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As a provider of software and data to the municipal market, we have a unique perspective on this market as we see and hear what our diverse groups of clients are saying thereby allowing us to consider multiple voices as we assess the current environment and look ahead as to how Lumesis can continue to provide beneficial tools to our market. Taking our cue from this diverse group of clients, below, we offer a perspective based on what we are hearing around Trading Activity and Risk Communication, volatility in Secondary Market Pricing, the importance of indicative scales, and diligence in the New Issue Market and we conclude with a preview of Lumesis’ enhanced debt map module.
Contextually, the market chatter we hear contemplates the issues we are reading about -- Interest rates, inflation, market volatility, labor force, supply chain issues, and more. As we know, the world and the fixed income municipal market are revisiting market dynamics not experienced in some time. For some, this is a time to hunker down while, for others, it is a time to leverage skill sets and strategies that have not seen the light of day in some time. For most of us, it is a reminder that markets do not always go up and that planning, strategy, and the ability to adapt are key to our professional survival.
Trading Activity and Risk Communication
Secondary Market Trading and Pricing:
Market outflows, interest rate movement, and volatility, have Increased trading activity and created a dynamic not seen in some time. Some clients talk about the need to sell for liquidity purposes and others see an opportunity to strike while the iron is hot -- take advantage of market levels. In both cases, participants are looking for data and information in as close to real-time as possible – “am I getting my face ripped off” (where are comparable bonds trading) or “should we buy at this level? where are comps trading?”
We are seeing increased use of our DIVER Secondary Pricing Tool and Muni Trade Ticker by traders and fund/portfolio managers. Having a real-time understanding of the market for user-defined market segments and/or target bond(s) is especially critical in the current environment. The fully configurable Muni Trade Ticker is being used by traders demanding real-time trading activity for distinct segments, obligors, or bonds. “I can run multiple Tickers simultaneously, configure the Ticker to display the data I want to see and, for taxable traders, Lumesis got it right -- calculating the average life spread for term bonds” (in addition to the final maturity methodology).
Clients also leverage the direct link from the Muni Ticker to the Secondary Pricing Analysis. “When I see something interesting on the Ticker, I can jump right to an analysis of that bond and comps. Comp trade metrics and transparency to all underlying bonds and trades as well as, for thinly traded bonds, trades from other bonds in the issue.” To provide this information, Lumesis uses the target bond’s structural and credit characteristics to identify recent trading activity for the target bond and bonds that are comparable. The output -- greater insight, intelligence, and trading ideas by making the trader and PM aware of other, comparable bonds, that are trading.
Risk Communication:
Let’s start with the increase in trading-related activity we are seeing thru our DIVER Advisor platform (and as reported by SIFMA). Advisor helps clients address their MSRB Rule G-47 time of trade disclosure obligation. In addition to efficiently aggregating information required to be communicated to the retail and non-SMMP clients of our users, Advisor allows each client to customize risk factors for communication to their clients.
As a result of interest rate increases and a sharp change in market dynamics, we have seen changes to descriptions and emphasis on risk factors, including, but not limited to, interest rate risk, market discounts, and, of course, de minimis risk.
We have also been in touch with our client base regarding de minimis risk and how we can help them (in addition to advising their clients of risk). We are actively exploring adding a de minimis calculation for every municipal bond in our Advisor platform.
New Issue Market – Indicative Scales and Diligence are More Important Than Ever:
Much has been written about the new issue market volume decline to date and what is expected for the rest of 2022 along with various reasons why. We want to tackle this subject based on what we are hearing from clients and other market participants.
Price Discovery, Scales, and Sales:
Market volatility has made price discovery and market intelligence more important than ever. Underwriting desks, overrun by scale requests previously, are seeing even greater demand for a market read, repricing, and a look at alternative structures. Add to that, the MSRB’s Request for Comment on Compliance Resources for New Issue Pricing (one assumes the MSRB will provide the market with its findings shortly), and the need to efficiently access comprehensive data and information is more critical than ever.
We have seen a significant uptick in firm and user adoption of the DIVER Pricing Platform. Users create pricing analyses for deals they are considering bringing to market and explore multiple structures. “The ability to update scales with one click has been especially valuable. I get current data to update the scales – so important in today’s environment.” The Pricing Platform is built on two foundational principles: full transparency to all comparable bonds and trades in the analysis and adjustable bond and trade parameters that allow the user to employ their professional judgment.
Another important use case embraced by clients has been the adoption and use of templates. “Templates provide our banking teams a read of the market segment of interest to them without having to ask [the desk]. The fact that our team can get a current read of their market and how their client’s bonds are trading in the secondary makes them smarter and more prepared and allows us [the desk] to focus on deals pricing this week.”
The MSRB’s RFC [insert title], has also driven some use as compliance professionals and others want to stay one step ahead if asked for support around new issue pricing. We all are awaiting the MSRB’s response to the RFC.
Rounding out the new issue pricing discussion is what we have learned from clients on the sales desk. More than ever, sales professionals require a deeper understanding of where like bonds are trading (primary and secondary) and where the bonds of new issues are trading in the secondary. Sales professionals have told us they are using the Muni Ticker to set a market segment Ticker and an obligor-specific Ticker to have real-time insight into where the market is to support their efforts.
Tight Margins, Hiring Pains, and Levering Resources:
The current market environment has exacerbated already contracting margins. Further, the ability to attract and retain talent has been impacted by a number of factors, including a limited labor force, compensation demands, work-life balance, and work location demands.
At an industry conference earlier this year, a panel of Heads of Public Finance was discussing issues they faced around attracting new hires punctuated by the above-referenced factors. The panelists went on to discuss how to best leverage fiscal resources in the context of hiring and deploying technology and other third-party resources. “Where technology can allow us to do and access more data and information more expeditiously and where tasks are manual or menial, we must lever these tools or risk losing people.” The competition for people is fierce – minimize the intellectual aspect of the job and you risk losing the resource.
To that end, we have seen a number of new clients engage with us for services they said their firm would not, heretofore, outsource – SEC Rule 15c2-12 reasonable diligence. The explanation is straightforward – “we don’t need analysts and bankers to be experts at doing a 15c2-12 analysis, they need to understand the rule and review the results. We need to engage them on a more meaningful level or someone else will.” The recipe has proven to be a win for our clients – they are saving money and having their people engage in a wider range of substantive activities.
Finally, while issuance is down in 2022, the importance of continuing to conduct reasonable diligence has never been more important. Starting with the obvious, MCDC and, more recently, SEC actions against issuers. The MCDC experience is seared in the mind of many. Beyond that, the current market environment demands comfort and confidence that the obligated party has and will meet their disclosure obligations. The current economic environment and the end of Covid relief will undoubtedly impact obligated parties in ways anticipated and unanticipated.
Tight Margins, Hiring Pains, and Levering Resources:
Throughout our 12-year history, Lumesis has focused on being responsive to the demands of our clients and our market. Looking ahead, in addition to enhancements to our existing platforms, Lumesis will be launching a Debt Analysis tool. The new tool will feature the ability to easily search for and select bond issues and generate debt maps, debt summary reports, and cash flow schedules. These debt maps and profiles will be available for all municipal issuers with outstanding debt. The platform will generate these reports on demand and will permit customization/configurability of content, saving bankers, analysts, and municipal advisors significant time and effort.
That’s just a sneak peek as there is more to come this year and as we look forward to 2023.
About Gregg Bienstock
CEO. Lumesis, Inc.
Gregg is the CEO and a Co-Founder of Lumesis. He is a frequent speaker and writer on municipal market technology and compliance. Prior to Lumesis, Gregg spent more than thirteen years with Ambac Financial Group where, most recently, he was responsible for Strategic Initiatives and previously served as Chief Administrative Officer and Employment Counsel.
Gregg is a 1991 graduate of Brooklyn Law School. He received his B.S. in Business and Economics from the University of Maryland. He serves as a member of the Board of Directors of The Children’s Village.
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