Municipal bond investing

The markup rule for municipal bonds

Cadmus Hicks, CFA, PhD
Manager of Performance Risk Analysis, Market Strategist,  Nuveen Asset Management
closeup of blueprint
In this article
  • New requirements by the Municipal Securities Rulemaking Board (MSRB) on the markup rule
  • How are special situations handled
  • The implications of the markup rule

On November 17, 2016, the securities and exchange commission approved a proposal by the Municipal Securities Rulemaking Board (MSRB) that would require dealers to post on the confirmations of non-institutional customers the amount of the dealer’s markup or markdown on the municipal bond transactions for which it acted as principal (cases where the dealer owned the bond at some point in the transaction).

What are the new requirements?

The change, which becomes effective on May 14, 2018, involves amendments to MSRB Rule G-15 (Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect to Transactions with Customers), and Rule G-30 (Prices and Commissions). The markup or markdown (hereafter called the markup) must be expressed as a dollar amount and as a percentage of the price used in calculating the markup.

In addition to including the markup on certain trades, confirmations must also contain a citation of, or an electronic link to, the location on the MSRB’s Electronic Municipal Market Access System (EMMA) where the customer can find information on the price at which that particular security has traded. The reference to EMMA is mandated for all trades with retail customers, not just those that require publication of the markup.

Disclosure of the markup would be mandated in cases where:

The price of the dealer’s transaction away from the retail customer is presumed to be the basis for calculating the markup. An alternative prevailing market price (PMP) will be used to calculate markups in cases where the dealer’s cost to purchase, or proceeds from sale, do not represent the value of the bond at the time of the transaction with the customer. The use of PMP would be appropriate if, between the times of the two transactions, there was a significant change in the general level of interest rates, or the credit of the bond’s obligor changed, or there was news about the obligor that affected the perceived value of its securities.

Under such circumstances, the dealer must use the following indicators, in this order of priority, to establish the PMP:

  1. Inter-dealer trades.
  2. Transactions with between dealers and institutional investors.
  3. Bid-ask quotations.
  4. Prices of similar securities.
  5.  Prices determined by an economic model, such as those used by pricing services.

How are special situations handled?

In cases where the dealer acquired or sold the bond in a transaction with an affiliated trading desk, the cost or proceeds of the trading desk must be used in calculating the markup.

If the dealer buys a bond from one retail customer and sells that same bond to another retail customer, an imputed markup and markdown must be allocated between the two trades.

If a dealer generates confirmations promptly at the time of the trade, rather than waiting until the end of the day, the dealer may not know at the time of the trade whether it will have another trade that same day on the same side of the market as the customer. To comply with the new rules, the dealer must assume that it will have such a complementary trade at some point during the day. If it has not yet engaged in such a complementary trade, the dealer will need to establish a PMP in accordance with the hierarchy of pricing sources.

The question has arisen as to whether a markup must be included on confirmations for separately managed accounts, where an investment adviser has full discretion to buy and sell bonds for the client of a dealer, and where the investment adviser does not charge a markup, but is compensated via a fee on assets under management.

The MSRB addressed this situation in a question and answer notice published 12 Jul 2017, writing that “Under the rule, registered investment advisers are institutional customers; accordingly, mark-up disclosure is not required when dealers transact with registered investment advisers. This is the case even where the registered investment adviser with whom the dealer transacted later allocates all or a portion of the securities to a retail account or where the transaction is executed directly for a retail account if the investment adviser has discretion over the transaction.”

What are the implications?

Since 2005, the MSRB has operated its Real-Time Transaction Reporting System, to which dealers have been required to report prices under MSRB Rule G-14. Retail investors have been able to use the EMMA system free of charge since 2009 to see the prices at which their securities have traded. With this new rule, the SEC wants to make sure that investors understand the significance of those reported prices when assessing the costs of their transactions.

In its 2012 report on the municipal market, the SEC recommended that, “The MSRB should consider requiring municipal bond dealers to disclose to customers, on confirmations for riskless principal transactions, the amount of any markup or markdown.” The new rules are intended to fulfill that goal.

Investors will now be in a better position to evaluate the costs of trading in municipal bonds. Such evaluations can be most important in cases where the amounts invested are small, since markups tend to be higher for smaller transactions. Thus, in certain circumstances investors may conclude that other vehicles for investing in municipal securities are more efficient than direct purchases of municipal bonds.

Related Articles
Weekly Fixed Income Commentary Treasury yields decline due to global growth concerns
Municipal bond investing Two is greater than one
Investment Outlook Changing dynamics boost the municipal market

For more information, please consult with your financial advisor and visit


A word of risk
This report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any investments or related securities. The analysis contained herein is based on the data available at the time of publication and the opinions of Nuveen Research. Information is current or relevant as of the date indicated and such information may become outdated or otherwise superseded at any time without notice. This analysis is based on numerous assumptions. Different assumptions could result in materially different outcomes.

The report should not be regarded by the recipients as a substitute for the exercise of their own judgment. An investment in any municipal portfolio should be made with an understanding of the risks involved in investing in municipal bonds. There are risks inherent in any investment including the possible loss of principal. Bonds and other fixed-income investments are subject to various risks including, but not limited to interest rate risk or the risk that interest rates will rise, causing bond prices to fall; and credit risk, which is the risk that an issuer will be unable to make interest and principal payments when due. The value of the portfolio will fluctuate based on the value of the underlying securities. This information should not replace an investor’s consultation with a professional advisor regarding their tax situation. Nuveen Asset Management is not a tax advisor. Investors should contact their tax advisor regarding the suitability of tax exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer.

CFA® and Chartered Financial Analyst ® are registered trademarks owned by CFA Institute.

Nuveen Asset Management, LLC, a registered investment adviser, is an affiliate of Nuveen, LLC.