Tags: Muni | Market | Rates | Probe

NYT: Muni-Market Interest Rates Probed for Possible Rigging

Tuesday, 31 July 2012 09:16 AM

Regulators are probing if the interest rates cities and states use to borrow money in the bond market has been rigged by banks, similar to the recent London Interbank Offered Rate (Libor) scandal, The New York Times reports.

The Municipal Securities Rulemaking Board (MSRB), the municipal bond industry’s self-regulator, agreed at its quarterly meeting held last week to study the processes used to develop municipal market indices, which are used to set prices that drive the borrowing costs, in response to concerns about the integrity of financial market indices, such as Libor.

Financial services and information company Reuters, which owns Municipal Market Data, said that it “has been involved in discussions with regulators” regarding the rates, which influence the prices of bonds and derivatives in the $3 trillion municipal bond market, according to The Times.

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The probe resembles the Libor rate-fixing scandal, in which global financial institutions have been accused of manipulating the Libor, an interest rate used by banks when lending to one another.

Banks worldwide are being probed from keeping the Libor rate artificially low to profit on trades and water down borrowing costs during the 2007-09 financial crisis.

Christopher Taylor, a former executive director of the MSRB, tells The Times that during his tenure he heard complaints concerning a lack of transparency surrounding Municipal Market Data rates that allowed data to be “manipulated” by banks that hold many municipal bonds.

“The feeling was that there were games being played with this,” Taylor says.

“Like other regulators, the MSRB is concerned about the transparency surrounding the development of market indices,” Alan Polsky, the group’s chairman.

“We plan to review indices used by the municipal market — and develop educational materials about their use — to ensure that the market operates fairly and transparently,” he adds.

In addition, the Securities and Exchange Commission is expected to release a report soon that recommends reforms for the municipal bond market to allow investors to be on more even footing, according to The Times. The interest paid on municipal bonds is exempt from federal taxes, making them popular among retail investors. However, customers do not have the information about how the bonds are priced.

According to a person who has seen the SEC report, the report questions the transparency surrounding the Municipal Market Data rates, The Times reports.

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Tuesday, 31 July 2012 09:16 AM
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