Spotlight Turns to U.S. Bond Index ; Regulators Want to Know If Municipal Debt Prices Could Be Manipulated

By Popper, Nathaniel | International Herald Tribune, August 1, 2012 | Go to article overview

Spotlight Turns to U.S. Bond Index ; Regulators Want to Know If Municipal Debt Prices Could Be Manipulated


Popper, Nathaniel, International Herald Tribune


In the aftermath of the scandal over the manipulation of Libor, the $3 trillion municipal bond market is looking at the company that sets its rates, with little transparency.

Yet another benchmark in the financial industry is under scrutiny.

Attention has swung to a set of interest rates that help determine how much U.S. cities and states pay to borrow money in the bond market. The scrutiny of the Municipal Market Data, or M.M.D. index, comes on the heels of revelations that a broader financial industry benchmark, the London interbank offered rate, or Libor, was manipulated by banks before and after the financial crisis. Libor is used to help determine the costs of products like mortgages and credit cards.

Thomson Reuters, which owns Municipal Market Data, said Monday that it had "been involved in discussions with regulators" about the rates, which influence the prices of bonds and derivatives in the $3 trillion municipal bond market.

The company released the statement after the municipal bond industry's self-regulator, the Municipal Securities Rulemaking Board, said that its board was "concerned about the transparency" behind the creation of a few indexes used to set prices in the municipal bond market, the most important of which is the M.M.D. index.

The M.M.D. rates influence a much smaller market than Libor, but it is one that is crucial to cities and states across the United States that borrow money to maintain roads and bridges and provide essential services like public education.

The rates are compiled and issued each afternoon by Thomson Reuters using a proprietary method that includes input from banks that buy and sell municipal bonds, industry participants said, though Thomson Reuters does not publicly explain its method.

Christopher Taylor, the executive director of the Municipal Securities Rulemaking Board until 2007, said that during his years at the agency he had heard frequent complaints that the opacity of the M.M.D. rates allowed them to be "manipulated" by banks that hold many municipal bonds. "The feeling was that there were games being played with this," Mr. Taylor said.

Since regulators in June accused Barclays of trying to rig Libor, lawmakers and government agencies have been taking a broader look at other benchmarks that the financial industry could influence for its own benefit. In Europe, regulators are investigating whether banks artificially moved the Euro interbank offered rate, or Euribor.

The scrutiny of the M.M.D. rates comes as a number of other events are drawing attention to the transparency and fairness of the municipal bond market. On Monday, three former bankers at UBS went on trial in New York on charges that they had colluded to steer municipal bond transactions to specific banks in exchange for kickbacks.

Separately, the Securities and Exchange Commission is due to release a lengthy report soon that recommends changes for the municipal bond market so that investors are put on a more even footing. Municipal bonds are popular among retail investors because the interest paid on them is exempt from U.S. taxes. But the market is largely controlled by big financial institutions that have resisted providing customers with information about how bonds are priced. …

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