re almost constantly narrowly averting the government shutdown at this point. Right, but you probably saw that the public finance network, which of course is that broad coalition of issuer groups actually just circulated a letter in support of numerous municipal market priorities that I know many if not all of which are shared by the broker dealer community. What’s your sense of the state of play there and could you tell us a little bit about what SIFMA specific legislative priorities are right now?
Leslie Norwood (10:53):
Well, in the muni space, as you point out, Kyle, our muni priorities are really in line with what our clients, the assured community are looking for. We’re looking to support the reinstatement of advanced refunding, increase in private activity bonds in terms of allocations and types of uses, as well as an increase in the bank qualified limit, and we’d also like to see a reexamination of the direct pay bond program. We know that there’s a lot of hesitancy about that with regards to the sequestration issues, and again, sequestration has become an issue now as the CRS pending or recently being passed, but there was a lot of discussion about that 1% kicking in again, but really the key focus I think, for all of the communities is the reinstatement of the advanced refunding. It is not looking very positive right now. However, we are continuing to work on it and discuss it with all of our legislative contacts.
Kyle Glazier (12:13):
Alright. Are there any other SIFMA policy goals that you think our listeners might be interested in that we should be aware of?
Leslie Norwood (12:24):
Kyle, I think one thing that’s very timely is we just submitted a comment letter to the SEC on the MSR B’S rule filing on G 12 K, which is the M ms B’S allegory to SEC rule 15 C 62. Now this is regarding allocations, confirmations, and affirmations by the end of trade date, and as I’m sure you’re aware, SIFMA has really been a leader in the transition to t plus one, which is scheduled to happen this spring over Memorial Day weekend on May 28th. The deadline was set by the SEC and we’re working as hard as possible to ensure our members have what they need in order to comply. We feel it’s going to be a non-event over Memorial Day weekend, but it’s taking a lot of work to ensure that we decrease the risk in the system that has come with the reduction in settlement cycles.
Of course, we were leaders in the move from T three to T two and now T two to T one. We’ve released a T one playbook to where star firms in the transition offer training videos and other seminars and the efforts in respect to allocations, confirmations and affirmations, whether it be 15 C 62 or G 12 K, are to ensure that broker dealers have the flexibility to have policies and procedures to ensure that they receive these allocations, confirmations, and affirmations an appropriate amount of time so that settlement can happen in T one. We do feel that this is a good rule by and large. However, there is certain things that we feel could be helpful in terms of guidance. I think that it’s a concern to the firms that when securities trade after 4:30 PM that a process flow be developed, that currently we’re looking at potentially 7:00 PM deadlines for allocations and 9:00 PM deadlines for affirmations, and that’s really not reasonable or practicable in the market to require custodians or agents or customers to act to affirm trades that late in the evening.
So we are hoping for some guidance that those types of actions can roll to the morning of T one. We also are asking for a delay in enforcement on G 12 K since 15 C two was approved back in February 15th, 2023, almost a full year ago. We really feel that G 12 K, which has now been proposed less than six months prior to the move to T one, the firms need some additional leeway in terms of enforcement to make sure that during the first six months of implementation, if something does come up, that they’re given the grace to be able to fix it in the new environment. It’s important to keep an eye that they want to comply, but they need a little bit of guidance potentially on what sort of expectations the examiners will have in the new environment, and we really want to ensure that the municipal securities broker dealers are given a fair shake in any examination that comes down from finra.
Kyle Glazier (16:21):
Alright. Well, Leslie, is there anything that we haven’t discussed that you wanted to touch on before we say goodbye?
Leslie Norwood (16:30):
I think that’s it, Kyle. Welcome the chance to talk to you anytime though.
Kyle Glazier (16:33):
Yes, we love having you and thank you so much.
Leslie Norwood (16:36):
Have a great day.
Kyle Glazier (16:37):
Thank you for listening to the Bond Buyer podcast. Please remember to rate us, review us, and email@example.com buyer.com/subscribe from the bond buyer. I’m Kyle, the pleasure. Thank you for listening.