MSRB NOTICE 2011-44 (AUGUST 12, 2011)

RULE G-34(C) ARS AND VRDO DATA ELEMENT CLARIFICATION AND REMINDER OF TIMELINESS AND ACCURACY REQUIREMENT

On May 16, 2011, changes to Rule G-34(c), on variable rate security market information, became effective.  Those changes enhance the interest rate and descriptive information collected from brokers, dealers and municipal securities dealers (collectively “dealers”) and made transparent by the MSRB on municipal Auction Rate Securities (“ARS”) and Variable Rate Demand Obligations (“VRDOs”).[1]  Among other requirements, the changes to Rule G-34(c) add, for ARS, information about all competitive orders placed by an ARS Program Dealer[2] with an ARS Auction Agent for inclusion in an auction and, for VRDOs, additional details about liquidity facilities, including the par amount of the security held by a liquidity provider.  This notice provides clarification on certain requirements for reporting these information items to the MSRB Short-term Obligation Rate Transparency (“SHORT”) System as well as the SHORT System logic for assigning “late” error codes. 

ARS Order Information

ARS Program Dealers are required to report to the SHORT System information about all competitive orders placed with an ARS Auction Agent for inclusion in an auction.  For each order, this information includes the type (buy, sell or “hold at rate”), the entity on whose behalf the order was placed (investor, issuer/conduit borrower or ARS Program Dealer for its own account), the interest rate for buy and “hold at rate” orders, the par amount of the order submitted to the auction and the par amount of the order that was filled following the auction. 

Rule G-34(c) requires that order information be submitted to the SHORT System in an aggregated manner to provide for concise presentation of information disseminated from the SHORT System.  Since many ARS programs have multiple ARS Program Dealers, the MSRB designed the SHORT System to aggregate order information prior to dissemination.  MSRB has applied this aggregation logic to all ARS submissions regardless of the number of ARS Program Dealers that submit order information for the same ARS program.  Accordingly, since the SHORT System performs aggregation of order information, dealers may elect to submit non-aggregated data to the SHORT System and rely on the SHORT System to perform order aggregation as required by Rule G-34(c). 

VRDO Self Liquidity Provider Secondary Market Purchase

VRDO Remarketing Agents are required to report to the SHORT System the current par amount of the VRDO, if any, held by a liquidity provider (referred to as the par amount held as a “Bank Bond”).  Typically, VRDO liquidity providers are third party issuers of a letter of credit or standby bond purchase agreement.  However, in the case of some VRDOs liquidity is provided by the issuer or conduit borrower.  This is generally referred to as “self liquidity.”  Liquidity providers – either third parties or self liquidity providers – offer to purchase positions in VRDOs that are tendered by holders in the event the VRDO Remarketing Agent is unable to find an alternative purchaser for the tendered position or is not willing to purchase the position for its own account (the “tender process”).  The MSRB has received questions of whether a voluntary purchase of a position in a VRDO outside of the tender process by an issuer or conduit borrower providing self liquidity should be reported to the SHORT System in the value reported for the par amount of the security held with a liquidity provider.   

The purpose of this requirement is to provide information to the market of the current amount of the VRDO held by liquidity providers and, for third party liquidity providers, the par amount held as a Bank Bond.  Whether an issuer or conduit borrower providing self liquidity purchases a position in its VRDO by means of the tender process or otherwise, its purchases should be included in the value reported for the current par amount of the VRDO held by a liquidity provider.  While the MSRB recognizes that, in some cases, the VRDO Remarketing Agent may not be aware of such a voluntary secondary market purchase of a VRDO by an issuer or conduit borrower providing self liquidity, the MSRB notes that Rule G-34(c) requires that the value reported for the par amount of the VRDO held by a liquidity provider “reflect the information available to the Remarketing Agent as of the date and time of the interest rate reset.”[3]

Requirement to Submit Data Timely and Accurately

Rule G-34(c) requires that submissions of ARS and VRDO data to the SHORT System be made by no later than 6:30 P.M. Eastern Time on the day that an ARS auction or VRDO interest rate reset occurs.[4]  Submissions of data that are received by the SHORT System after the deadline in Rule G-34(c) are assigned a “late” error code.[5]  MSRB reminds dealers that submissions of data to the SHORT System must be timely, all data submitted to the SHORT System must be accurate, and all submissions must be complete and include all required data.  Further, the initial submission of data to the SHORT System should be accurate and complete, and changes to submitted data should be rare.  Changes to submitted information, whether by modifying the submission or cancelling an erroneous submission, are recorded by the SHORT System.  Dealers should be aware that modifications to submitted data after the deadline in Rule G-34(c) also are assigned a late error code, as such modifications indicate that the submission of data was not accurate or complete by the deadline in Rule G-34(c). 

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Questions about this notice may be directed to Justin R. Pica, Director, Uniform Practice Policy, at 703-797-6716.

August 12, 2011


[1] See Securities Exchange Act Release No. 34-62755, August 20, 2010 (File No. SR-MSRB-2010-02).

[2] An ARS Program Dealer is defined in Rule G-34(c) as a dealer that submits an order directly to an Auction Agent for its own account or on behalf of another account to buy, hold or sell ARS through the auction process.

[3] Accordingly, a VRDO Remarketing Agent will not be in violation of Rule G-34(c) in the event that it is not aware that an issuer or conduit borrower providing self liquidity effects a voluntary secondary market purchase of its VRDO provided that the VRDO Remarketing Agent accurately reports information available to it as of the date and time of the interest rate reset.  If the VRDO Remarketing Agent receives information of such a secondary market purchase at a later time, Rule G-34(c) requires that the next required submission of data to the SHORT System reflect the updated information available to the VRDO Remarketing Agent.

[4] For VRDOs, the date and time that the interest rate reset occurs reflects the date and time that a VRDO Remarketing Agent determines the interest rate for the next interest rate period.  This date and time may differ from the date and time that the interest rate becomes effective.  See MSRB Notice 2009-17 (May 5, 2009).

[5] The 6:30 P.M. Eastern Time deadline only applies to those ARS auctions and VRDO interest rate resets that occur during an “RTRS Business Day,” as defined in Rule G-14(d)(ii).  Information about ARS auctions and VRDO interest rate resets that occur outside of the hours of an “RTRS Business Day” is required to be submitted to the SHORT System by no later than 6:30 P.M. Eastern Time on the next “RTRS Business Day.”