By Campbell Pryde, President and CEO, XBRL US
The complexities of the municipal bond market make it challenging for users of bond data to quickly find what they need when searching in the Municipal Securities Rulemaking Board (MSRB) Electronic Municipal Markets Access (EMMA) system. A single bond issue can have more than one security, and more than one obligor. The obligor and issuer may be different entities, as in the case of so-called conduit issuers. The obligor may be an enterprise fund of a legal entity. The obligation may be restricted to a pledged revenue stream.
The Financial Data Transparency Act (FDTA) presents an important opportunity to enable easier, more concrete search capabilities at a granular level by leveraging entity identifiers and standardization of data. The XBRL data standard and the Legal Entity Identifier (LEI) can be used together to identify the issuer and obligor responsible for a specific security and associate an identifier for the security and the obligor to facts reported about the security to obligor relationship.
To explore the possibilities, we investigated four scenarios that can be found in the municipal marketplace. We modeled these scenarios to determine if the web of relationships could be untangled by using data standards and identifiers to allow EMMA users to search by issuer, security, or obligor to find the proverbial “needle in a haystack”:
- Issuer and obligor are the same legal entity. There is more than one security in the issuance.
- Issuer and obligor are the same. The bond can only be repaid through a specified pledged revenue stream.
- Issuer and obligor are different legal entities. There are multiple distinct obligors, as in the case of a municipal pool program or a joint action agency.
- Issuer is a legal entity. Obligor is an enterprise fund of a legal entity (but is not a legal entity itself).
The challenge is that obligated entities are not always legal entities, and may just be a fund associated with a legal entity. The XBRL standard has unique linking features that can establish relationships between for example, a government, and a proprietary fund; or a government entity and a pledged revenue stream. Mathematical and parent/child relationships can be established as well that further define the meaning behind the data.
We found that the ability to combine identifiers for securities and legal entities with a data standard that enables linking, is an effective, efficient strategy to define the complexities of municipal debt issuance. This approach has been used by public companies in disclosures for more than a decade. While municipal market participants often have complicated entity structures, given the presence of various funds and component units, standards and identifiers can be effectively employed to resolve these challenges.
This method will improve the efficiency of information exchange and provide municipal investors, analysts, issuers and obligors with greater flexibility and accessibility to securities related information.
To take a deep dive into the individual scenarios and how this would work, read: Identifying the Obligor for Municipal Securities July 2024
