Technological Advances on the Horizon Promise to Make Muni Disclosure Easier
You are an underwriter for a $30 million negotiated bond deal in California and are about to sit down with the bond counsel, financial adviser, and insurer of the deal to review a first draft of the official statement.
The trouble is you are in New York, the bond counsel is in Los Angeles, the adviser is in Chicago, and the insurer is in Atlanta.
Instead of jumping on the next flight out or spending hours sending marked-up drafts back and forth by facsimile machine or an express mail service, you simply turn to your personal computer and insert a software package that, with the help of a modem, connects you with the other members of your working group.
Using an electronic notes window on the screen, you comment on the contents of the official statement and review the notes and comments of others. Gradually, a final document takes shape.
Meanwhile, your trading desk is getting ready for a busy week of bond offerings totaling millions of dollars in your region. The dealers are hunting for bargains, but, nervous about Norteastern economic conditions, they need some fast research on the financial health of the issuers going to market.
Moving to a computer work station, they select software supplied by an information vendor that provides two-page snapshots of each of the issuers' official statements for the past three years. Of particular interest to your dealers are the call features of dozens of regional bonds now available in the secondary market. They turn to a software program that succinctly outlines the call features of all bonds issued in the Northwest during the past year.
New Technology on Horizon
Does this scenario sound like it is a few light years away? Actually, such technology is almost at the market's fingertips.
Pacific Financial Printing in San Francisco is testing a system called Electronic Express, which would allow working groups of bond lawyers, underwriters, financial advisers, insurers, and other participants in bond deals to craft official statements and other bond documents with only basic computer technology. Such basic technology would include any International Business Machines Corp. personal computer or compatible and any Apple Computer Inc. Macintosh computer that has a modem.
Work on the documents could be performed by any member of the working group at any time during the day or night, says Pacific President Donald Beatty. He noted that the system has an "E-mail" communication service so that on-line working group members can swap information on meetings, schedules, telephone calls, and other information.
Regarding Pacific's Electronic Express product, one participant in the testing of the product was enthusiastic. "We're sort of excited about it," said Mike Gallagher, senior vice president at Capital Guaranty Insurance Co. in San Francisco. "It's another way to communicate a little more efficiently."
He noted that the system would offer the facsimile option since there is a facsimile board in the computer. "We can do computer-to-computer or computer-to-fax," he said. For West Coast firms, it is a scheduling boon, Mr. Gallagher said, adding, "If it's a deal done out of New York, you don't have to worry about meeting Federal Express deadlines.
"We have the equipment now," Mr. Gallagher said. "We wouldn't have to add anything to be able to participate," he said, noting that a modem typically costs $100 and a fax is roughly the same amount. "I think over time this is going to be a big benefit."
The other participants in the testing, an underwriter and a bond lawyer, were not available for comment.
Turning to other software, such as packages that provide quick reference to call features, a stream of new product could be available as early as winter. Such products could be developed in response to the Municipal Securities Rulemaking Board's "imaging" system for official statements and advanced refunding documents, which was approved by the Securities and Exchange Commission this summer.
Data Will Be at Fingertips
The "OS/ARD" system will make available on magnetic tapes computerized photos of the documents on a continuous basis to information vendors, rating agencies, and large dealers.
The board hopes to begin selling the tapes as early as Jan. 2, 1992. Vendors can take the images off tapes and repackage them in ways of interest to the market, such as by region or according to specific features.
Christopher Taylor, executive director of the MSRB, said the board is in the process of selecting a contractor to image the documents. "The whole intent is to make this information readily available. By putting it up on electronic tape, it allows the technical slicing and dicing of information."
Just how many vendors and other key market participants will take the plunge immediately and begin buying the tapes is unclear. Officials with at least two major information vendors, J.J. Kenny Co. and Bloomberg Financial Markets, have told the MSRB they will buy the tapes, but they have not announced any plans as yet to repackage the materials.
Erin Sanders, manager of the municipal bond department at Bloomberg, said she could not comment on what her company will do when it begins taking in magnetic tapes. "We haven't even seen an example of the tapes yet," she said. "I would like to get more information before we" act, she said.
David Francescani, general counsel for J.J. Kenny, said his company will use the magnetic tapes initially to augment Kenny-Base, the service that condenses official statements to one-page summaries and supplies them via computer to market subscribers. He added, however, that Kenny expects to announce soon some preliminary plans for repackaging the information for sale to the market.
Kenny earlier this year launched a system for secondary-market disclosure called KennyAlert, which takes in market-sensitive information on paper or by facsimile machine and transmits it electronically over KennyBase and other systems. Response from the market, which has concerns about the legal risks involved in voluntarily supplying secondary market information, has been sluggish. According to Mr. Francescani, the system has alerted the market electronically to 60 events submitted by issuers and trustees.
Also expected to be sluggish is the market's response to secondary-market disclosure guidelines that are expected to be published this month by the corporate trust committee of the American Bar Association. The guideline recommend that trustees, with the approval of the issuers in their deals, send market sensitive information to one or more nationally recognized repositories via paper or electronic submission.
According to the guidelines, trustees should do so until the central repository for secondary market disclosure that is currently being planned by the MSRB gets SEC approval. The MSRB's proposed system was tabled by the SEC this summer because of concerns that it only permitted the electronic submission of current reports and ongoing financial information to the system.
SEC Chairman Richard Breeden, whose agency has struggled for years to get an electronic disclosure system for equities, dubbed EDGAR, off the ground, said issuers must have the option of sending information via paper.
But the myriad financial reports and notices prepared by municipal issuers and their lack of standardization compared to other markets raises major hurdles for the MSRB. Using the imaging technology to make copies of reams of issuers' documents is impractical for the board's Municipal Securities Information Library because the imaging process is not fast enough.
The National Association of State Auditors, Comptrollers and Treasurers documented the degree of market paperwork in a study earlier this year of four states: California, Texas, Ohio, and North Carolina.
In one state, for instance, a total of 4,538 counties, cities, townships, villages, and special districts must provide financial reports to the state auditor in a format that he prescribes. School districts provide reports to the state department of education, which then supplies these on magnetic tape.
The report concluded that there is no central agency in any of the four states that maintains comprehensive information on demographics, financial position, or bond information for all levels of governmental issuers.
Meanwhile, the municipal market is not the only government debt arena going through technological growing pains. The government securities market, under heavy pressure from Congress and federal regulators to expand the dissemination of price information, is in the early stages of implementing its own system, called GOVPX.
Coordinated by the Public Securities Association, the system provides for the five interdealer brokers to feed prices electronically into a central source, which consolidates it into one composite feed that is then made available to a handful of vendors. Each vendor gets the same information off the composite feed and makes it available on their various screens to the market.
On June 16, GOVPX began live transmission of prices on all U.S. Treasury bills, notes, and bonds in the interdealer brokers market by all primary dealers in U.S. government securities. The data feed is a composite of dealer activity showing executed trade prices, volume of executed trades, best bid quotations, yield, and running aggregate volumes traded in each security on a daily basis. GOVPX is already upgrading its system to add best offer information to its data feed.
According to a description of the system, eight primary pages will appear on computer screens. The primary pages will contain data on the 16 securities that are considered to be of the greatest interest. The primary headings are Treasury bills and issues maturing within two years, from two to three years, from three to five years, from five to seven years, from seven to 10 years, and from 10 to 30 years.
A composite page will contain the 16 bills and coupons appearing on the eight primary pages that are considered to be of greatest interest by GOVPX. The bills will occupy the upper display lines and the coupons will be located on the lower lines.
Since there are typically more than 16 securities in any one maturity range, additional secondary pages will be provided and securities will be arranged in sequence by maturity date.