The Role of Municipal Securities Brokers Brokers in the Municipal Markets
Municipal securities are debt obligations issued by cities, counties, states, and other non-federal governmental entities, which use the proceeds to build schools, highways, hospitals, sewer systems and many other projects for the public good. There are approximately 55,000 issuers of municipal securities nationwide, ranging from small school districts and fire districts to U. S. territories and all 50 states, which have issued more than 1.1 million individual securities represented by CUSIP numbers.
Broker’s broker activity is defined by the Municipal Securities Rulemaking Board’s (MSRB) Rule G-43. Colloquially, a registered broker dealer has been considered a municipal securities broker’s broker (MSBB), when it acts as an agent or riskless principal in the purchase or sale of securities for registered broker-dealers, registered municipal securities dealers, dealer banks, sophisticated municipal securities professionals (SMMPs) and institutions. These market participants have been the transactional counterparties of MSBBs when:
- dealers are seeking liquidity on behalf of themselves or their customers;
- dealers are seeking to distribute a new issue or adjust an inventory position; and
- dealers, SMMPs and institutions desire direct access to the bid wanted market.
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Introduction
Municipal securities are debt obligations issued by cities, counties, states, and other non-federal governmental entities, which use the proceeds to build schools, highways, hospitals, sewer systems and many other projects for the public good. There are approximately 55,000 issuers of municipal securities nationwide, ranging from small school districts and fire districts to U. S. territories and all 50 states, which have more than 950,000 individual securities outstanding represented by CUSIP numbers.1 This compares to the public corporate securities market which has approximately 5,500 issuers,2 who have approximately 58,000 individual securities outstanding represented by CUSIP numbers.3 As of December 31, 2013, there were about $3.7 trillion of municipal bonds outstanding,4 (approximately $334.9 billion issued in 2013),5 which accounts for approximately 9.2% of the total outstanding debt in the U.S. market. As a comparison there are 872 U.S. Treasury securities represented by CUSIP numbers, representing $11.9 trillion in outstanding bonds.6
Once these bonds are issued, investors buy and sell municipal securities in what is referred to as the “secondary market.” These investors can be individuals, institutional investors as well as broker-dealers acting on behalf of their customers or trading for their own account. Currently, 44.3% of municipal securities are held by private individuals.7
$11.18 billion flow through the municipal secondary market on a daily basis, with 83% of daily transactions being attributable to retail (customer) transactions.8 The graphs, noted on page 2, display the size of the municipal markets as measured by the number of trades as well as trading volume. Both of these factors help explain why the municipal securities broker’s brokers (MSBBs) add value to the municipal markets.