MSRB: Transparency In Bond Transactions

New rule (G-15) will require brokerage firms to disclose the mark-up or mark-down on bonds.

A research paper regarding “Secondary Trading Costs in the Municipal Bond Market” by Lawrence Harris and Michael S. Piwowar was first published May 16, 2006. This paper discussed the high transaction costs for retail accounts for Muni bonds which averaged more than 2.0% per transaction. For example, the purchase of a $50,000 block of bonds would have markups of about $1,000. The paper concluded that these costs were significantly higher than similar-sized equity trades which might be less than $25.00. Since this paper was published Mr. Piwowar had become the acting head of the SEC for the first part of last year until Jay Clayton took over. It should be no surprise that Mr. Piwowar supports lower transaction costs for purchases of Muni bonds by retail investors and has had significant influence in this regard at the SEC. 

In response to pressure from the SEC, the Municipal Securities Rulemaking Board (MSRB) has initiated a new rule (G-15) which is on track to go into effect in May 2018. This rule is called the “markup disclosure rule” and is designed to make retail transactions in the Muni market more transparent. This rule requires brokerage firms to disclose the mark-up or mark-down on purchases/sales of corporate, agency and municipal bonds by retail investors. These markups above the prevailing market price of the bonds will be shown on confirms received by investors. 

The transparency caused by this rule will make it less attractive for brokers whose practices depend on large commissions for bond trades and will make fee-based models using Separate Account Managers more attractive for them going forward.