Like a bug trapped in amber, crucial financial information about thousands of bonds in multi-billion dollar municipal bond portfolios held by millions of shareholders is in a similar fossilized state, embedded in decades-old technology.

The municipal bond market is a $ 3.9 trillion capital market with no digital financial data.

Financial reporting: digitized and mechanically readable

The Financial Data Transparency Act (S. 4295 – “FDTA”), pending before the Senate, offers a readily available solution for releasing such information, making it widely available and usable. In doing so, the FDTA expands the adoption of digitized, machine-readable financial reports. Based entirely on existing information that is already requested, collected and made available to anyone for free, this legislation is potentially transformative for the US $ 3.9 trillion municipal bond market. It inaugurates access and transparency in government financial reporting which, while standard for public corporations in the United States and the rest of the world, is unprecedented in the public sector.

All of these are the reasons why co-sponsors of the legislation, US Senators Mark R. Warner (D-VA) and Mike Crapo (R-ID) presented the bill. FTDA offers “increased transparency and usability for investors and consumers, along with simplified data submission and compliance for our regulated institutions,” Senator Warner offered. Senator Crapo noted that the bill would represent a major step forward in “making financial data used by federal regulators more accessible and accessible to the American public”, as well as “improving government transparency and accountability.”

Machine readable, digitized, standardized, transparency, accountability. All very technical and ambitious, but what does it practically mean for investors and regulators?

It means that all financial information available from cities and countries and authorities – assets, debts, tax and tax receipts, cash flows, and so on – can be easily downloaded or uploaded to a spreadsheet and treated like any other group of numbers. It means it can be easily classified, analyzed, plotted, plotted, graphed, and the dozens of other things you do with financial information to better understand what they mean. This is just for starters.

Just as an individual investor, investment advisor or portfolio manager cannot effectively make prudent investment decisions without this essential data in a readily accessible structured format, nor can regulators play the roles mandated by Congress to secure markets. fair and efficient without consistent and standardized financial data.

What is at stake for investors and capital market regulators?

Start with this number. Six hundred thirty-one eight hundred fifty-nine million. Sounds like one of those made-up numbers used to overdo it, right? Floating somewhere between a bazillion and a gazillion? It’s a little hard to take seriously.

Yet $ 631,859,490,332 is exactly the total amount of assets under management held in the open-ended funds of the top 10 municipal bond mutual fund managers as of July 2022, according to Morningstar Direct.

Now here’s another number: $ 908.9 billion. This is the total assets in all open municipal bond mutual funds calculated by the Federal Reserve at the end of the second quarter of 2022.

(For the intrepid, data on municipal bond holdings from the entire market can be found in the Municipal Securities section of the Federal Reserve System’s Board of Governors, Federal Reserve Statistical Release Z.1 Financial Accounts of the United States, Flow of Funds, Balance Integrated Macroeconomic Cards and Accounts).

Match the times and compare the Fed number with the previous AUM number. You’ll soon find that nearly 70% of all municipal bond mutual fund holdings are held by these top 10 fund managers.

This is an extraordinary concentration of activity in this sector of the financial markets, which raises a number of concerns for both investors and regulators. Not least are liquidity risk in general, liquidity during market dislocations, increased volatility, commodification of interest rates, a redefinition of systemic risk and a fair market price.

Keep it together

For mutual fund managers overseeing these huge amounts of other people’s money at that size, it becomes less of an investment strategy and more of an operational and logistical challenge.

Think about it for a while. A multi-billion dollar mutual fund has thousands upon thousands of holdings in its portfolio. Vanguard Tax-Exempt Index Fund is an example, but any of the funds in the Top 10 will do. It has $ 19.2 billion invested in 6,330 bonds (as of 09/30/22). Now expand it with the billions held in all the other funds that make up the Top 10. There are tens of thousands of bonds in those portfolios.

There is no way to manage portfolios of this size without well-established and coordinated structures to keep track of all the various aspects of managing billions of dollars, from trading to accounting, valuation, surveillance, analysis, compliance. .. the list goes on.

What holds all these pieces together is standardized, machine-readable and digitized data. Information on the acquisition of data on the bond, its coupon, maturity, purchase price, premium, discount, rating and calling characteristics. Data on interest accruals, capital gains, losses, dividends, shares purchased and shares sold. Data on valuations, variance and spread relations. Data on compliance metrics, fees and shareholder expenses.

All of these data fields and a host of others track every single component of managing thousands of bonds and billions of dollars.


Except for one data series.

A $ 3.9 trillion capital market with no digital financials

There is no source of readily available, comprehensive, digitized, downloadable and structured structured financial data on the underlying issuers of the bonds. Nobody. Not by the Securities and Exchange Commission, not by the Treasury Department, not by the Federal Reserve Board, and not by four other capital market regulators listed in the FTDA.

Not even the Municipal Securities Rulemaking Board, the regulatory agency with a Congressional mandate to “protect municipal bond investors, municipal entities, obligated persons and the public interest.” Not even the MSRB’s central disclosure repository for the municipal bond market, EMMA, where nearly all financial reports of municipal bond issuers must be filed. From states to cities, from cities to authorities, all their financial information stored in EMMA is in an unstructured format: PDF.

A PDF is not scanned data. Numbers aren’t even actual numbers, just pictures of numbers, pictures made up of pixels, like a picture you take with your camera. It is not directly convertible into digital data. As research has shown, even the best attempts to scrape PDF to digitize data have serious shortcomings. Most of the time, to convert information on PDF pages into digital data, you need to manually enter it into a spreadsheet.

Like a bug trapped in amber, crucial financial information on tens of thousands of bonds held in multi-billion dollar investment portfolios – essential information for valuing, monitoring, accounting and valuing these investments held by millions of mutual fund shareholders – is locked down as a relic buried in lucite.

A simple solution

It is a simple solution. In general, this financial information is already collected as data and organized to meet the widely followed rules established by the Government Accounting Standards Board as generally accepted accounting principles. It requires only a modest effort to digitally label this data, linking it to already well-defined GAAP categories.

That’s all this legislation gives regulators the ability to request. No new disclosures. No new authority. No changes in data governance. Just more information available, for free, that any investor with a computer can use, from multi-billion dollar mutual fund managers or individual investors, in the $ 3.9 trillion municipal bond market.

Transparency just a click away.

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