Municipal Syndicate Operations

Now that you know how municipal bonds are brought to market, the next step is understanding syndicate mechanics: how dealers organize, share risk, earn compensation, and allocate bonds to investors.

Syndicate Formation and the Syndicate Agreement

• A municipal syndicate is a group of dealers that jointly underwrites a new issue
• The senior manager (lead underwriter) organizes the syndicate, negotiates with the issuer, and manages the book
• Syndicate members sign a syndicate letter (agreement among underwriters) that spells out each member's participation level, the type of account (Eastern or Western), order priority, and profit-sharing rules
• Members submit a good faith deposit (typically 1-2% of the par value of their participation) to demonstrate commitment to the offering

Eastern (Undivided) vs. Western (Divided) Accounts

The syndicate agreement specifies which type of account structure governs unsold bonds:

Think of it this way: In an Eastern account, if another member fails to sell their bonds, you share the burden. In a Western account, their unsold bonds are their problem, not yours.

Exam Tip: Gotchas

• Eastern = undivided = shared liability. If any member cannot sell their allocation, every other member picks up a proportional share of the unsold bonds.
• Western = divided = individual liability. Each member is only on the hook for their own unsold bonds.
• The exam frequently tests which account type carries more risk. Eastern accounts carry more risk because of shared liability.

Underwriter's Spread Components

The spread (also called the underwriter's discount) is the difference between the price the syndicate pays the issuer and the price at which bonds are sold to the public. It has several components:

• Management fee: Compensation to the managing underwriter for organizing and running the syndicate
• Underwriting fee (risk component): Compensation for assuming the financial risk of purchasing bonds from the issuer
• Selling concession: The largest component of the spread; compensation for actually selling bonds to investors
• Total takedown: Underwriting fee + Selling concession (what a syndicate member earns per bond sold). Does NOT include the management fee
• Reallowance: A portion of the selling concession shared with non-syndicate dealers who help sell the bonds (the smallest piece of the spread)

Key formulas:

• Total spread = Management fee + Underwriting fee + Selling concession
• Total takedown = Underwriting fee + Selling concession (excludes management fee)
• A member who sells bonds from their own allocation earns the total takedown
• A non-member dealer who sells bonds earns only the reallowance

Example: If the total spread is $10 per bond:

• Management fee: $1.00
• Underwriting fee: $2.00
• Selling concession: $7.00 (always the largest)
• Total takedown: $2.00 + $7.00 = $9.00 (what a syndicate member earns)
• Reallowance: $4.00 (a portion of the selling concession, paid to non-member dealers)

Exam Tip: Gotchas

• The selling concession is always the largest component of the spread. If a question asks which part of the spread is largest, the answer is the selling concession.
• Total takedown does NOT include the management fee. Total takedown = underwriting fee + selling concession only.
• A non-member dealer earns only the reallowance, which is less than the total takedown. The reallowance is a portion of the selling concession, not an additional payment.

Order Priority (MSRB Rule G-11)

The Municipal Securities Rulemaking Board (MSRB) sets the rules for syndicate operations. Under Rule G-11, the syndicate establishes the priority of orders before the first offer. The standard priority (most common):

Key rules:

• The senior manager must communicate the priority provisions in writing to all syndicate members before the first offer
• The senior manager may deviate from the standard priority if it is in the best interest of the syndicate and consistent with the issuer's requirements
• Under MSRB Rule G-11, customer orders must receive priority over orders for dealer accounts, unless the issuer agrees otherwise

Memory Aid: "Please Get Dessert Made" = Pre-sale, Group, Designated, Member (highest to lowest priority).

Exam Tip: Gotchas

• Pre-sale orders get the highest priority because they were placed before the syndicate even won the bid, helping demonstrate demand.
• Group net orders benefit the entire syndicate; member orders benefit only the individual member who placed them. The exam tests whether you know who profits from each order type.
• The senior manager sets the priority in writing before the first offer. If a question asks when priority is established, the answer is before any bonds are sold.

Syndicate Settlement (MSRB Rule G-12)

• Syndicate accounts must be settled within 30 calendar days after all securities in the new issue have been delivered to the syndicate
• The senior manager must send each member a summary of syndicate activities, including total expenses, allocations, and each member's share of profits or losses
• Any remaining good faith deposits are returned after settlement

Exam Tip: Gotchas

• 30 calendar days is the settlement window for syndicate accounts after delivery. This is different from regular-way settlement (T+1 for most securities).
• The senior manager must provide a written accounting of the syndicate's activities to all members.