MSRB budget designed to modernize market regulation

The Municipal Securities Rulemaking Board expects to spend $43.3 million during the fiscal year that began Friday, releasing a FY 2022 budget highlighting investments in technology and a focus on upholding the public trust.

“Informed by extensive engagement with our stakeholders, we are making strategic investments focused on strengthening the capital market that facilitates economic and societal progress for communities across the country,” said MSRB Board Chair Patrick Brett in a joint letter with MSRB CEO Mark Kim.

The FY 2022 budget increased about 4% from the previous year due to earmarks of reserves for technology modernization, while revenues are expected to drop sharply with a temporary reduction in market-based fees aimed at returning $19 million to regulated dealers.

Revenues are budgeted at $29.3 million. This represents a decrease from the prior year of about $11.9 million, which the MSRB says reflects the impact of rates assessed on underwriting, transaction, and technology fees assessed for dealer activity from April 1, 2021 to Sept. 30, 2022.

The MSRB projects to bring its reserves to about $38 million by the end of the fiscal year, a 40% reduction from the start of the previous fiscal year.

The organization described the temporary fee reduction as “the most substantial move yet to return excess money to the dealer community, whose fees historically account for over 75% of the MSRB’s revenues.”

“In FY 2020, historically high levels of municipal issuance and overall high levels of market activity related to disruption associated with the COVID-19 pandemic resulted in FY 2020 revenue significantly out performing the budget, driving up reserves beyond expected levels,” the MSRB said.

However, taking the temporary fee reduction into account, nearly 70% of the MSRB’s revenue will come from municipal underwriting and trading fees.

Considering ongoing challenges with predicting bond and trading volume due to the ongoing economic impacts of the COVID-19 pandemic, this budget takes a less conservative approach than the prior year, to budgeting for bond volume.

The FY 2022 budget is based on a bond volume of $500 billion which represents an increase of $100 billion over the prior year’s budget.

The MSRB says that this increase is partially offset ”by a continued downward trend in the trading par volume and number of transactions executed.” Trading volume reached historic highs in 2020 but volume has significantly decreased this year.

Overall, the primary focus of the FY2022 budget is on modernizing market regulation through the largest investments in technology the organization has made in its history.

As part of this modernization, the MSRB is making a long-term strategic investment in its suite of market transparency and technology systems including the Electronic Municipal Market Access (EMMA) system. The board approved over $17 million for this effort, which is the organization’s largest expense.

The MSRB is also looking to modernize its regulation.

“The MSRB will take significant steps forward in its retrospective rule review, continuing to retire outdated interpretive guidance…and modernizing its rules in light of evolving market practices,” the organization said in a release.

This push toward modernization is driven primarily by dramatic changes in the market since MSRB rules and guidance were first introduced more than forty years ago.

“The pace of change continues to accelerate as we adapt to a shifting world and embrace new ways of conducting our business remotely,” Brett and Kim said.

As a complement to EMMA, the MSRB has created EMMA Labs, an “innovation hub” that will allow municipal advisors and participants to collaborate with MSRB staff.

Brett and Kim explained that the goal of EMMA Labs is to “generate ideas and test out concepts that could be the future of data analytic tools and services available on the free EMMA website.”

The MSRB’s budget also directs attention to building a strong foundation of public trust, which the organization indicated also includes a focus on increasing diversity and inclusion within the agency.

“We are committed to upholding the public trust and contributing to economic and societal progress and a more sustainable and resilient future for communities across the country,” Brett and Kim said.

As part of that plan, the MSRB is also evaluating ways to reduce its environmental impact.

The goal, according to the organization, is to “become carbon neutral through net zero greenhouse gas emission in [its] operations.”