1. What MSRB fees are impacted by the proposed rule change?
The MSRB’s proposal would change the rates of assessment for the MSRB’s Underwriting Fee, Transaction Fee, and Trade Count Fee described in MSRB Rule A-13 (collectively, the “Market Activity Fees”) and the MSRB’s Municipal Advisor Professional Fee described in MSRB Rule A-11. The revised rates would become effective as of January 1, 2024, and remain effective for 12 months through December 31, 2024.
2. What is the Annual Rate Card Process?
The Annual Rate Card Process allows the MSRB to adjust the rates of assessment for the Market Activity Fees and the Municipal Advisor Professional Fee each year using a process that is more transparent and predictable for the MSRB’s stakeholders while retaining the MSRB’s ability to flexibly react to changing circumstances when establishing reasonable fees on regulated entities. It enables the MSRB to better align its revenues with its near-term funding needs and to quickly return any additional revenue generated due to volatility in market activity. In the past, the accumulation of excess reserves has led to the need for significant and ad hoc temporary fee reductions or rebates.
The Annual Rate Card Process provides an annual mechanism for the MSRB to return excess fee revenue in the immediately following year by decreasing the rate of the related fee. For example, in 2023, trading activity significantly outperformed the MSRB’s revenue budget. The proposed rates for 2024 reduce the Transaction and Trade Count Fees proportionally to return the excess revenue assessed. Conversely, when there is a shortfall in the budgeted versus actual revenue generated for the respective fee, such as with the Underwriting Fee in 2023, the shortfall will be captured in an increase to the next year’s rate.
3. Why did the MSRB establish the Annual Rate Card Process?
In support of its focus on financial stewardship, the MSRB Board of Directors conducted a full review of its fee structure that included extensive engagement and outreach with stakeholders. The Board approved changes to its fee setting process in January 2022 to advance its goals of maintaining fair and equitable fees among regulated entities and reducing reserve targets, while also ensuring that the MSRB has sufficient revenue and organizational reserves to maintain its operations, without interruption, even in economic downturns and other unforeseen circumstances. This new approach of annual rate setting allows the organization to more effectively and efficiently manage its funding and reserve levels needed to fulfill its statutory mandate. Specifically, this process eliminates the potential for over accumulation of reserves through timely rate adjustments that abate the impact of excess revenue while assuring funding of the MSRB’s annual budget.
4. What are the amended fee rates in the proposed rule change?
The following proposed rates of assessment would become effective as of January 1, 2024, under the proposed rule change.
| Basis | Current 2023 Rates |
Proposed 2024 Rates |
Percent Change | |
| Underwriting Fee | Per $1,000 Par Underwritten | $0.0297 | $0.0371 | 25% |
| Transaction Fee | Per $1,000 Par Transacted | $0.0107 | $0.0091 | -15% |
| Trade Count Fee | Per Trade | $1.10 | $0.57 | -48% |
| Municipal Advisor Professional Fee | Per Covered Professional | $1,060 | $1,160 | 9% |
5. How were the proposed rates for 2024 calculated?
Consistent with the MSRB’s Funding Policy, the rates reflect the formulaic results of executing the Annual Rate Card Process.
Rates were set based on several inputs:
- Annual expense budget for Fiscal Year 2024;
- Reserves variances versus target (not applicable in 2024);
- Expected revenue from sources other than the Market Activity Fees and Municipal Advisor Professional Fee;
- Variances between actual and budgeted Market Activity and Municipal Advisor Professional Fees in Fiscal Year 2023; and
- Forecasted volume for Fiscal Year 2024 for the basis for each of the Market Activity Fees and the Municipal Advisor Professional Fee.
Each fee rate was determined based on the total amount of revenue each fee was expected to contribute and the expected volume of activity underlying the fee. The amount of revenue each fee contributes is designed to be a fair and equitable balance, in line with recent historical precedents.
6. Is there a cap on how much fees could increase or decrease in a given year?
As prescribed by the Funding Policy, fees are subject to two maximum caps on increases from year to year, but there are no limits on potential fee decreases. The first cap on fee increases is a 10% cap on the maximum increase in the targeted revenue for each fee based on the highest amount of such targeted revenue in the previous two annual rate cards. The second cap is a 25% cap on the maximum increase in the assessment rate for each fee based on the highest assessment rate in the previous two annual rate cards. Accordingly, the proposed 2024 rate for the Underwriting Fee is capped at a 25% increase over the 2023 rate.
7. How did revenue variances in Fiscal Year 2023 impact the proposed rates for 2024?
In Fiscal Year 2023, the Transaction Fee and Trade Count Fee had surpluses versus budget of $2.73 million and $4.35 million, respectively, which decreased the proposed rates for 2024 to return these same amounts of excess revenue. The Underwriting Fee had a shortfall of $3.37 million versus budget and the Municipal Advisor Professional Fee had a shortfall $0.04 million versus budget in FY 2023. These rates were increased to collect the shortfall in 2024.
The initial calculation for the proposed 2024 Underwriting Fee resulted in a rate of assessment that exceeded 25% over the 2023 Underwriting Fee rate. As a result, the Underwriting Fee rate for 2024 was capped at a 25% increase over the 2023 rate. Due to this limitation, the MSRB anticipates that the full amount of the shortfall for the Underwriting Fee in 2023 will not be fully recaptured in 2024 and the remaining shortfall will carry over into the calculation for the next annual rate card in 2025.
8. Why are some fees increasing or decreasing more than others?
In addition to the impacts of the revenue variances in Fiscal Year 2023, the proposed rates for January 1, 2024, through December 31, 2024, are based on (i) projected volume levels for each fee category and (ii) the relative contribution of each fee to overall revenue. The MSRB used historical and current data to inform the expectations for volume of activity for the coming fiscal year. The MSRB also maintains a fair and equitable balance of revenue by setting the relative contribution of each fee in line with recent historical precedents. The MSRB intends to maintain fairness and equity in fees through relatively stable contribution targets.
Annually, the MSRB considers the historical revenue performance of each fee over time to assess whether there is a durable, material shift in market structure or circumstances that would indicate that the expectations for the relative contributions from one or more fees are no longer reasonable or appropriate. For the initial fees established in 2022 under the Annual Rate Card Process for 2023, the MSRB established contribution targets based on the distribution of revenue assessed over the prior two completed fiscal years (Fiscal Year 2020 and Fiscal Year 2021). Since that time, material changes in the municipal market and broader macroeconomic conditions, including significantly higher interest rates, have materially shifted the balance of market activity. Specifically, primary market activity has been significantly lower and secondary market activity has been significantly higher. As a result, the MSRB determined that a durable, material shift in market structure or circumstances warranted adjustments to the contribution targets. For 2024, the relative contribution for the Underwriting Fee was changed from 37% to 30%, the Transaction Fee was changed from 39% to 41% and the Trade Count Fee was changed from 16% to 21%. The relative contribution from the Municipal Advisor Professional Fee is unchanged at 8%.
9. What factors could cause fees to increase or decrease in the coming years?
As previously discussed, rates for Market Activity Fees and the Municipal Advisor Professional Fee can increase or decrease in a given year. Factors that would cause all rates to increase would be an increase in MSRB annual expenses, replenishing reserves to target levels or planned increases to reserve levels. Such increases would impact all rates proportionally with respect to the total amount of revenue each fee is expected to contribute. Individual fee rates may independently increase or decrease depending on the anticipated or actual volume levels or market activity performance. Even if individual rates fluctuate, the overall amount of revenue contributed by the Market Activity Fees and Municipal Advisor Professional Fee will remain proportionate, fair and equitable.
10. When does the MSRB anticipate modifying these rates again?
Consistent with the Board’s adoption of the Annual Rate Card Process, which will adjust these rates annually on a calendar year basis going forward, the MSRB currently anticipates that it will seek to amend the rates of assessment for the Market Activity Fees and the Municipal Advisor Professional Fee near the end of calendar year 2024. That proposed rule change would propose rates for calendar year 2025 to be effective as of January 1, 2025, through December 31, 2025.
11. What happens next?
The MSRB submitted the proposed rule change to the SEC for immediate effectiveness, as is the typical practice for fee filings. The MSRB welcomes stakeholder feedback. Stakeholders have an opportunity to comment on the proposed changes before they are scheduled to become operative on January 1, 2024.
