August 13, 2009

 The Honorable Timothy F. Geithner

 Secretary

 U.S. Department of the Treasury

 1500 Pennsylvania Avenue, N.W.

 Washington, D.C. 20220

Dear Secretary Geithner:

The MSRB has been following with interest the development of the Administration’s 

proposal for the establishment of a comprehensive regulatory framework for over-the-counter 

(OTC) derivatives, most recently articulated in the proposed legislation sent to Congress on 

August 11, 2009. The proposed legislation makes clear that you are aware of the extensive use 

of derivatives by state and local governments, particularly interest rate swaps designed to hedge

the risk of interest rate changes in variable rate demand obligations (VRDOs). There also is a 

market in credit default swaps (CDS) for which the reference obligations are municipal bonds

or a portfolio of municipal bonds. We refer to those CDS as “muni CDS.” 

As you know, municipal derivatives are not currently defined as securities and, therefore, 

not within the jurisdiction of the Municipal Securities Rulemaking Board (MSRB)1. However, 

despite this fact, the MSRB has long emphasized to municipal market participants the importance 

of understanding derivatives and their risks, and of holding derivatives players to the same 

standards as those in the municipal bond market.

Because of the prevalence of municipal derivative activity, and the current lack of 

regulatory oversight of these contracts, in a February 6, 2009 letter to the chairmen and ranking 

members of the Senate Banking Committee and House Financial Services Committee (on which 

you were copied), the MSRB recommended that “derivative instruments based on municipal 

securities should be subject to the same comprehensive regulatory framework that may be 

 

1 The Municipal Securities Rulemaking Board (MSRB) is a self-regulatory 

organization established by Congress in 1975 under Section 15B of the 

Securities Exchange Act of 1934 to develop rules for securities firms and 

banks that underwrite, trade, and sell municipal securities. 
developed for swaps and other types of derivative financial products in other markets . . . .” 

The MSRB noted that:

[t]he proposals under discussion for increased oversight of the derivatives market 

includ[ing] the development of a central clearinghouse for . . . CDS; the use of a 

central counterparty; filing disclosures by hedge fund managers, brokerages, and 

institutional investors; disclosure by CDS dealers of their trades and positions; and 

minimum capital reserves . . . appear reasonable, appropriate and worthy of further 

study. Should enhanced disclosures in derivative instruments be a part of any 

regulatory scheme, the MSRB is well poised with its [Electronic Municipal Market 

Access] (EMMA) system to provide disclosures of municipal derivative contracts 

and provide the necessary transparency for our market.

EMMA is the repository for trade data about municipal securities transactions, offering 

documents for new issues of municipal securities, advance refunding documents, and continuing 

disclosure about municipal securities. EMMA already accepts voluntary issuer disclosure 

concerning derivative transactions through its continuing disclosure system. While municipal 

derivatives disclosure is not mandated, many investors consider it material to their investment 

decisions and have recommended that issuers use EMMA as a means to disseminate such 

disclosure to all investors.

The MSRB continues to consider it essential that all municipal derivatives counterparties 

be well-informed about the risks of their derivatives contracts, which often are quite complex. 

We note that the proposed legislation would require the Commodity Futures Trading Commission 

and the Securities and Exchange Commission to adopt business conduct standards for derivatives 

dealers, which would require disclosure to counterparties of material terms and risks. This 

proposal is consistent with our principles of fair dealing, under which municipal securities 

underwriters should disclose the material facts (including affiliations or other potential conflicts 

of interest, fees earned, etc.), implications, and risks of complex derivatives transactions that are

integral to municipal securities transactions. In addition, we reiterate our position stated earlier 

this year, wherein the MSRB Board called for bringing derivative advisors in our market under a 

comprehensive regulatory scheme including professional qualification requirements, pay-to-play 

restrictions, and fair dealing responsibilities.

We would welcome the opportunity to meet with you or your staff to discuss issues unique

to the municipal derivatives market.

Very truly yours,

 

Ronald A. Stack

Chair
Cc: Mary L. Schapiro, Chairman, U.S. Securities and Exchange Commission

Gary Gensler, Chairman, U.S. Commodity Futures Trading Commission

Ben S. Bernanke, Chairman, Federal Reserve Board

William C. Dudley, President and CEO, Federal Reserve Bank of New York