The Securities Industry Financial Markets Association (SIFMA) is phasing out its indexes tracking auction-rate securities as the credit crisis renders the market inactive.

SIFMA, which maintains eight ARS indexes in partnership with Municipal Market Data, will begin terminating the indexes first with the SIFMA auction-rate preferred one-month index. The index will be published for the last time on April 8.

In a statement, SIFMA explained that reliable indexes need sufficient data points to represent the state of the market.

Because the volume of outstanding ARS is shriveling, SIFMA does not expect to have enough data points for indexes to be valid.

Once the number of securities in an index shrinks to 10, that index will terminate four weeks later, SIFMA said.

An ARS is a bond the interest rate on which resets regularly through an auction, effectively financing an issuer with a long-term loan at a variable interest rate.

The auctions take place anywhere from weekly to biannually. At each auction, the ARS changes hands from the current holder to the bidder, who assumes ownership of the bond until the next auction.

Nearly $307.2 billion in municipal ARS have been issued since 1988, according to SIFMA.
Auction-rate securities ran into a fatal stumbling block beginning in 2007. When an auction fails, the holder is stuck with the paper and the issuer is forced to pay a penalty rate, typically a multiple of the London Interbank Offered Rate or a commercial paper rate.

Failed auctions used to be rare. From the inception of ARS through 2006, only 13 auctions failed, out of thousands.

Thirty-one auctions failed in the second half of 2007, according to SIFMA. On Feb. 22, 2008, 258 of 286 auctions failed.

The universe of outstanding ARS has shrunk to $78 billion, according to the Municipal Securities Rulemaking Board.

Municipalities are no longer issuing ARS and are refunding outstanding securities. According to the Regional Bond Dealers Association, issuers have refunded or restructured $100 billion of outstanding ARS since the market collapsed.

“Due to the decrease in the amount of auction-rate securities issues outstanding and the outlook for future issuance, we recognize that there may not be enough data points to calculate these indices,” said Leslie Norwood, managing director and associate general counsel at SIFMA.
SIFMA’s eight muni ARS indexes track rates and activity for different issuers and auction periods.

Five of the indexes track ARS with seven-day auction periods and three have one-month auction periods.

Two indexes cover issues from California, Massachusetts, New Jersey, and New York. Five include all the other states.

Four indexes track preferred ARS. Five cover tax-exempt and two cover taxable.

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