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Electronic Municipal Market Access

From Wikipedia, the free encyclopedia

The Electronic Municipal Market Access (EMMA) system, operated by the Municipal Securities Rulemaking Board (MSRB), serves as the official source for municipal securities disclosures and related market data in the United States. EMMA provides free on-line access to centralized new issue municipal securities disclosure documents (known as official statements),[1] on-going continuing disclosures for all municipal securities,[1] escrow deposit agreements for advance refundings (i.e., refinancings) of outstanding bonds,[2] real-time municipal bond trade price information,[3] interest rates and auction results for municipal auction rate securities[4] (the first free source for this kind of information on the auction rate securities market[citation needed]) and interest rate reset information for variable rate demand obligations,[5] together with daily statistics on trading activity[6] and investor education materials.[7]

EMMA's disclosure collection operates in coordination with the MSRB's investor protection rules mandating that securities firms and banks selling municipal securities to customers provide them with complete disclosure of all important information about the investment.[8] EMMA also is the central information utility through which municipal securities disclosures mandated by the Securities and Exchange Commission (SEC) through its Rule 15c2-12 are made freely available to the general public.[9] The EMMA continuing disclosure service provides access to audited financial statements, default notices, taxability notices, notices of rating changes, and approximately 30 additional categories of financial and other updates relating to municipal securities.[1] The MSRB and SEC continue to work toward expanding the types and timeliness of disclosures available through EMMA.[10][11]

Public access to the integrated collection of primary market and secondary market disclosure provided through EMMA parallels the centralized disclosure currently available for securities offerings by public companies through the SEC's EDGAR system, although EMMA provides additional items of information beyond the base disclosures provided by EDGAR, such as trade prices, interest rates, market statistics and educational materials. The collection of disclosure documents available through EMMA for municipal securities is not identical to what is available through EDGAR for registered offerings of corporate or other securities since municipal securities and their state & local governmental issuers are afforded broad exemptions from most provisions of the federal securities laws (such as the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940) otherwise applicable to private-sector issuers of corporate and other types of securities.

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  • ✪ Municipal Securities - Basic Analysis
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Transcription

- Hi, I'm Jeremy Hauser, the Senior Capital Markets and Securities Specialist for the FDIC's Kansas City Region. - And I am Kim Schulte, a Risk Management Examiner in the Hays, Kansas, Field Office. - In this module, we will discuss a basic method for analyzing municipal securities that can be used for both pre-purchase analysis and on-going monitoring. This basic framework may be sufficient for lower-risk municipal bonds, and can also be used to identify higher-risk bonds where expanded analysis is warranted. The Expanded Analysis module provides additional details. The framework presented in this module is for example purposes only, as the FDIC expects industry practices will continue to evolve. It is not intended to be all-inclusive, nor is it appropriate for all banks. Each bank should implement a framework consistent with the complexity of the Board's approved investment activities. Similar to other investments, a pre-purchase analysis process should be established for municipal securities. The extent of the assessment will depend upon the risk characteristics of the individual bond. This analysis should consider credit risk, interest rate risk, and liquidity risk. We will first discuss credit risk and some possible factors to consider as part of the due diligence process. - When assessing credit risk, pre-purchase analysis should be completed by bank personnel, using data obtained by the bank, from a third party, or a combination of the two. Management may rely on third-party support when completing this analysis; however, management must review and understand the data, analysis, and methodology used. Remember, decision-making responsibilities may not be delegated. If a third party assists in the credit risk analysis, management should ensure the third party is independent, reliable, and qualified. Independence can be achieved in various ways, including a separation between the third-party's sales representatives and analytical support staff. Common third-party providers include securities brokers, correspondent banks, and rating agencies. Basic credit risk analysis should consider various factors and can include: The location of the municipality issuing the bond and the current economic conditions impacting that municipality. The type of municipal bond issuance. An assessment of the financial condition of the municipal bond obligor. A review of the municipality's fiscal responsibility. And an evaluation of ratings and other reports issued by rating agencies. Now, Jeremy will discuss economic conditions. - A municipality's location and the condition of its economy influences credit risk. For many banks, the municipal portfolio is generally confined to relatively local issues. Monitoring local economic conditions is part of management's routine activities and is generally documented in the minutes of the Loan and Asset/Liability Management Committees. Typically, no additional structured review is needed. However, if the local market is distressed, an expanded analysis of all factors is necessary to ensure the issuer has the capacity to continue to perform on its obligations. If investments are located outside the local market, an expanded analysis of economic conditions is warranted. This analysis may conclude that the economic conditions of the issuer are distressed, resulting in an expanded review of all credit risk analysis factors. - The next basic credit factor to consider is type of issuance. As discussed in the Overview & Industry Trends module, credit risk can generally be ranked from lower to higher risk by grouping municipal bonds into four broad categories. General obligation bonds typically have minimal credit risk. Essential purpose revenue obligation bonds, which may fund water, sewer, and electrical facilities, also generally exhibit lower credit risk. Basic analysis is usually sufficient for these two investment types. Non-essential purpose revenue obligation bonds, which fund projects such as hospitals or multi-family housing facilities, and other higher-risk municipal issuances have less stable repayment streams and greater credit risk. As a result, expanded analysis of the obligor's financial condition and fiscal responsibility is necessary. Assessing the obligor's financial condition is the third factor in basic credit risk analysis. This is often accomplished by analyzing the issuer's most recent financial statement, and calculating key statistics and ratios. A table, such as the one presented here, is a possible tool for this analysis. Other formats may be more appropriate depending upon the level of detail management wishes to present to the Board. The Debt Per Capita and Debt To Assessed Value ratios are measures of leverage, and are typically associated with general obligation bonds. The Debt Service Coverage Ratio, a capacity-related ratio, is typically associated with revenue obligation bonds. Management may determine that other ratios are more useful and appropriate. The analysis utilized should be tailored to the risk profile of the bank's municipal portfolio. - Kim, I see covenant compliance is listed as an item that might possibly be reviewed. What are some common examples of municipal bond covenants? - Well, many municipal bond documents include covenants to protect investors, such as restrictions on debt levels and minimum working capital requirements. Reviewing compliance with covenants could apply to all bond types. As the table suggests, all of the measures reviewed and calculated should be compared to Board-approved policy guidelines to determine if the bond meets the bank's creditworthiness standards. Exceptions to policy guidelines may require expanded analysis, and will require approval prior to purchase as specified in the bank's investment policy. There are helpful resources available to assist banks in developing policy guidelines. These resources include rating agency median reports, banking associations, correspondent banks, and other third parties. - Assessing fiscal responsibility of the municipality is the next area we will discuss as part of the basic analysis, and may include an evaluation of budget trends, audit procedures, and disclosure practices. Although this is one of the most qualitative and challenging areas to assess, it can be an important factor for a bank to consider as an issuer's ineffective management and governance can impact performance and may increase credit risk. A review of budget trends is important for assessing the fiscal soundness of the municipal bond issuer. The analysis should determine whether the issuer has historically operated with a balanced budget, surplus, or deficit. Recurring deficits are a potential sign of increased credit risk. Reviewing the municipality's audit procedures is an important part of assessing fiscal responsibility. Preferably, the issuer's financial statements are audited annually by an outside certified public accountant. Lack of an independent review by a qualified party may affect the reliability of the information disclosed. Disclosure practices are another factor of fiscal responsibility. Ideally, municipalities should disclose timely annual financial statements. Disclosure delays can be a cause for concern. If concerns are identified by reviewing these three areas, then expanded analysis may be warranted. KIM: The credit ratings and associated reports from the rating agencies can be one component of the credit risk analysis; however, they cannot be the sole component. External ratings for municipal bonds are not always updated on a timely basis after issuance and can vary among rating agencies. As a result, management should understand the rating methodologies, investigate any ratings differences, and consider the timeliness of the reports. - Kim, are other reports available from the rating agencies that bankers may find useful in the credit risk analysis process? - Yes. The rating agencies also produce median reports for various types of municipalities grouped by credit rating. These reports present median, or mid-point ratios and other data for financial and tax base information. They can be useful when setting internal policy guidelines, and assessing rated and non-rated securities. The median reports are derived only from that rating agency's universe of rated bonds; therefore, the ratios and data may not reflect industry medians. The rating agencies issue other reports, which can assist in assessing individual bond and overall portfolio risk, such as sector outlook reports, default statistics, and rating methodologies. These reports can be beneficial in analyzing rated and non-rated securities. - Next, we will discuss interest rate and liquidity risks as part of a bank's pre-purchase analysis, focusing first on interest rate risk. All bond prices are influenced by interest rate changes, but the level of interest rate risk can vary depending on the security. Pre-purchase analysis should consider how the bond's individual interest rate risk profile impacts the bank's overall position. Understanding the various features of a bond is key to evaluating the instrument's interest rate risk. Repricing risk results from timing differences between coupon changes or cash flows. The long-term maturity and fixed rate structure of many municipal bonds can expose the bank to repricing risk. Some municipal bonds are issued with call features that allow early repayment of the bond at the option of the issuer, which results in option risk. Basis risk occurs when municipal market rates do not move in unison with rates of other balance sheet instruments. Finally, yield curve risk is the risk that changes to the shape of the yield curve will negatively impact the value of a bond or an investment portfolio. - We will conclude our discussion on pre-purchase analysis by reviewing liquidity risk. Market liquidity affects bond prices and the ability to convert the instrument into cash. Among other things, it is influenced by issuance size and market characteristics. Although the municipal market is large and diverse, individual bond liquidity can vary greatly for many reasons. Let's examine a few. Municipal bonds are traded using a network of dealers. Only a small number of municipal bonds are actively traded in the secondary market, and in fact, Securities and Exchange Commission studies indicate that 70 percent never trade after issuance. There may be few dealers willing to make a market for smaller municipalities, smaller issuances, and nonrated securities, resulting in higher bid/ask spreads and less liquidity. The reduced liquidity of municipal securities may limit their eligibility as collateral to secure public deposits and borrowing lines, as state statutes and secured lenders might not allow municipal securities to serve as collateral. Even if eligible, municipal securities may be subject to higher collateral margins than other investment types. Before concluding our pre-purchase analysis discussion, we would like to address a question that the FDIC frequently receives from the banking industry. Jeremy, sometimes brokers will offer a bank a municipal bond, but provide only a short amount of time for management to make a purchase decision. How can management perform a proper pre-purchase analysis under such limited timeframes? - Generally speaking, the FDIC expects that basic or expanded pre-purchase analysis should be performed for most municipal bonds. However, to help save time when making purchase decisions for general obligation bonds, the bank's board can approve a process where an analysis is prepared in advance. This analysis can be used to develop an internal list of acceptable municipal investments, including terms and amounts, consistent with the Board's policies. The FDIC expects that this list will be limited to general obligation issuers in markets that are local, familiar, and not distressed. In most cases, revenue obligation bonds will not qualify for inclusion on the list. Further, management should perform ongoing monitoring to determine what issuers should be included on, or removed from, the list of acceptable investments. Similar to monitoring this list, management should monitor credit risk of the entire municipal bond portfolio on an ongoing basis. Ongoing monitoring should assess credit, interest rate, and liquidity risks. Interest rate and liquidity risks are captured by a bank's routine asset/liability management process. Therefore, our ongoing monitoring discussion will focus on credit risk, which is based on the same factors as those discussed in the basic pre-purchase framework. The ongoing monitoring of the location and economic conditions is limited to determining if the market is distressed. Expanded analysis is required in distressed market conditions. Ongoing monitoring of the type of issuance is not necessary as the bond type does not change. A regular assessment of the financial condition of the municipal bond obligor is the primary component of an ongoing credit analysis. At a minimum, financial reviews should be conducted annually. Fiscal responsibility should also be routinely monitored as part of the process. Management should monitor the municipality's budget, audit, and continuing disclosure. Rating agency reports can assist in the assessment of the financial condition and fiscal responsibility of the issuer. - Ongoing monitoring should be completed at least annually and appropriately documented. Interim analysis may be necessary in certain situations that suggest increasing risk, such as: A ratings downgrade; Adverse publicity; A technical default, including failure to comply with bond covenants; An unexpected reserve fund draw, which could occur in response to revenue declines or spending increases; And other event notices, such as payment delinquencies or unscheduled credit enhancement draws. In general, basic analysis should be performed on all bonds in the portfolio. Those bonds where higher-risk characteristics are identified should be subject to some form of expanded analysis. Some bonds within the portfolio will almost always require expanded analysis, while others may move between basic and expanded ongoing monitoring as risk characteristics change. The depth of the analysis and monitoring procedures should be consistent with the bond's risk profile. - Before we conclude this Basic Analysis module, we want to discuss some resources that may assist in the overall risk management process. The Electronic Municipal Market Access website, or EMMA, is the official repository for information on municipal securities. The Municipal Securities Rulemaking Board operates the EMMA website, which provides free access to official disclosures, trade data, credit ratings, and educational materials. It also allows users to track and receive notifications on specified bonds. The issuer may also be contacted to obtain financial information, such as the annual report or the official statement. Many state auditors or attorneys general, provide information on municipalities located within their respective states. Often, this information can be accessed via their websites. Other third parties, such as securities brokers; correspondent banks; rating agencies; and investment banks, can also be a valuable source of information. If third-party information is used to supplement the internal credit risk analysis, management should ensure the third party is independent, reliable, and qualified. - To summarize the key points of this module, basic pre-purchase analysis and ongoing monitoring must be conducted for each bond purchased. It should include an evaluation of credit, interest rate, and liquidity risks. A basic pre-purchase credit risk analysis should consider the issuer's location and related economic conditions, the type of issuance, and the obligor's financial condition and fiscal responsibility. It can also include a review of rating agency reports. - The primary focus of ongoing monitoring of credit risk for individual bonds is an assessment of the obligor's financial condition. Interest rate and liquidity risks of each bond should be reviewed at the time of purchase, while ongoing monitoring of these risks is captured within the bank's routine interest rate risk and liquidity reports. If concerns are identified prior to purchase or during the ongoing monitoring, some form of expanded review should be performed. The Expanded Analysis module provides additional information on this review.

References

  1. ^ a b c "About the Information Available on EMMA". Emma.msrb.org. Retrieved 8 December 2014.
  2. ^ "EMMA Electronic Municipal Market Access - Refunding Information". Archived from the original on December 12, 2008. Retrieved December 13, 2008.
  3. ^ "EMMA Electronic Municipal Market Access - Recent Trades". Archived from the original on December 12, 2008. Retrieved December 13, 2008.
  4. ^ "EMMA Electronic Municipal Market Access - ARS data". Archived from the original on January 31, 2009. Retrieved October 5, 2008.
  5. ^ "EMMA Electronic Municipal Market Access - About the information available". July 29, 2009. Archived from the original on December 12, 2008.
  6. ^ "EMMA Electronic Municipal Market Access - Market Statistics". Archived from the original on December 28, 2008. Retrieved December 13, 2008.
  7. ^ "EMMA Electronic Municipal Market Access - Overview". Archived from the original on December 11, 2008. Retrieved December 13, 2008.
  8. ^ MSRB Notice 2009-42[dead link]
  9. ^ "SEC, MSRB: New Measures to Provide More Transparency Than Ever Before for Municipal Bond Investors". Sec.gov. Retrieved 8 December 2014.
  10. ^ "Press Release: SEC Votes to Propose Rules Enhancing Municipal Securities Disclosure; 2009-161; July 15, 2009". sec.gov. 15 July 2009. Retrieved 8 December 2014.
  11. ^ MSRB Seeks to Provide Investors With Additional Disclosure Information, July 15, 2009[dead link]

External links

This page was last edited on 27 August 2017, at 14:24
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