Data providers target data deficiencies in muni bonds market

Quarterly reported financials, earnings calls, and other kinds of disclosures are valuable resources for investors for cross-checking the creditworthiness of corporate bonds. The municipal bond market, however, has historically been less transparent, as municipalities are not required to make financial disclosures to the same extent that public companies are.

While the US Securities and Exchange Commission (SEC) requires large, publicly reporting companies to disclose information on an ongoing basis, the deadline for financial information that is not reported in annual accounts can be submitted “when and if available.”

With a shortage of reported data on municipal bonds, revenue predictions are harder to make, and fewer investors want to take risks on these instruments, resulting in a lack of liquidity in the muni bond market. The market is modernizing, however, with the electronification of the fixed-income markets via trading venues like MarketAxess and the Intercontinental Exchange (Ice) and efforts from data providers to improve transparency in muni bonds.

Lynn Martin, president of fixed income and data services at Ice, says there has been a long-standing demand from the market for revenue and financial reporting from municipalities. “There are not the same timeliness requirements around the reporting of financial information [as there are around other securities]. There is not the same level of transparency in the muni market that exists in the corporate market,” she says.

Ice is now looking into ways to collate unstructured data from providers like ADP, a technology company specializing in human capital data, to gain more insight into municipal issuers’ creditworthiness. From ADP data, Ice can see how much tax revenue a corporation is contributing to a specific jurisdiction, county, or zip code. “We can see what the demographic of that jurisdiction looks like by looking at whether there are people claiming residency in those places, and by looking at the average payroll in that area,” Martin says.

The data science team at Ice uses artificial intelligence (AI) to aggregate this unstructured data. The process of cleaning the data varies by dataset, but the first step is to put it into a structured format to see if any historical correlations can be made. Ice looks at reference data and evaluated pricing to map a security to various characteristics, and then comes up with what it deems to be fair market value. Ice has an evaluated pricing product that provides end-of-day and continuous pricing for 1 million US municipal bonds.

Mark Watters, co-founder of London-based fixed-income trading software provider AxeTrading, says that “muni bond trading is starting to catch up with the other segments of the bond market. The challenge is, as always, cost and benefit and the need to choose the right systems.”

The trading software provider is seeing better use of data-driven approaches to increase transparency, automation, and electronic trading. But he says the range of sources for quality municipal bond data is still limited in comparison to corporate bonds and selecting the appropriate data and the right data providers is “a crucial part of successful trading.”

Watters says each data provider has its own distinct offering, and AxeTrading works with its clients at banks, buy-side firms, and agency brokers to choose which is best for them, whether it’s from Bloomberg, IHS Markit, Tullet Prebon Information, or Ice Data Services.

But as the demand for more data grows, Watters says the range of sources for quality municipal bond data is still limited in comparison to corporate bonds. “We are seeing a growing demand from muni bond market participants for quality data to be integrated within their trading workflow. This ranges from more accurate pricing to algorithmic quoting and trading automation,” he says.

Overbond is an AI-driven data and analytics company providing trade automation solutions for the global fixed-income markets. Overbond CEO Vuk Magdelinic says the future of a data-driven municipal bond market looks “something similar” to a data-driven corporate bond or government bond market. “While data transparency is definitely an issue in the corporate bond markets, the muni markets are more opaque at this time,” Magdelinic says. Over the last few years, greater automation and digitization have come into the corporate bond markets, but the muni markets have “lagged,” he says.

He also says that once real-time data becomes mainstream for muni bonds, Overbond and other trade automation providers could then apply risk analysis, such as liquidity scoring, to isolate which tier of muni bonds is eligible for trade automation based on their liquidity. To get to that point, he says that “data assembly needs to be further enhanced to include settlement layer data, from the Depository Trust and Clearing Corp. (DTCC), for example, in order to bridge the severe illiquidity gaps that are common in the muni market.” As a post-trade financial services company, the DTCC holds trade settlement data.

Improving Emma

While these companies are trying to step into the muni data breach, there is a free, public source of data on the muni bond market, via the Municipal Securities Rulemaking Board (MSRB), a self-regulatory organization and independent provider of information on the US municipal market. The issue with this data, however, is that most of it is unstructured, and unsuitable for, say, algorithmic pricing.

The MSRB provides free, real-time trade data, as well as financial disclosures for more than 50,000 different state and local government entities that issue bonds in the US via its Electronic Municipal Market Access (Emma) system. When Emma was launched in 2008, it corrected the “glaring deficiency” that unlike investors in corporate securities, who have direct access to free company information via the SEC’s Edgar platform, muni investors had no way of getting information easily.

However, the filings made to Emma are primarily in formats like PDF, rather than machine-readable formats, and more recently, it has become clear to the MSRB that it should focus on modernization efforts.

Brian Anthony, chief data officer at MSRB, says the organization wants to work more closely with market participants on a technology strategy to enhance the value of Emma. “We see great potential to leverage cloud technology, artificial intelligence, and machine learning to unlock this data,” Anthony says.

The MSRB in April 2020 announced that it had formed a new advisory group to help migrate Emma to the cloud and enabled big data analytics and more contemporary market transparency tools. In July 2020, the MSRB’s board approved $10 million of reserves for funding a multi-year strategic investment to modernize its market transparency systems via cloud migration.

The MSRB is also developing Emma Labs, a hub where stakeholders can collaborate on projects that could improve Emma.

Covid-19 Hits Munis

The Covid-19 pandemic made liquidity even harder to access, Watters at AxeTrading says, “The muni market has been under pressure in the last few months particularly, and the past year more generally, as issuers suffered in the pandemic because of lower revenue and, in contrast to the US federal issuer, find it more challenging to tap capital markets.”

Martin says it’s too soon to tell what the knock-on effects of the coronavirus have been on the muni market, but specific instances of rail companies and transit systems like the MTA in New York, which lost revenue as commuters stayed home, could point to the similar impact on municipalities.

“New York City, for example, is a big issuer of debt, and due to the coronavirus, revenues in that area are very much down. Restaurants are closed, Broadway is closed, and you have people and families leaving the city, which impacts the revenue base of a municipality,” Martin says.

Using alternative data (as Ice is doing with ADP) to ascertain how many people are claiming residency in a particular area could give another layer of transparency into the revenue predictions associated with that municipality.

Looking for alternative data to shed light on the impact of coronavirus in the financial markets has been a theme of 2020. Martin says the municipal data product is the first project Ice is doing with ADP, but the firm is continuing to explore other ideas.