Education Center

Understanding Auction Rate Securities

An auction rate security (ARS) is a municipal security for which the interest rate resets on a periodic basis through an auction process. The typical auction process is one referred to as a Dutch auction in which securities are sold at the lowest interest rate, or “clearing rate,” at which all of the securities that have been offered for sale by current holders of the securities will clear the market. Auctions are conducted by agents of the issuer of the ARS, called auction agents, and orders are submitted to the auction agent by certain dealers, called program dealers, that have rights granted to them through an agreement with the issuer or auction agent to submit orders. Information on EMMA about an ARS is provided by the MSRB’s Short-term Obligation Rate Transparency (SHORT) System, which began collecting such information on a phased-in basis beginning January 30, 2009. Information about an ARS generally is collected by no later than 6:30 P.M. Eastern on the day that an auction occurs.

The following items are disclosed in connection with an auction in an ARS, depending on your current view.

Date and Time of Interest Rate Reset - shows the time and date that an auction took place.

Date and Time of Interest Rate Posting - shows the time and date that results of an auction were communicated to program dealer(s) by the auction agent following an auction.

CUSIP - shows the CUSIP9 number for the ARS. Data is not available for an auction in an ARS that does not have a CUSIP9 number.

Program Dealer(s) - shows all program dealers that submitted orders to the auction agent to buy, sell or hold securities in an ARS through the auction process. Note that the identity of each program dealer is displayed as such information is received and processed by the SHORT System so, for an ARS having multiple program dealers, the list of program dealers for an auction may grow as the day progresses and each program dealer submits its information at different times.

Length of the Interest Rate Reset Period - shows the number of calendar days that the interest rate produced by the auction process is applicable.

Interest Rate - shows the interest rate, expressed as a percentage, produced by the auction process. This is the interest rate that the ARS will be during the applicable interest rate reset period.

Rate Type - shows how the interest rate was determined on the specific auction date. Rate type categories are as follows:

- (M) Maximum Rate – indicates that the interest rate is set at the highest rate allowable under the ARS program documents, typically as a result of a “failed” auction.

- (H) All Hold Rate – indicates that all existing holders in an auction decided to hold at any rate. An all hold rate typically is a multiple of a specific market index as specified under the ARS program documents.

- (A) Set by Auction – indicates that the interest rate reflects the lowest interest rate at which all of the securities that have been offered for sale by current holders of the securities cleared the market, also known as the “clearing rate.”

Minimum Denomination - shows the minimum principal amount permissible for transactions in the security as specified under the ARS program documents.

Minimum Rate - shows the lowest interest rate, if any, as specified under the auction rate security program documents that could be set for the ARS on the day that an auction occurs. If a minimum rate is specified in the program documents, but such interest rate is the result of a formula that cannot be calculated on the day of an auction, a value of “NC” will be shown.

Maximum Rate - shows the highest interest rate, if any, as specified under the ARS program documents that could be set for the ARS on the day that an auction occurs. If a maximum rate is specified in the program documents, but such interest rate is the result of a formula that cannot be calculated on the day of an auction, a value of “NC” will be shown.

Order Type - indicates whether an order submitted is an order to buy (B), sell (S) or hold (O).

Order Interest Rate - shows for orders to buy or hold at rate, the interest rate associated with such orders.

Order Entity -indicates whether an order placed or that was filled is for an investor (I), program dealer for its own account (P) or issuer/conduit borrower of the ARS (C).

Order Par Amount - shows the aggregate par amount submitted to the auction for each order type, interest rate for buy and hold at rate orders, and order entity.

Filled Par Amount- shows the aggregate par amount filled as a result of the auction for each order type, interest rate for buy and hold at rate orders and order entity.

Bid-to-Cover Ratio - ratio providing one indication of the level of demand, or lack thereof, by investors and, in a limited number of cases, issuers/conduit borrowers in an auction for an auction rate security using the following formula: (Par Amount Outstanding – Aggregate Sell Orders – (Aggregate Hold at Rate Orders – Aggregate Hold at Rate Orders Filled) + Buy Orders) / Par Amount Outstanding. This calculation does not include orders by program dealers for their own accounts and therefore the bid-to-cover ratio provides only a representation of demand for the auction rate security by investors and issuers/conduit borrowers in comparison to the supply of auction rate securities from these auction participants. A bid-to-cover ratio greater than 1 indicates that the demand among investors and issuers/conduit borrowers for the auction rate security was greater than the amount of securities offered for sale by these auction participants in an auction. A bid-to-cover ratio of less than 1 indicates that the demand among investors and issuers/conduit borrowers for the auction rate security was less than the amount of securities offered for sale by these auction participants and a bid-to-cover ratio of 1 indicates that these amounts were equivalent. However, since the bid-to-cover ratio does not reflect program dealer orders, the bid-to-cover ratio for a successful auction may be less than 1 if the auction was successful as a result of buy orders from program dealers. In addition, in some instances, a bid-to-cover ratio will not be displayed because the calculation was not able to be performed due to erroneous or insufficient data. Note that on December 10, 2012 this formula changed from a ratio depicting the aggregate par amount of securities bid for the aggregate par amount of securities offered for sale that included program dealer orders for their own accounts and did not incorporate the par amount outstanding of the auction rate security. Thus, historical bid-to-cover ratios differ from those computed on or after December 10, 2012. For the most complete understanding of the level and nature of demand in a specific auction, you should view the details of each order entered (including orders entered by program dealers) for such auction by clicking on the green expand (+) button corresponding to that auction date on the Auction Information tab of the Security Details page for such security.