What Financial Reform Means for Municipal Bonds

All bonds are not created equal.


As market participants seek to unravel the unintended consequences of the Dodd-Frank lawcommonly known as FinReg, it is clear that municipal bonds and corporate bonds are not the same and will be impacted differently.

One important distinction between the corporate and municipal bond markets is that corporate bonds are registered securities—municipal bonds are not. That key distinction is meaningful as details of the new law are unraveled and especially meaningful in light of the controversy surrounding bond sales and the ratings agencies.

Case in point, state governments such as California are considering the new law and its implications for its state’s bond issuance. Tom Dresslar, spokesman for California Treasurer Bill Lockyer had this to say:

“Our preliminary assessment is that this problem would not affect municipal bond issuers. The provisions of the federal reform bill that raise the liability concerns, we believe, apply only to securities registered under the 1933 federal securities law."

Dresslar added, "Most municipal bonds are not registered under that law, so we wouldn’t have to get agencies’ consent to use their ratings in our offering documents. We’ll thoroughly review with our bond counsel before coming to a final conclusion. But that’s our initial take.”

According to the website, the Securities Industry and Financial Markets Association (SIFMA), there is currently about $2.7 trillion worth of municipal bonds outstanding in the United States. And the biggest player in that market is California, trading over $3 billion (par value) on-average each day in 2009. With so much at stake, what California has to say matters.

Chris Mier, Loop Capital Markets Strategist reacted to the statement from Lockyer's office.

"Using only the statement made by the Treasurer's office of the State of California, there is no application to any securities that aren’t registered securities. The municipal bond market does not have securities that are registered. Therefore this does not apply to the municipal bond market."

Mier continued, "The discussion is over, it is now law and we are getting down to how that law is going to be executed.”

So, clearly everything is not clear to everyone in the market. But what is clear is that municipal bonds and corporate bonds will be treated differently under the Dodd-Frank law.