Recent Issues in Sub National Debt Management in the United States

Transcription

1 Recent Issues in Sub National Debt Management in the United States Martha Mahan Haines Assistant Director, Division of Trading and Markets Chief, Office of Municipal Securities U.S. Securities and Exchange Commission 1 Disclaimer: The U.S. Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author s colleagues on the staff of the Commission. i 2 1

2 USA: A Federal System National Government Created by a Constitution approved by the states. 50 States States retain all powers not expressly granted to the federal government in the Constitution. 80,000 Local Governments Local governments are established by state law and can only issue bonds if permitted by state law. No federal permission required. About 50,000 are issuers. 3 U.S. Municipal Market $3.2 Trillion Outstanding $320 Billion Issued in 2010 $3.8 Trillion Annual Trading Million trades Million Separate Securities 90%+ interest tax-exempt 4 2

3 Investor Types Primarily Individual Ownership 38% Held Directly by Individual Investors 33% Held Indirectly by Individual Investors Trading 80%% + of the number of all customer trades involve direct individual investors 12% of the $ volume of all customer trades involve direct individual investors Broker Dealer Concentration 5 Broker dealers accounted for 53% 5 Broker dealers accounted for 53% percent of the $ amount of all customer trades (i.e., not inter dealer trades) by par amount (44% percent of the number of customer trades) 10 Broker dealers accounted for 71% of the $ amount of customer trades (59% of the number of customer trades) 3

4 Correlation to US Treasury Securities States and Local Governments 2010 State and Local Debt = 22% US GDP Up from a recent low of 12 % of GDP in 2000, but similar to the average levels from the mid 1980s to the mid 1990s States and localities spend around 4 to 5% of their budgets on debt payments Many face significant long term challenges managing increasing costs of employee pensions and other post employment benefits. 4

5 Market Changes Decline in credit ratings of bond insurers % of municipal bonds issued were insured (with AAA ratings) % of municipal bonds issued were insured and no insurer has AAA ratings from any rating agency Credit Rating Agencies move municipal securities to a Global Ratings Scale Market Changes Phase Out of Tender Option Bond Market Auction Rate Securities Market Freeze Build America Bond Program Experiment with taxable municipal bonds Direct subsidy payment from US Government to issuer or tax credit to investor EMMA new data repository for munis 5

6 Potential for Impact on Overall US Financial System Limited due to tax exempt nature of municipal debt. Most municipal bond investors employ negligible levels of leverage, which has the practical effect of insulating other market participants from the credit performance of these holdings. However, financial institutions, including banks and insurance companies, do have material exposure to municipalities, owning about 20 percent of municipal debt. 6

7 Bank exposure through letters of credit (LOCs) as liquidity backstops for variable rate demand obligations (VRDOs) issued by states and local l governments Bank balance sheets expanded when investors exercised their VRDO put rights during credit crisis. Banks have now re priced LOCs to compensate for the exit of bond insurers and the liquidity and capital impacts of Basel III. Generally reduced issuance of VRDOs. The United States does not directly guarantee state or local debt. US U.S. Treasury and the Obama administration have indicated they have no intention of bailing out states or localities that encounter financial distress. States typically have mechanisms in place to assist with the recovery of financially distressed localities, or establish them when needed, generally without assuming any of its debt. Example: Municipal Assistance Corporation for New York City in the 1970s. 7

8 Dodd Frank Act: Municipal Advisors Registration and Regulation of Municipal Advisors who: Advise municipal entities (including public pension plans) about issuance of securities, use of municipal derivatives, guaranteed investment contracts, and investment strategies Solicit i business on bhlf behalf of broker dealers, investment advisers or other municipal advisors Some exceptions from the definition Dodd Frank Act: Municipal Advisors Fiduciary y Duty to their Clients Municipal Securities Rulemaking Board (MSRB) will issue rules subject to SEC approval. Anticipated rules include: Prohibition on municipal advisors doing business with issuers to whose officials the advisor di made political l contributions tib ti Prohibition on Municipal Advisors underwriting bond offerings for which they have provided advice 8

9 Dodd Frank Act Swaps with Special Entities Business Conduct Rules for Swaps with special entities including states and local lgovernments CFTC and SEC must implement rules As proposed by CFTC, swap dealer that makes a recommendation to a special entity must act in the best interests of the special entity Swap dealers or major swap participants that act as a counterparty in swaps with special entities must have a reasonable basis to believe that there is a qualified independent representative advising it (may be an employee) Independent representative must act in the best interests of the special entity Dodd Frank Act: Increased Regulation of Credit Rating Agencies The Dodd Frank Act requires SEC to: Establish a new Office of Credit Ratings Conduct annual exams Conduct studies Undertake rulemakings addressing internal controls and procedures, conflicts of interest, credit rating methodologies and other matters Remove references to credit ratings in existing rules 9

10 Dodd Frank Act & Municipal Securities Requires the SEC to establish an independent Office of Municipal Securities headed by a Director who reports to the Chairman. Would be adequately staffed with experts in municipal securities. Not yet established due to funding constraints. Current SEC Activities re: Municipal Market National hearings re: municipal securities lead by Commissioner Walter with wide variety of interested parties now in process. Staff report with recommendations for legislative and regulatory changes and improvements to industry practices will follow. Commissioner Walter and Commission staff are also working on an update to 1994 Interpretative Release concerning disclosure practices of issuers in the municipal market. 10

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