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Federal Register / Vol. 86, No. 44 / Tuesday, March 9, 2021 / Notices
khammond on DSKJM1Z7X2PROD with NOTICES

economic downturns and other unforeseen disruptions.13
Establishing the Reserves Target. The Board establishes a reserves target to ensure that the organization maintains a prudent level of liquid funds to fund operations and ensure the long-term financial sustainability of the organization, taking into consideration a range of reasonably foreseeable market conditions and expected expenditures over a three-year time horizon. The reserves target is determined after conducting a detailed and comprehensive analysis of the liquidity needs in four categories: 1 Working capital, 2 risk reserves, 3 strategic investment reserves, and 4 regulatory reserves.14 The Board refines the reserves target on an annual basis, being vigilant of the dynamic impact of market activity on the MSRBs financial position and cognizant of the variability of such future market activity.15
Monitoring and Management of Reserves. The Board monitors the actual reserves balance on an ongoing basis, and MSRB staff actively manages the financial position of the organization in accordance with the Board-approved target. As necessary or appropriate, the Board is prepared to approve the use of reserves to mitigate unforeseen revenue fluctuations and otherwise maintain funding for services essential to the efficiency of the municipal market.16
Conversely, when actual revenue exceeds expenses, the MSRB generates additional reserves. In the circumstances of such an operating surplus, the Board balances the need to 13 See MSRB Funding Policy, available at http
msrb.org/About-MSRB/Financial-and-OtherInformation/Financial-Policies/
Funding%20Policy.aspx. The MSRB publishes its annual audited financial statements, annual fiscal year budgets, and key financial policies on its website. The Board believes that this transparency provides municipal market participants and other stakeholders insight into, and a clearer understanding of, how the Board utilizes its resources in fulfillment of the MSRBs statutory mandate.
14 Id these four categories are identified in the discussion under Reserves Considerations.
15 See MSRB Fiscal Year 2021 Budget for a further discussion of the MSRBs budget and reserves, available at http msrb.org//media/Files/
Resources/MSRB-FY-2021-BudgetSummary.ashx?la=en.
16 For example, in 2010, after several years of heavy investment in the technological infrastructure needed to launch the MSRBs Electronic Municipal Market Access EMMA
website, the MSRBs financial reserves levels had dropped below the then reserves target that the MSRB had previously established. As a result, replenishing the MSRBs reserves became a priority.
The following year, the MSRB increased the transaction fee under Rule A13 and began assessing a new technology fee for dealers under the same rule. See Release No. 3463621 Dec. 29, 2010, 76 FR 604 Jan. 5, 2011 File No. SRMSRB
201010.

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maintain sufficient reserves in relation to ongoing funding demands, while also examining the fair and equitable balance of its fee structure and opportunities for strategic organizational investments in furtherance of the MSRBs statutory mandate.17
Market Activity in Fiscal Year 2020 and Effects on Reserves The MSRB began Fiscal Year 2020
with reserves above target.18 The Board anticipated funding a budgeted operating deficit for Fiscal Year 2020, an investment to migrate MSRB market transparency systems to the cloud, and projected deficits in out-year pro forma budgets using these excess reserves.
However, the market activity occurring during MSRB Fiscal Year 2020 exceeded the budget established by the Board, due in large part to the COVID19 pandemic driving increased market volatility and high levels of primary market issuance.
While the Board intended its Fiscal Year 2020 budget to result in a deficit and thereby spend excess reserves, the market activity resulting from the pandemic drove unexpected revenues in the collection of market activity fees. All in all, market activity fees paid by dealers exceeded the MSRBs budget by $4.9 million in Fiscal Year 2020. Over the same period, the MSRBs financial results also benefited from expense savings, including savings associated with operating remotely during the pandemic, and, consequently, the MSRBs excess reserves continued to grow beyond their target instead of being reduced as planned.
Board Determination on the Need to Rightsize Reserves The additional market activity fee revenue generated in Fiscal Year 2020
built upon the Boards existing excess 17 For
example, the Board has designated excess reserves for one-time investments to fund major technological initiatives to benefit the market, including migrating all MSRB market transparency systems to the cloud, which was completed in Fiscal Year 2020. Also, in Fiscal Year 2020, the Board designated $10 million of reserves for a multi-year strategic investment to modernize its market transparency systems to leverage the power of the cloud. See, e.g., MSRB Holds Final Quarterly Board Meeting of FY 2019 July 29, 2019, available at http msrb.org/News-and-Events/Press-Releases/
2019/MSRB-Holds-Final-Quarterly-Board-Meetingof-FY-2019.aspx; and see also MSRB FY 2021
Budget Reflects Priorities of Modernizing EMMA
and Reducing Compliance Burdens Oct. 1, 2020, available at http msrb.org/News-and-Events/PressReleases/2020/MSRB%20FY%202021
%20Budget%20Priorities.aspx.
18 See MSRB 2020 Annual Report link at note 11
supra. See also discussion of the MSRBs Sources and Uses of Funding, available at http msrb.org/
About-MSRB/Financial-and-Other-Information/
Sources-and-Uses-of-Funding.aspx outlining organizational reserves as compared to the Boardapproved target over multiple years.

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reserves position.19 As a result, the Board prioritized the evaluation of organizational reserves levels at the beginning of Fiscal Year 2021. Based on this evaluation, the Board has determined that it is necessary and appropriate to temporarily reduce certain fees with the objective of rightsizing its reserves to the target level over an eighteen-month period. The MSRB projects that the proposed rule change will result in approximately $18.8 million of forgone revenue and serve to reduce the MSRBs reserves to the target level over the eighteen-month period of the temporary fee reduction, which the Board has determined is appropriate and consistent with prudent fiscal management.20
The Board desires to address its excess reserves by providing a temporary fee reduction to the class of regulated entities that directly contributed to the excess reserves position. During the eighteen-month temporary fee reduction period, the Board will evaluate the organizations fee structure with a view towards the MSRBs long-term financial positioning in relation to its fee structure.21 For this reason, the Board believes it is reasonable and appropriate to utilize the temporary fee reduction mechanism already established and effectively used in Fiscal Year 2019 while it proceeds with a broader review of its fee structure.22
Board Determination to Temporarily Reduce Market Activity Fees While all regulated entities contribute to the MSRBs revenue base, market activity fees constitute the vast majority of budgeted revenue, a total of approximately 77 percent in Fiscal Year 19 Id.
20 See MSRB Fiscal Year 2021 Budget for a further discussion of the MSRBs reserves link at note 15
supra.
21 While it is premature to presume any particular outcome of the Boards review, the Boards objectives will include maintaining a fair and equitable balance of fees among regulated entities, evaluating whether the impact of market-based fees, and their inherent volatility, as a contributor to the growth of excess reserves can be mitigated, and ensuring funding is sufficient to address expected structural operating deficits projected in future years under the current fee structure. The Board is cognizant of the temporary fee reductions it has adopted as a mechanism to address excess reserves in recent years and has developed these objectives for its review considering the factors that led to the use of such temporary fee reductions.
22 The Board filed a proposed rule change amending Rule A13 to temporarily reduce market activity fees for Fiscal Year 2019. See Release No.
3483713 July 26, 2018, 83 FR 37538 Aug. 1, 2018 File No. SRMSRB201806; see also Release No. 3485400 Mar. 22, 2019, 84 FR 11841
Mar. 28, 2019 File No. SRMSRB201906
providing for an additional temporary fee reduction in Fiscal Year 2019.

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