- Expectations for market performance
- Bond volume after a record year
- Muni credit conditions
- Challenges and opportunities for the year ahead
Transcription:
Kevin Murphy (00:10):
Thank you, our keynote speaker, it did really set the stage for this panel. I'll just briefly reintroduce everybody. Mark Kim, President, CEO of the MSRB. You all know them, of course. Bryan Rowan, Director of Financial Planning Analysis Strategy at the new JFK Terminal one, Kristin Stephens, Managing Director and Head of the Northeast Region for Public Finance at Oppenheimer. Glenn McGowan, Managing Director and Co-Head of Municipal Underwriting at RBC Capital Markets and Yaffa Rattner, Senior Managing Director and Head of municipal credit at Hilltop. So as our keynote speaker mentioned the house ways and means We'll start off with tax policy. I think House Ways and means 10 year estimate of 250 for all Muni 145 billion for PABs and Babs as a cost. I know GFOA estimated the actual cost issuers over the peers much higher in the 800 billion range. So I think we'll start off Yaffa if it's okay at down at the end. Are we worried enough? How worried should we be and why? What's your assessment of the chances here for either one or both of those scenarios? As the Bond Buyer noted in some of its coverage, we're assuming that we don't really know what's in those numbers. We were assuming it's perspective, but what's your assessment of the risk and what should we be doing as an industry?
Yaffa Rattner (02:03):
Well, good morning everybody, and thank you for hosting us today. The risk is really real and in the 30 years in which I've been a part of the municipal bond industry, never has the political and fiscal environment culminated to such a degree that the threat of the repeal of the municipal tax exemption, I would call it imminent and it cannot be underscored. Let me unpack that statement. We've all been talking about a lot of different numbers and a lot of different situations that are together culminating in this assessment. So I'm going to take it from a political perspective, a fiscal perspective, and then finally an advocacy perspective. So let's talk about it for political first. We have a new administration that was voted in by a clear majority that wants change and this new administration is not afraid to challenge the convention and has certain mandates and priorities that it needs to get funded.
(03:12):
So that's our political environment. Not saying anything that we all don't know, but just trying to put it as three legs to a chair, three legs to a stool. Excuse me, why we've got such an issue. Now, the fiscal situation. So we all know that the tax cut and Jobs Act is subject to expire at the end of this year. Current treasury estimates that the value of extension of that policy would take or that act would cost about $4 trillion and we have various different fiscal watchdog agencies that have said that in fact, it's not 4 trillion, it might be closer to 5 trillion. So what we need to do is figure out how to limit the deficit or the mismatch between revenues and expenses as well as political priorities. Finally, this is all going on in a situation in which we're noticing a lack of advocacy from our constituent issuing partners.
(04:17):
And I know that the GFOA and Emily in particular has been doing an amazing job, really trying to ring the alarm bells, but at the same time we're seeing our governors and our mayors really focused on public safety, affordable housing, immigration, the economy, and they're not really focusing on what the new world would look like without the tax exemption. So under this entire environment, we saw the Federal House and means committee introducing a list of potential targets of which the tax exemption was included. That's estimated to save about 500 billion over 10 years, about 75% of it coming from municipal and state a tax exemption and about 25% of it coming from private activity bond allocation. But what's super interesting, and we've seen the GFOA numbers as well as other numbers produced, is that although the savings may be 500 billion, the actual cost would be about 800 plus billion.
(05:28):
So frankly a negative delta of about 300 billion if you eliminate the tax exemption. And for those that say, well, how are you coming up with that number? The bottom line is if you unpack it further, you're pretty much going to say that each governmental entity or nonprofit issuer is going to have an increase in their debt service costs of between 25 to 40%. It's probably going to be closer to 40% for those smaller issuers and maybe closer to 25% for the larger more sophisticated issuers. But again, the smaller entities that are least capable of affording this increase are going to be the ones that are most challenged with the increase. So real conundrum, because although you're saving theoretically 500 billion, you're really costing taxpayers in excess of $300 billion and this is going to happen in an environment of we need to fund more for our public infrastructure, not less.
(06:31):
So at the end of the day, what we really need to do is promote additional advocacy from our governmental partners, making sure that everybody is bringing forth a parallel and a uniform message that there isn't a $500 billion savings. In fact, there is an $800 billion cost that will ultimately hit the taxpayers in their pocket. And then as importantly, each of us and our governments in terms of our infrastructure, that's not keeping pace with where it should be according to the American Civil Society of Engineers. So the last thing, I'd like to bring it full circle and say, well, what does this mean with respect to issuance for 2025? So we all know that 2024 was a record municipal bond issuance at about $504 billion issued last year. And so what does that mean for this year? And I know the speaker before me mentioned that there's a huge range of what the possible issuance would look like this year.
(07:40):
So Hilltop put forward a projection for 2025 that basically spans between $535 billion, which is what that number would look like if the tax exemption is maintained all the way up to about 50% higher, about 745 billion. If we lose the tax exemption, the concept would be a race to issue debt so long as the tax exemption is still out there and the question that we will all have if we see that larger issuance happen is will our mutual fund and capital investing partners have the ability to absorb that trajectory of debt for a finite period of time as we rush to try to maximize the tax exemption? So those are some thoughts and I know that there are lots of other really interesting questions that we want to get to. So I will pause.
Kevin Murphy (08:38):
Thank you. Thanks for unpacking some of that. I was kind of wondering what's the difference between the GFOA number and the estimate and that helped clarify a bit. I think maybe we'll go out of order and ask Bryan and I should say, I think we're kind of on time time, so please feel free to, I mean I noted everybody's title and I think almost everybody in the room knows who you are, all the panelists, but if you'd like to say just a word or two about your organization or your role or your project, but I guess after that setting the stage, let us know how does this big topic or the other, everything else that's in play in 2025 affect how you're thinking about financing for the remainder of the financing for your project.
Bryan Rowan (09:32):
Sure. Thanks Kevin. So for those that don't know who I am again, Bryan Rowan, I'm the Director of Financial Planning Analysis and Strategy at JFK New Terminal one. We are a private consortium that is redeveloping the new terminal one at JFK International Airport stood up by our four financial sponsors for oal, JLC, infrastructure Eco and the Carlisle Group. Our team entered into a lease agreement with the Port Authority back in 2022 and we are developing a 23 gate, two and a half million square foot airport terminal on the site of the existing terminal one, former terminal two, former terminal three, and the former Green Garage when it's all said and done in 2026. In terms of our first phase, we're looking to be the preeminent facility for International Airlines accessing the JFK Gateway to the US along with my CFO Minosh Patel. I lead the financing function for the organization and we've been really, really pleased to see a healthy appetite for our paper in the muni market first in 2023 with a $2 billion bond deal that we did with our financing partner and conduit issuer of the New York Transportation Development Corporation, and then again in 2024 with a record $2.55 billion deal, the largest for an airport in US History.
(11:02):
We have gone a long way towards refinancing our initial bank commitment, but we still have some yet to come and we do have future phases to our project that we have to think about. So all of the discussion today is very timely. I will say that prior to my role here at J-F-K-N-T-O, I did spend the first 16 years of my career in the advisory side of the business. So for all the issuers in the room, if your advisors are a little bit late and get you those scenarios after the close of business, it's a busy time right now, so cut them some slack.
(11:44):
We are right now working with our advisory team to analyze what this all means for us considering the size of our transactions over the past 18 months. We are in a much better cash position, I believe than we initially planned to be at this point in our construction program, which is scheduled to exist for this first phase in June of 2026. But because of the uncertainty of the continued access to the taxes at municipal market as a private activity bond issuer, we are concerned and we are analyzing contingency plans. I think they really focus around two strategies. One would be secure certainty in terms of cost of borrowing, and then the other is around securing optionality and flexibility in the event that there is an adverse impact in terms of achieving certainty. The easiest way to do that is to get out and go issue more.
(12:57):
As I said, we don't need the cash right now. However, given the relatively flat yield curve, the penalty of acceleration is not what it would be in a typical yield curve environment. So I think that is on the table Additionally, evaluating any private solutions that may exist in terms of private placement, forward delivery, I think everything is on the table right now and our initial plans, our plan is still to come back to the market when we need the cash, but we are continually reassessing to try and manage that risk. Additionally, as mentioned, this is just the first phase of our program.
(13:39):
We have another two to $3 billion of capital requirement coming associated with future phases that per our lease with the port authority, we are obligated to commence as soon as we finish our first phase. And so we are identifying ways to preserve our current cost of borrowing and whether that is through evaluating some tools such as multimodal bonds, evaluating tenor on potential bank programs that we may use to finance construction in advance of long-term takeout. I think these are some of the things that we've had to think about. We've been very lucky for the first two and a half, three years of our refinancing program to be able to execute in a relatively plain vanilla fashion thanks to the market appetite for our paper, but tougher times are ahead and my job is to be ready for it.
Kevin Murphy (14:34):
That's a lot of things to think about and consider every day for you. Thank you, Bryan. Glenn, maybe we'll go to the underwriter and whether when you're talking to your clients, what are you telling issuers both in terms of, I mean Yaffa gave her firm's projections for volume. How do you see all these factors playing out with it's tax policy, fiscal policy, and where rates are both in terms of what this year will look like with respect to rates and volume and win?
Glenn McGowan (15:14):
Well, thanks for the question. I guess I'll start by saying Robert had mentioned TikTok a few times and I did post a market update on tiktoks. It got zero views, not even my wife looked at it, so this might be a better form for that. Robert, I think did a nice job kind of summarizing where the market ended up last year throughout the volume numbers and some expectations for this year with all the volatility that we've seen to have had a record year of issuance in the municipal bond market, I think was very impressive. There's a couple of different ways to cut those numbers. So I think the headline number was 507 or 508 billion. If you focus really on long-term debt, it was closer to four 90 and again, depending on which data set you look, it's either up 33% or up 37% or thereabouts.
(16:01):
But either way, a record year of issuance, our forecast for the year ahead, which does not take into account potential repeal of exemption is 5 25. But I would say that in the last probably two months, all the conversations that we've had with large institutional investors, I think we are comfortable thinking there could be some upside to that number. And then to Y Alpha's point earlier, if a tax exemption does get repealed, then you could see a rush to the market that would drive those numbers higher. What I think is interesting when we think about tax exemption is the whole concept, again, Yaffa mentioned of advocacy and I think that the efforts to really educate representatives in DC about the value of tax exemption, what it does for communities, what it does for infrastructure and investment is a very important topic. And I think that if the constituency that's really pushing that is the dealers and sifma, yes, there's value there, but I think the risk is that it comes off looking like something that Wall Street wants and not something that Main Street needs.
(17:10):
And the reality is it is very much something that Main Street needs. So telling that story is going to be very important from the macro perspective. The RBC house view is that we'll continue to have solid economic growth in the year ahead. Long term economic growth has trended to about 2%. We've been running a little bit higher, a little bit closer to 3%, so we see it normalizing back to about two. Right now, the Fed funds target rate range is four point a quarter to four point a half, and our view is that we're pretty much at terminal. If you think about inflation sitting at basically one third of its peak, the core and headline numbers that we just got for December are wrapped around 3% plus or minus with core a little bit higher than headline. That's about a third of what it was, a little bit less than a third of what it was in the summer of 2022, I think in June of 22, annualized headline CPI was 9.1%, so sitting just below 3%, obviously I think you could say the Fed's job was largely accomplished, but we're still sitting basically a third higher than what the fed's target is.
(18:19):
All the while we have an economy that continues to add jobs, we've got a resilient consumer that's really driving this economy and we continue to expect that consumer spending will help to drive growth. So we don't necessarily see in the context of inflation that's declined but is still sticky and still above the fed's target and an economy that's continuing to add jobs and is powered by a strong consumer. We don't expect to see more rate cuts this year, but I know that that's sort of an out of consensus view. If you think about the movement in interest rates, 10 year note right now is sitting right around a four 40. Our forecast for the end of this year is a 475. There is a Bloomberg screen for all the desk folks out there, BYFC, and it's bond yield forecast. It's a composite forecast of all the big banks and the economic shops, and I think the number that we have gotten from there is closer to about a 435.
(19:17):
So our forecast is higher, and the reason our forecast is higher is because our view of the terminal fed funds rate is higher. So if you're building out a term premium on a yield curve, if your starting point is higher, then you're going to get to a higher ending point. All of this could certainly be impacted by policies out of DC and I think frankly just not a political statement at all. There's just a lot of uncertainty in terms of the news flow and the volatility that results from that uncertainty is manifested in markets in the form of volatility. We had volatility for very different reasons in 2024. We expect to have volatility over the course of this year, and we've traded in the tenure rate range of about a 440 to a 480 averaging right around a 460. And I think if you had to throw some buoys in the water, that's probably the range with a lot of five to 10, 10 plus basis points swings in the treasury market until the news flow maybe normalizes a little bit. So what does that mean for Munis, again, a heavier year in terms of issuance? This has certainly been one of the most active Januarys and starts to February that I can recall.
(20:27):
I don't necessarily think that that's all totally driven by uncertainty in DC, but that could have the impact of bringing certain sectors healthcare and higher ed issuance, pulling that issuance earlier in the year. And I think it'll just be interesting to see how that conversation evolves. So I think a busier market in terms of overall issuance, we've had some inconsistency in terms of mutual fund flows, but we've had very strong growth of SMAs. SMAs are thought to own at least a trillion dollars of the $4 trillion municipal bond market of outstanding paper. And so that's at least a quarter of the market. And I've seen some forecast that maybe it's as close to 1.4 or 1.5 trillion, and we've seen tremendous growth of ETFs. One of the conversations that we're having with many of our issuant clients and their advisors is if you have a large transaction trying to get to ETF eligible sizes so that those tax exempt bonds can be included into the various indices that are tracked. All those things are top of mind, but I think it's been a very good couple of weeks, kind of a rocky start for the first half of January, but a very good performance in our marketplace as rates have come down in recent weeks. And I think the name of the game going forward is just to try to navigate the volatility and try to unpack as much of the news and data flow as we can on a real-time basis.
Kevin Murphy (21:57):
Thank you, Glenn. Speaking of news, I feel funny not having looked at my phone for, I'm not usually a news junkie, but this week, I don't know what else has happened in the world or the country in the meantime, but Kristin, I guess your role at Oppenheimer for you to tell us about that and how do you, from a credit outlook perspective, how do you see all these events, whether it's federal policy or as Robert Rodriguez has mentioned, the recent and the pace of these natural disasters, weather events that we're seeing, how is that affecting how investors are looking at credit risk and state and local government issuers and their projects and increasing costs related to all that? And feel free to comment on anything else that the other analyst has said.
Kristin Stephens (23:01):
Easy question. Okay, so Kristin Stephens, I'm the Head of the Northeast region for Oppenheimer and a longtime Credit Analyst. So much of what we try to do is work with our clients on credit strategy needs. So you take a particularly I would say, fraught time like we're in right now, and those needs are as high as they've ever been. I think, I don't have data on this, but we've got a lot of rating analysts in the room. Credit is very much cyclical in my opinion. It tends to flow in a five year sort of cycle, and we're coming out of a pretty strong time here post pandemic. We heard about strong reserve balances, and that's been wonderful and all that's normalizing. So we see what I call it is, it's almost like a trifurcated credit view, if you will. I think the first one is what issuers would expect coming out of the environment where the stimulus dollars are fading off.
(23:58):
I think issuers are by and large, very sophisticated. They know how to manage their budgets, they'll be well positioned to handle this. We've seen this time and time again, I believe the catch word of the morning is resilience and issuers have been resilient in our market. However, now we got a few twists, right? So here comes your trifurcated view twist one, of course is this federal policy risk. We call it federal wild card risk. It's going to affect every single sector. It's going to affect some more than others. It probably will affect the smaller issuers more profoundly than the bigger ones. It just by ability to withstand something like that. And I would not discount the third rail, the third leg of the stool, to your point, which is physical risks. This is another issue that we're just seeing this with such intensity and cost.
(24:52):
And I think in our market for decades, the physical risk, the concern of that with investors has been managed by the fact that we have FEMA as our backstop. Well, if that ties into federal policy risk, because if FEMA isn't there for issuers to the same degree that it used to be historically, at the same time, these costs are just significantly higher than anything we've seen in the past. And we have to start thinking about things like homeowners insurance and its availability and what decisions does it, and this takes years, but what does this do over time and people's decisions? So we have, as I said, the environment is fraught. There's so many things it's to be thinking about here. It's a very interesting time for our industry. And when I look back just a year ago at this conference, I think, what were we all talking about? It was the loss of several large broker dealers from our market. And I think that was very jarring at the time. But compared to what we're talking about now, which is the potential loss of the tax exemption, I think I would take that conversation in a heartbeat and it makes one wonder what will be next year's topic at the same time. It is really together. It is great to work with this group because there are so many meaty issues that we all need to be collectively thinking about.
Kevin Murphy (26:17):
Yes, for sure. That's a lot. And you mentioned homeowners insurance. I know in the sector that I work mostly in multifamily housing, project insurance is a huge issue. I don't know if anyone else wants to comment on that, but
Bryan Rowan (26:33):
I can just say at our project at NTO, when the team was designing the terminal, building resilience was top of mind. So a few key features. One, we raised the base elevation of the building several feet above the floodplain, being that we are right on Jamaica Bay and right across from the runway, this was critical. We've raised all critical mechanical systems off of the floor in that first floor, which has absolutely no passenger activities. So again, protection from a flood perspective and just from a resilience and redundancy in terms of utilities, we have a partnership with Alpha SR for a 12 megawatt microgrid system inclusive of over approximately 13,000 solar panels on our roof, which is the most in New York City, most for US airport terminal. So yeah, I think certainly don't want to claim prescience here, but this topic is only going to continue to become more and more in focus.
Yaffa Rattner (27:42):
Yeah, I think what I would like to add on this point with respect specifically to insurance is this concept, if you rewind about 36 months and 24 months when we be talking about credit, what would be driving credit to a very large degree was the annual increase in labor costs, the annual increase in supply costs, which was challenging any entity or any issuer to ensure that their recurring revenues were sufficient to cover their recurring expenses. Now, in the current environment, we need to add one more expense into that that people haven't really necessarily been focusing on, and that is the ability to ensure the assets. And if you're looking at project finance, or you might be looking at a student housing transaction, do we have adequate insurance on the facility? What is the incremental growth in that cost as well? So one, do you have appropriate fire and catastrophic insurance? And number two is, can you afford that in an environment where your margins have been compressed given the historical labor and supply increases? So it's another leading indicator of how you look at credit. And one thing that we always look at is to ensure that you actually can get the appropriate coverages, because particularly in a project finance credit, if you don't have it and a catastrophic event hits, there will be an issue with recurring with getting principal and interest repaid on a security.
Kristin Stephens (29:15):
And if I could quickly jump in, Yaffa kind of sparked my mind on something I think you were asking how are investors going to possibly be rethinking investments in this? I think the big word here is affordability. If to your point, and we talked, should it be the loss of a tax exemption? You had mentioned Yaffa, but that's almost like a tax transfer that's rising costs. But through any sector, one consistent theme that I've seen is just rising costs across the board and that notion of affordability and which issuers are going to be able to show to the investor universe that they can sustain these costs and that they're with a rate base, if you will, that's still affordable to their users.
Glenn McGowan (30:00):
And I think a related topic there, if tax exemption does go away and all of a sudden we find ourselves having a fully taxable municipal market, the BAB era brought what, 186 billion of issuance or thereabouts over a two year period. The corporate bond market last year had one and a half trillion with a T of issuance that was up about 26%. It wasn't a record year, but it was close to it. It was one of their busiest years that they have had. That market is not built to have another half a trillion plus of serialized callable municipal securities issued. I think that the largest issuers in this marketplace do have experience issuing make hold calls and index eligible securities that look like a corporate bond and that are generally very well received by corporate investors who want name diversification, liquidity, different names in their portfolio and very strong credit quality. But you would have a pretty dramatic crowding out effect that would severely impact the market access and the cost of accessing capital for more regional and smaller local issuers. And that's something that we have to think about.
Kevin Murphy (31:07):
So maybe Bryan touched on the 2025 word of the year resilience, resiliency. Maybe another word is affordability. We definitely want to hear from Mark what is your perspective, I guess first, what is the MSRB looking to do in 2025? What's your agenda and priorities, but also feel free to the extent you want to give us your view on anything that we discussed from your seat in Washington, how that looks?
Mark Kim (31:41):
Sure. Thank you. And I'd like to thank Mike Ballinger and the Bond Buyer for inviting the MSRB. Thank you Lynne Funk, and thank you Kevin for moderating our panel. I came up from Washington DC I don't think it will surprise anyone if I say that there's a tremendous amount of uncertainty, volatility, and risk in our nation's capital at this moment. So one of my hopes in coming up today was to provide some certainty around the regulatory outlook for this next year. Unfortunately, I'm going to fail in that goal because the regulatory outlook at this moment is uncertain. We obviously have a new administration, but that administration is not articulated very clear priorities with regards to financial regulation of our markets. There's been some general conversations around deregulation and around undoing the rules and regulations of the prior administration, but that hasn't translated into a particular policy around financial regulation.
(32:53):
President Trump has nominated all Atkins to be the next chair of the SEC, and we will wait for his confirmation, which is expected sometime later this spring or perhaps this summer, to better understand the priorities of the new SEC. The role of the chair is very important in determining the regulatory outlook. Mr. Atkins predecessor chair Gary Gensler, as I think all of had a very aggressive regulatory agenda and we will wait to see what the priorities of this new administration are and their impacts on the financial regulatory framework. I wanted to though provide a little bit of breaking news at this conference yesterday, both the MSRB and FINRA announced that we are respectively delaying the implementation of our trade reporting rule amendments, which would reduce the requirement of reporting trades from 15 minutes to one minute. You may be familiar with this joint rulemaking between MSRB and FINRA.
(34:11):
We've been working on it for the last couple of years. We went through a public notice and comment, had extensive engagement with the industry around improving trade reporting. We filed that rule with the SEC last year and the SEC approved it and all that remains is for the MSRB and FINRA to file a notice on when that rule would become effective. So yesterday, MSRB and FINRA respectively published a notice indicating that we're going to delay establishing the effective date of that rule in order to address certain concerns that have been raised since the SEC approved the rule about the ability of firms to comply with that rule and be able to meet the new trade reporting requirements. So we are going to take this pause as an opportunity to evaluate those additional concerns regarding the rule and evaluate potential further technical amendments to the rule. What I wanted to though provide and share with you was a brief history of the transparency of our market, which is an amazing story of progress and evolution in our market. So back in 1995, MSRB first required dealers to report inner dealer trades dealer to dealer trades and transactions in municipal securities. In 1998, MSRB extended that to required dealers to report customer trades.
(35:53):
And then in 2025 years ago, the MSRB formally began publishing secondary market trades to the market with our T plus one report. So dealers were required back in 2000 to report all trades to the MSRB by the end of day. And then the following day, MSRB made those trades transparent to the market and established transparency in secondary market trading in 2005, MSRB amended that trade rule and reduced the trade reporting requirement from end of day to 15 minutes, which was a sea change and an incredible improvement in transparency. That was 20 years ago. We've had this 15 minute trade reporting rule for the last 20 years In that time as supported by a number of academic studies, we've seen issuers like Bryan be able to access lower costs of funds through lower spreads, and we've seen investors receive better prices on their bonds from reduced bid as spreads.
(37:05):
Transparency is good for the market, it's good for issuers and it's good for investors who are the two entities that Congress charged us with protecting. Over the last 20 years, our market has continued to evolve in really important and significant ways. Some of those were touched on in some of the prior comments on this panel. We've had SMAs and investors accessing our market through ETFs and new products that have brought additional liquidity into this market. We've seen the rise of alternative trading systems begin to electronify our market. We're seeing almost two thirds of every inner dealer trade happening electronically through an ATS, and that is further driving efficiencies and enhancements in our market. So the MSRB and FINRA began on a joint rulemaking initiative to see if it was appropriate to further reduce the trade reporting time. And so in the last 20 years since we've had a 15 minute trade reporting requirement, wanted to ask all of you to guess what percent of trades today are reported within 60 seconds, even though we have a 15 minute trade reporting requirement on the books.
(38:33):
So today, it might surprise you to learn that 78% of trades in our market are reported within 60 seconds. It's really a remarkable advancement. And so really the question is who's in that 22%? That's what this rule is really about. Who isn't reporting within 60 seconds or what types of trades are not being reported within that timeframe? And we did the analysis and looked, and the reason why we feel it's appropriate to continue to move forward is what we found is that there are instances in which there's a trade that is done that is not reported, say for 15 minutes, and there are intervening trades that have been done at a lower price and higher yield that arguably would have reset the price on that security for the investor. But the investor didn't have the benefit of that information because that trade was not reported before the intervening trades had been happening. So what that indicates to me is that there's potential for this market to continue to improve and that this market will continue to evolve as electronic trading continues. And as we continue to advance, this market is going to continue to be able to provide greater transparency, which is in the benefit of everyone in this room.
(40:08):
So we will continue to consider the additional concerns that have been raised and we look forward to continuing to address those concerns and continue to advance the transparency in our market. One of the most, and the last point I wanted to touch on, the administration has identified one priority, which is around the regulation of cryptocurrencies. And that has some implications for our market. There's a lot of work to be done on the regulatory side in terms of understanding and agreeing on whether digital assets are securities and if they're securities then they are regulated by the SEC and financial regulators like the MSRB and finra, or whether those digital assets might be more akin to derivative contracts, which might make them subject to regulation by the CFTC. So there's some regulatory uncertainty around that area that needs to be cleared up. These assets are being traded on crypto exchanges, which themselves are unregulated. And so there's another question around the regulation of these exchanges and how we're seeing these technology innovations impact our market is over this last year we've seen multiple transactions where issuers have tokenized their municipal securities bond offerings and distributed them on private blockchains. So this is starting to happen in our market. And the reason why the MSRB is paying attention to this is that it has enormous ramifications for the structure of our regulatory framework.
(42:00):
Blockchain has the potential to disrupt normal or rather it has the potential to disrupt legacy, maybe might be the right better word, legacy ways of clearing and settling bonds, which are laid out and dictated by our rules. And so we're continuing to watch and I think it's the responsibility of regulators to evolve with the market that it regulates. And we're continuing to pay attention to these trends to see if there is greater adoption of distributed ledger, if there's greater use of blockchains, and to evaluate what the implications would be for our rule book, which would be significant in the midst of all this uncertainty. And I'll end here. I really appreciated and found interesting your comments, Bryan, saying that one of your responses may be to accelerate issuance and I saw for a moment the joy in all the banker's hearts across the room when they heard that you might come to market sooner with more deals. So thank you for bringing joy when I brought uncertainty may, but back to you guys.
Kevin Murphy (43:11):
Thank you, Mark. I don't know if anyone else has anything they want to touch on. If not, we can open up the Florida. Any questions if, go ahead. Do we have, I'm sorry. Just want to, yeah. Okay. We can hear you.
Audience Member 1 (43:35):
So with the one minute trade reporting, consider on individual mom and pop retail, it's my understanding that it's very difficult to get somebody to confirm a trade, call them back, do another trade, especially if you're trying to liquidate a portfolio for an individual. So I would love to hear your comments on that.
Mark Kim (43:58):
Yes, thank you. So the question was really around, it really goes to the heart of a unique feature of our market, which we're an over the counter market. Municipal bonds are not traded on a centralized exchange and there is still a high prevalence of manual trade execution, particularly for certain types of trades, mom and pop potentially being one of them. And yes, we feel taken that into account in our rule. So within the one minute rule framework, there's two important exceptions. One of the exceptions we found in looking at the trade data, that there are a large number of firms that have very limited trading activity in the secondary market. These firms account for individually account for less than one 10th of 1% of the market's overall trading volume on any given day. And those were a large number of the firms that were not able to execute trades in one minute.
(45:02):
They provide relatively marginal liquidity to the market, but still an important source of liquidity for our fragmented market. And so we created an exemption for firms that have limited trading activity that do not need to report within the new one minute timeframe. They can continue to report within the prior 15 minute timeframe. But to your question, there's a second important exemption that we included in our rule, which was for manual trades, and that was to address exactly the subject that you raised, which is when you have a voice negotiated trade, it's perhaps impossible to be able to paper that trade within 60 seconds. And we recognize that and we recognize that that's still an important feature of our market, not withstanding the fact that our market is moving towards electronification and will continue to adopt those practices today, the current state of the market still has a very significant amount of manual trades. And so we created an exception as well for manual trades where it ramps down over a period of number of years from the current 15 minutes to 10 minutes and then to five minutes and then pauses at five minutes. So we feel that we've adequately addressed the concern around that, that we want to make sure that our goal is not to get the rule done. Our goal is to get the rule right and in order to make sure that we get the role right, we want to take some more time.
Kevin Murphy (46:42):
Thank you for the question. Are there any other questions in the audience? You have one in the back. See that is,
Audience Member 2 (46:51):
Thank you. Just a little more Mark on the pause. In announcing the effective date, did you put a definite length of time or is this an indefinite pause?
Mark Kim (47:02):
It's an indefinite pause for now. Sorry. How about that? For a regulator's answer, we don't have at this time kind of a set timeframe for when we would take subsequent action. So I think the fairest answer would be that it's indefinite at this time until further notice.
Kevin Murphy (47:37):
I think we might have time for one more. I don't know if it's going to be for Mark.
Audience Member 3 (47:42):
Can I ask, do you have a trigger for when the decision, like what it is that would move the decision along from this indefinite pause?
Mark Kim (47:51):
Sure. Both FINRA and the MSRB collectively and separately have heard additional concerns being raised by our respective rules and FINRA's rule and MSRB and FINRA developed our rules together, but the rules are not identical. There're slight differences to account for the differences in the corporate market and the municipal bond market, but the framework is essentially the same. So FINRA has received some additional concerns that are unique to its rule and the MSRB has received a number of questions and concerns about firm's ability to comply with the rule under certain conditions. And so we want to take that time to evaluate those concerns and to see whether it merits additional guidance or perhaps technical amendments to the rule.
Kevin Murphy (48:46):
Thank you, Mark. So I think we've come to the end of our time, but feel free to talk to our panelists in the coffee break that's coming up. Thank you all.