BPFC Briefing Muni Mkt 12-15

BRIEFING PAPER ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !

Municipal Bonds: Raising the bar on best execution in a $3.7 trillion market

December 15, 2016

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1001 Avenue of the Americas Suite 1218 New York, NY 10018 Tel: (212) 719-7535 www.bryantparkfc.com

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New Era of Transparency The!$3.7!trillion!municipal!bond!market!enters!a!new!era!of!transparency!in!2016!with! implementation!of!a!new!best!execution!requirement!along!with!other!regulatory! initiatives!designed!to!improve!disclosures.!!The!new!best!execution!requirement!is!the! latest!step!in!a!multiIyear!push!by!regulators!to!bring!more!transparency!to!this! predominantly!retail!market.!!This!series!of!regulatory!initiatives!has!significantly!raised! the!bar!on!disclosures!for!issuers,!dealers!and!other!market!participants.! As!a!result,!the!municipal!bond!market!is!poised!to!embrace!more!electronic!trading!as!it! strengthens!its!compliance!and!oversight!functions.!!The!purpose!of!this!briefing!is!to! review!recent!regulatory!developments,!with!reference!to!their!impact!on!electronic! trading!and!on!the!market!for!data!and!technology!services.! The!current!regulatory!initiatives!have!their!recent!roots!in!a!2012!SEC!study!of!practices! and!dealing!costs!in!the!municipal!bond!market.1!!Research!cited!in!that!165Ipage!study! and!subsequent!analysis!concluded!that!trading!spreads!were!significantly!higher!in!the! municipal!bond!markets!than!in!the!corporate!bond!market.2!!The!study!also!raised! questions!about!whether!underwriters!and!issuers!were!making!sufficient!disclosures.!! Since!2012,!events!such!as!the!fiscal!problems!of!Detroit,!Illinois!and!Puerto!Rico!have! kept!the!market!and!its!regulatory!issues!in!the!headlines.! EMMA's Birth The!Municipal!Securities!Rulemaking!Board,!the!industry's!selfIregulatory!organization,! took!a!significant!step!toward!improving!the!market's!transparency!in!2009,!setting!up! the!Electronic!Municipal!Market!Access!system!(EMMA®)!under!authority!granted!by! the!SEC.!!EMMA!has!two!mandates!as: !

The!official!central!repositary!for!disclosures!by!municipal!issuers.!

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A!central!source!of!historical!price!information!on!municipal!bond!trades,!giving!the! public!free!access!through!its!web!site!to!data!going!back!to!2006.!!!

Since!2012,!dealers!have!been!required!to!report!all!trades!within!15!minutes,!which! then!appear!on!EMMA.!!New!features!on!EMMA!allow!investors!to!compare!trade! histories!on!bonds!with!comparable!features.!!! In!response!to!the!2012!SEC!study!and!its!recommendations,!a!consortium!of!dealers! announced!in!2012!the!formation!of!Municipal!Bond!Information!Services!(MBIS).!3!!The! consortium!said!it!planned!to!launch!a!"suite!of!products!designed!to!enhance!preItrade! price!transparency!and!postItrade!operational!practices!for!the!municipal!bond! marketplace."! MBIS!offers!two!data!feeds.!!The!first!is!aggregated!bid!and!offer!data,!which!is!available! intraIday!and!refreshed!every!5!minutes.!!This!service!includes!an!endIofIday!bulk!feed.!! The!second!is!a!Comparable!Securities!Service!designed!to!help!market!participates! make!judgments!about!the!pricing!of!less!liquid!securities.!!MBIS!data!has!been!cited!in!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !Report!on!Municipal!Securities!Market,!Securities!and!Exchange!Commission,!July!31,!2012.! !"Statement!on!Making!the!Municipal!Securities!Market!More!Transparent,!Liquid!and!Fair,"!Commissioner!Luis!A!Aguilar,! U.S.!Securities!and!Exchange!Commission,!Feb.!13,!2015.! 3!Founders!include!Associated!Bond!Brokers,!Butler!Muni,!Hartfield!Titus!&!Donnelly,!Regional!Brokers!Inc.,!RW!Smith!and! Associates,!Stark!Municipal!Brokers,!Sentinel!Brokers!Company,!Tradeweb,!Tradition!Asiel!Securities!and!Tullett!Prebon.!! See!site:!http://www.mbis.com.! 1 2

©!Bryant!Park!Financial!Communications!2015!

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articles!appearing!in!The$Bond$Buyer,$the!leading!publication!for!the!municipal!securities! market,!and!in!other!financial!media.!! Defining 'Reasonable Diligence' More!than!a!year!ago,!the!MSRB!proposed!a!new!best!execution!requirement!as!part!of! the!next!phase!of!its!efforts!to!promote!market!transparency.!!The!approval!of!the! proposed!amendments!to!Rule!GI18!was!followed!by!a!lengthy!comment!period!as!the! MRSB!heard!from!the!industry!about!its!concerns!and!coordinated!with!FINRA!on!the! details!of!implementation.!!! On!November!20,!2015,!the!MSRB!issued!guidelines!on!the!standard,!which!will!become! effective!on!March!21,!2016.4!!!The!amended!Rule!GI18!requires!dealers!to!exercise! "reasonable!diligence"!to!determine!the!best!market!in!the!security!it!seeks!to!trade!on! behalf!of!a!customer.!!Then!dealers!must!buy!or!sell!securities!in!that!market!so!that!the! resulting!price!to!the!customer!"is!as!favorable!as!possible!under!prevailing!market! conditions."!! The!new!standard!will!not!apply!to!investors!with!at!least!$50!million!in!assets!as!long!as! they!affirm!that!they!meet!the!MSRB!definition!of!"sophisticated!municipal!market! professionals,"!or!SMMPs.!!It!also!does!not!apply!to!interIdealer!trades,!but!customer! trades!cleared!through!another!dealer!are!covered!by!the!standard.! MSRB!defines!"reasonable!diligence"!in!terms!of!process!and!dealers'!policies.!!MSRB! guidance!says!that!the!factors!dealers!should!consider!in!adhering!to!the!standard! include!but!are!not!limited!to:! !

The!character!of!the!market!for!the!security!!(e.g.,!price,!volatility,!and!relative! liquidity)!

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The!size!and!type!of!transaction!

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The!number!of!markets!checked!

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The!information!reviewed!to!determine!the!current!market!for!the!subject!security! or!similar!securities!

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The!accessibility!of!quotations!

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The!terms!and!conditions!of!the!customer’s!inquiry!or!order,!including!any!bids!or! offers!that!result!in!the!transaction,!as!communicated!to!the!dealer!

MSRB!also!instructs!dealers!to!establish!policies!spelling!out!how!they!meet!the! standards.!!The!Board!suggests!that!existing!standards!in!the!corporate!bond!market! should!inform!the!language!of!these!policies.! 'Reasonable Diligence' and Electronic Platforms Much!of!MSRB's!19!pages!of!guidance!on!Rule!GI18!II!issued!in!November!2015!II!relates! to!dealers'!use!of!electronic!Alternative!Trading!Systems!and!"broker's!brokers"!(defined! by!MSRB!Rule!43)!to!meet!their!obligation!for!"reasonable!diligence."!!The!guidance! noted!that!there!is!"no!categorical!requirement"!that!a!dealer!collect!quotes!from!an!ATS! platform!or!use!a!"broker's!broker."!But!the!guidance!makes!this!point:! As!the!availability!of!electronic!systems!that!facilitate!trading!in!municipal!securities!increases,!dealers! need!to!determine!whether!these!systems!might!provide!benefits!to!their!customer!order!flow,! particularly!retail!order!flow,!and!help!ensure!they!are!meeting!their!obligations!under!Rule!GI18(a)!

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!MSRB,!" Implementation!Guidance!on!MSRB!Rule!GI18,!on!Best!Execution,"!Nov.!20,!2015.!

©!Bryant!Park!Financial!Communications!2015!

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with!respect!to!ascertaining!the!best!market!for!their!customer!transactions.!!Similarly,!preItrade! transparency,!such!as!through!electronic!trading!platforms,!is!also!increasing!in!the!municipal!securities! market,!and!dealers!need!to!periodically!analyze!and!determine!whether!incorporating!pricing! information!available!from!these!systems!should!be!incorporated!into!their!bestIexecution!policies!and! procedures.!

The!MSRB!acknowledges!that!a!wide!range!of!trading!systems,!pricing!platforms!and! quote!aggregation!sites!operate!in!the!municipal!securities!market:! Some!systems,!including!autoIexecution!systems,!both!display!prices!and!provide!execution! functionality,!while!other!systems!display!prices!but!provide!no!execution!functionality.!!Still!other! systems,!such!as!requestIforIquotation!systems,!may!provide!indications!of!interest!but!not!display! prices!or!provide!execution!functionality.!

The!three!leading!ATS!platforms!for!municipal!bonds!are!TMC,%KCG%BondPoint!and! Tradeweb.!!(See!profiles!on!Page!5.)!!They!are!used!by!dealers!to!trade!with!one! another!as!well!as!to!provide!trading!access!to!the!retail!market!through! workstations!and!other!types!of!services!used!by!financial!advisors.!!In!addition!to! ATS!platforms,!the!municipal!market!uses!bulletin!boardIlike!services!such!as! fabkom.com!that!allow!dealers!to!post!quotes!and!solicit!bids.5!! Another!feature!of!the!market!are!the!many!retail!sites!operated!by!dealers!or!groups! of!dealers!to!attract!and!aggregate!orders!from!individuals.!!Examples!include! municipalbonds.com,!thebondcenter.com!and!bond!underwriter.!com.! Spread Disclosures Regulators!are!also!pressing!dealers!to!disclose!markups!and!markdowns!in!transactions! with!retail!customers.!!!Under!a!proposed!change!to!MSRB!Rule!GI15,!a!dealer!who! purchases!or!sells!bonds!from!for!its!own!account!would!have!to!disclose!the!markup!or! markdown!on!the!costumer's!confirmation!under!three!conditions:! ! It!executes!a!transaction!on!the!same!side!of!the!market!as!the!customer! ! The!transaction!is!greater!than!or!equal!to!the!size!of!the!customer's! ! And!the!dealer!transaction!occurs!within!a!twoIhour!window!of!either!side!of!the! customer!transaction.! The!customer's!confirmation!would!disclose!the!difference!between!price!to!the! customer!and!the!prevailing!market!price!for!the!security.!!This!would!be!expressed!as! dollar!amount!and!as!a!percentage!of!the!principal!amount!of!the!customer!transaction.!! A!hyperlink!to!relevant!price!information!in!EMMA!or!TRACE!would!also!be!included!in! the!confirmation.!!The!MSRB!has!indicated!it!would!limit!the!proposed!rule!to!secondary! market!trading.! SIFMA,!in!a!letter!to!the!MSRB!and!FINRA!on!Dec.!11,!2015,!the!last!day!for!comment!on! the!proposal,!urged!that!the!disclosure!standard!be!limited!to!riskless!principal! transactions!involving!customers.!!It!also!favored!a!twoIhour!window!for!capturing! contemporaneous!reference!trades!for!confirmations,!rather!than!a!sameIday!standard! proposed!by!FINRA.!!In!general!comments,!SIFMA!urged!regulators!not!to!finalize!the! rule!until!they!had!weighed!expected!benefits!of!the!disclosures!against!the!high!costs!of! implementation!and!the!potential!impact!on!market!liquidity.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 5!In!September!2015,!Bloomberg!reported!that!one!of!the!trading!sites!operated!by!a!"broker's!broker"!II! MuniBrokers.com!II!was!under!scrutiny!by!the!Justice!Department!for!anticompetitive!practices!in!secondary!trading.!!The! site,!owned!by!Hartfield,!Titus!&!Donnelly!LLC,!was!reported!to!have!been!the!target!of!a!complaint!that!firms!using!the! site!had!agreed,!or!were!being!asked!to!agree,!to!boycott!competing!services.!!!A!day!later,!news!reports!said!the!inquiry! had!been!closed!with!no!action!taken.!

©!Bryant!Park!Financial!Communications!2015!

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Profiles of Municipal Bond ATS Platforms

TMC Bonds

KCG BondPoint

Tradeweb Direct

Background: Privately held ATS founded in 2000 as TheMuniCenter with backing of Merrill Lynch (now Bank of America Merrill Lynch), Salomon Smith Barney (now Citi Global Markets), and Morgan Stanley. Assured Guaranty took a stake in April 2001. These firms are active on the platform as market participants and board members. In 2011, the firm rebranded as TMC Bonds. Located at 850 Third Avenue in New York, it has about 100 employees.

Background: A fixed-income ATS and applications provider to the retail bond market. BondPoint is a division of KCG Holdings, the publicly traded dealer and market maker formed by the 2012 merger of Knight Capital and Getco. BondPoint is used by about 150 dealers to trade retail-sized orders. KCG's center of operation on the East Coast is in Jersey City, NJ. Headcount for BondPoint could not be determined.

Background: Tradeweb added municipal bond trading capability with its acquisition in October 2011 of Rafferty Capital. In 2004, Rafferty had acquired J.J. Kenney Drake, a long established muni market inter-dealer that was owned by Standard & Poor's. In 2013, Tradeweb acquired BondDesk Group LLC, a retail fixedincome products platform that was said to have175 dealers and 105,000 fiancial advisors on its network. After the acquisition, Tradeweb grouped BondDesk and J.J. Kenney into its retail division, rebranded as Tradeweb Direct. According to site, J.J. Kenney's trading system "provides regional and national coverage on approximately 500 screen pages of market activity, offerings and bid-wanteds; coverage by region, state and bond type; and descriptions on various advertised issues through web and digital feeds."

Market Share: TMC has reported that its share of "MSRB-related, inter-dealer trades" was 29% in 2014. Clients: Describes client segments as institutional "customers" (their quotation marks), interdealers & proprietary traders, and retail brokerages. In October 2013 news release, TMC said its network included 5,000 traders and over 125,000 financial advisors. Products and services Provides customized desktop applications for advisors and retail investors. Private label offerings include the Advisor Workstation and Client Investor Portal.

Market Share: KCG's third quarter SEC filing reported that its market share of municipal bond trades fewer than 250 bonds each was 7.5% in the quarter. That was up from 6.9% in the second quarter and 6.1% in the first quarter. Clients: Include "buy- and sell-side traders who access our fixed income ATS, an electronic marketplace linking more than 500 financial services firms to 200,000 live and executable bids and offers." Products and services !

Advisor Workstation supports commissioned brokers, dually registered financial advisors, and fee-only independent RIAs, providing: !

Asset Gathering (Offerings Lists, Customer Portfolios/Proposals & Tax Loss Harvesting Analysis)

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Data from DPC Data, Interactive Data, Thomson Reuters

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Pre-Trade Analytics

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Price Discovery & Multi-Asset Class Composition (i-Scatter Yield Visuals, Basket Trading)

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Pre-Trade Compliance & Regulatory Vetting

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Advisor’s orders can be routed to TMC Bonds’ marketplace for auto execution or to a dealer's fixed-income traders for "review & release." Clearing brokers can have orders routed to them in the absence of a correspondent’s own trading desk The Trader Workstation offers live, executable access to two-sided markets for all taxable and tax-exempt securities. Leadership CEO and Chairman, Tom Vales; President, James Wangsness; CTO, David Kovalchick

©!Bryant!Park!Financial!Communications!2015!

KCG BondPoint Broker Workstation: Tailored fixed income product access and trading for financial advisors and brokers. Browser-based application provides entry to live secondary market trading, new issues, fixed income reports, analytics, portfolio tools and news through integration with front, middle and back office systems KCG BondPoint Trader Workstation: Advanced fixed income trading capabilities for trading professionals. Web-based platform enables direct market access to the KCG BondPoint ATS for price discovery, analytics and trade execution. BondScope: An electronic surveillance tool. Three modules designed work independently or as an integrated solution to provide pre-trade and post-trade transaction review and oversight to help deliver best execution through price transparency and market analytics. Activity and trade audit results are archived for reference and reporting.

Leadership Bill Vulpis is Managing Director and Head of BondPoint:.

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Tradeweb is majority-owned by Thomson Reuters and 11 dealers. Its headquarters are at 1177 Avenue of the Americas. Market Share: Facilitates 1 in 5 of all municipal bond trades, according to the Tradeweb site. That statistic is attributed to MSRB data. Clients: Reports it has more than 2,100 Liquidity Takers on its network, defined as financial advisors, traders and buy side investment professionals. The site says there are more than 200 Liquidity Providers, defined as dealers and buy-side investment professionals. Provided quotes on 40,438 unique municipal securities, as of 10 am on Dec. 7, 2015, according to the Tradeweb site. Products and services Services are delivered through Tradeweb Direct workstation. Includes analytical tools, trading history report and research, and a suite of compliance and monitoring tools. Notes the site: "Automated preand post-trade analysis capabilities support best execution efforts by indicating if bond offerings are fairly priced and whether customers’ executions fall out of line with the firm’s pre-set tolerance levels." Tradeweb Direct Muni Ticker service is available on the The Bond Buyer site. Leadership John Cahalane is Managing Director and Head of Tradeweb Direct.

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Scrutiny of Issuers and Their Advisors Among!the!pending!regulatory!issues!in!the!municipal!market!is!a!proposed!rule!on! the!conduct!of!municipal!advisors!(MAs),!which!includes,!under!MSRB!definitions,! broker!dealers!and!investment!banking!specialist!firms!working!with!issuers.!!! The!industry!has!criticized!proposed!amended!language!relating!to!broker!dealers'! principal!transactions!with!issuers!on!securities!deals!in!which!their!firms!provided! advice.!!Industry!groups!have!asked!for!further!clarification!on!the!MRSB's!latest! version,!which!was!released!on!Nov.!9,!2015.! The!debate!over!Rule!GI42!comes!amid!stepped!up!regulatory!actions!against!both! broker!dealers!and!issuers.!!In!June!2015,!36!banks,!including!several!leading!Wall! Street!firms,!settled!SEC!charges!that!they!failed!to!make!adequate!disclosures!to! investors.!!Each!firm!paid!$500,000!in!fines,!except!for!one!regional!broker,!which! paid!$250,000.!!!The!fines!were!the!first!against!underwriters!since!the!SEC!launched! its!Municipalities!Continuing!Disclosure!Cooperation!(MCDC)!program,!which!offered! leniency!if!underwriters!and!issuers!took!action!to!correct!disclosure!failures.! MCDC,!along!with!the!new!approaches!to!best!execution!and!the!role!of!MAs,!has! bolstered!the!market!for!technology!and!data!products!designed!to!help!dealers,! underwriters!and!financial!advisors!document!their!compliance!process.!!An!example! is!the!Diver$suite!of!products!offered!by$Lumesis!Inc.!of!Stamford,!Connecticut.$!TMC,! KCG,!Tradeweb!and!Pershing!all!have!relationships!with!Lumesis.! Market structure: Retail, regional, and highly fragmented In!adjusting!to!new!best!execution!and!disclosure!requirements,!market!participants!face! the!challenges!inherent!in!a!highly!fragmented,!illiquid!trading!environment.!!The!market! consists!of!over!1.5!million!different!securities!issued!by!more!than!80,000!cities,!states! and!other!agency!and!corporate!entities.!!These! Municipal Bond Ownership securities!have!a!wide!range!of!different!features! Other, 4% regarding!security,!call!structure,!insurance,!tax! status,!sinking!fund!and!other!features.6! Insurance Cos., 13%

Banks, 14%

Individuals, 42%

Mutual Funds, 28%

The!market!is!predominantly!retail,!with! individuals!accounting!for!70%!of!holdings! directly!or!through!mutual!funds.!!Retail! investors!are!drawn!to!these!issues'!taxIexempt! status!and!their!security!relative!to!corporate! bonds.!!In!selling!these!securities,!advisors!focus! on!the!taxIequivalent!yield!of!municipal!issues! relative!to!corporate!bonds.!

Because!tax!exemptions!are!usually!applicable! only!to!obligations!in!specific!states!or! SIFMA Q2 2015 Data jurisdictions,!the!market!is!highly!regional!in! character.!!Municipal!bond!mutual!funds!reflect!this!regional!nature.!!Of!1,055!municipal! bond!mutual!funds!available!on!Fidelity's!site,!282!are!singleIstate!funds.!!!A!third!of!the! singleIstate!funds!on!the!site!are!focused!on!taxIexempt!issues!of!California!entities.!

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !A!highly!readable!guide!to!the!categories!of!municipal!securities!can!be!found!on!Fidelity's!site!at:! !http://www.fidelity.com/fixedIincomeIbonds/individualIbonds/municipalIbonds.! 6

©!Bryant!Park!Financial!Communications!2015!

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Municipal!bonds!are!largely!a!buyIandIold!market!in!which!issues!trade!infrequently!and! in!small!lots.!!In!2014,!the!MRSB!released!a!study!that!looked!at!trade!data!covering!43! million!secondary!principal!transactions!in!more!than!a!million!distinct!securities!from! 2003!through!2010.!7!!The!research,!which!included!a!period!marked!by!the!credit!crisis! and!the!implementation!of!real!time!trade!reporting,!found!that:! !

50%!of!all!trades!in!the!municipal!market!had!a!value!at!or!below!$25,000!

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Only!5%!of!trades!had!a!value!equal!to!or!in!excess!of!$490,000!

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50%!of!all!municipal!securities!traded!an!average!of!2.4!times!or!fewer!each!year!

Monthly!trade!data!compiled!by!SIFMA!showed!that!in!November!2015!82%!of!all! municipal!bond!transactions!were!under!$100,000!and!13%!were!between!$101,001!to! $500,000!in!the!month.!! Trading!volume!in!the!municipal!securities!market!declined!after!the!credit!crisis!as!the! worries!about!the!fiscal!condition!of!issuers!and!with!low!yields!reduced!investor! demand.!!(See!chart,!below.)!!Volumes!have!yet!to!return!to!the!highs!seen!in!the!summer!! Trade Breakdown November 2015

Trading Volume on the Decline SIFMA municipal securities trading data, Jan. 2007-Nov. 2015

Total trades 33,674

$700,000

Source; SIFMA

$600,000

Monthly(volume,(par(value(in($million( $500,000

Interdealer Trades 39%

$400,000

$300,000

Customer Bought 42%

$200,000

$100,000

Customer Sold 19% Ju l-0 Ja 8 n09 Ju l-0 Ja 9 n10 Ju l-1 Ja 0 n11 Ju l-1 Ja 1 n12 Ju l-1 Ja 2 n13 Ju l-1 Ja 3 n14 Ju l-1 Ja 4 n15 Ju l-1 5

7

08

n-

Ja

l-0

nJa

Ju

07

$0

Municipal Securities Issuance

Municipal Bond Mutual Fund Flows

$ billions, through Nov. 30, 2015. Source: SIFMA

$ millions, through Dec. 8, 2015 Source: ICI

2012

400.0 350.0

2013

2014

2015

2011

300.0 250.0 200.0 150.0 100.0 50.0 0.0

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 7!See!"Report!on!Secondary!Market!Trading!in!the!Municipal!Securities!Market,"!Eric!R.!Sirri,!Babson!College,!July!2014.!! This!report!was!commissioned!by!the!MSRB!and!is!available!on!its!site.!

©!Bryant!Park!Financial!Communications!2015!

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!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!Municipal Bond Market Briefing

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of!2007.!!But!issuance!has!picked!up!in!2015!and!seems!on!track!to!exceed!levels!last! seen!in!2012.!!Moreover,!mutual!fund!net!flows!have!recovered!from!a!midIyear!slump,! with!more!than!$6!billion!of!net!new!money!going!into!portfolios!so!far!in!the!fourth! quarter!of!2015.! Conclusion Regulators'!imposition!of!new!bestIexecution!standards!and!additional!disclosure! requirements!is!remaking!the!municipal!securities!market.!!The!changes!mean!that! market!participants!will!likely!step!up!adoption!of!electronic!trading!and!the!purchase!of! processing!and!monitoring!services!in!2016!as!they!adjust!their!compliance!and! oversight!to!meet!the!new!standards.!!Larger!broker!dealers!and!advisor!networks!that! are!able!to!spread!these!costs!over!a!sizable!franchise!will!reap!competitive!advantages! as!a!result!of!this!change.! At!the!same!time,!an!improving!fiscal!picture!for!states!and!cities,!plus!the!prospect!of! higher!yields,!could!help!reinvigorate!the!municipal!securities!market!in!2016.!!High! levels!of!volatility!in!the!equities!markets!may!also!drive!more!interest!in!this!fixedI income!sector.!! As!Morningstar!noted!in!a!Dec.!10,!2015!commentary:! Despite!a!few!negative!headlines!(Puerto!Rico,!Illinois,!and!Chicago,!to!name!a!few),!the! municipal!market!has!recovered!nicely!since!the!2008!crash!and!largely!remains! healthy...!California,!for!example,!topped!the!short!list!of![flagging]!states!following!the! crash,!but!budget!cuts!and!tax!hikes!helped!the!state!get!its!finances!in!line,!making!it!a! highIprofile!success!story.!

The!taxIexempt!market!has!seen!an!imbalance!between!supply!and!demand!in!recent! months,!the!report!suggests,!adding,!"that!tailwind!has!helped!municipal!bonds!and! funds!perform!well,!even!in!the!face!of!potentially!rising!interest!rates."!!A!sign!of!the! imbalance!was!the!narrowing!of!discounts!on!municipal!bond!closedIend!funds,!from!an! average!of!7%!at!the!end!of!2014!to!6%!as!of!November!2015,!the!fund!researcher!notes.!!! Though!longerIduration!municipal!bond!mutual!funds!will!see!a!slight!outflow!in!2015,! portfolios!in!Morningstar's!intermediate!national!category!had!attracted!$10.75!billion!in! net!flows!through!the!end!of!October!and!looked!set!to!end!the!year!on!a!strong!note.! ! End! ! ! ! ! ! ! ! ! ! ! ! ! !

©!Bryant!Park!Financial!Communications!2015!