May 14, 2009 comply with both the arbitrage rebate and yield restriction regulations take into account all gross proceeds pay on time verify the bond yield understand the spending exceptions remember a bond year election consider the impact of a refunding. Coordinate with the citys bond counsel to take any remedial or other actions. Irs provides more flexibility for arbitrage rebate refunds. Federal arbitrage rebate requirements the arbitrage group. Under the arbitrage rebate and yield limitation regulations, interim payment of excess earnings above the bond yield are required to be paid to the united states treasury within sixty days of each fiveyear anniversary date and after the final redemption. Taxexempt municipal bond issuers are subject to federal arbitrage compliance rules as a condition of.
Sacks also introduced a stateoftheart bond year slicing optimization financial model used. The irs requires that arbitrage calculations be completed no later than five years from the date of a bonds issuance, every five years thereafter, and upon final maturity. Investors can use this approach to value bonds and find mismatches in prices, resulting in an arbitrage opportunity. A pooled financing issue is an issue of arbitrage bonds, however, unless the.
The group was initially formed in 1998 as a result of kpmgs decision to discontinue providing services related to arbitrage compliance. Rebate the irs requires the arbitrage profits be rebated unless there is a rebate. May 04, 2015 arbitrage rebate calculation services. Our decades of experience, national client base and highly competitive. Arbitrage rebate services we have provided arbitrage rebate and yield compliance services to issuers located throughout the country and have performed our calculations under federal tax code interpretations as set forth in arbitrage certificates prepared by many of the countrys leading bond counsel firms. New software package provides help on arbitrage rebate. Munipricetracker automated price transparency for bond. Elements of an effective postissuance tax compliance program include. Acs professional staff expertly handle all facets of bond compliance and arbitrage. Thus, even if the future value of the issuers arbitrage rebate payment on a computation date, computed under the method for determining arbitrage rebate, is greater than the issuers rebate amount on that date, an issuer is only entitled to a refund to the extent that the amount actually paid exceeds that rebate amount. The software uses a modern platform enabling quick updates to reflect current financing structures and the unique activities of individual housing finance agencies. Mar 25, 2020 as an issuer of taxexempt bonds, or an obligated party in a taxexempt issue, binghams expertise can help you navigate the complexities of arbitrage rebate compliance. He has developed two software packages that help users perform calculations to size and structure bond offerings and figure out rebate expenses.
Nixon peabody has teamed with omnicap group llc, to provide comprehensive arbitrage rebate compliance services to municipal issuers and conduit borrowers. Bond compliance arbitrage compliance specialists, inc. Arbitrage rebate compliance services are provided for all investments managed. If any pricing discrepancies exist, it is possible to construct an arbitragebased trading strategy designed to exploit small differences. Our arbitrage rebate compliance practice is focused exclusively on the challenges of arbitrage rebate and postissuance compliance. The group is an established set of professionals totally dedicated to providing arbitrage rebate and mathematical verification services on a national basis for our clients.
Federal register arbitrage rebate overpayments on tax. Rebate payments are required when the proceeds of the debt issue are above the bond yield and is considered a. Program investment, a type of purpose investments, generally represents one or more loans of bond proceeds to a substantial number of persons representing the. Arbitrage is the ability to obtain taxexempt bond proceeds and invest the funds in higher yielding taxable securities. A strategy that consists of building a portfolio of taxexempt municipal bonds and simultaneously hedging the duration risk of the portfolio through the short sale of. Depending on whether an arbitrage bond is also used for projects relating to municipal.
About the program the virginia state nonarbitrage program. Rebate rules the arbitrage rebate rules provide that certain arbitrage earnings must be paid, or rebated, to the u. Because the financing of a construction issue is a separate governmental purpose under 1. Arbitrage rebate refunds final regulations the public. Caine mitter provides quantitative services using proprietary software specifically developed to model the activities of housing finance agencies. Public finance partners, llc public finance partners. Munease is sold in individual modules that work together seamlessly as one software product. Arbitrage rebate and refunding verification services are the core of amtecs business.
If a bond valued with the arbitragefree pricing approach turns out to be priced higher in the market, an investor could have such an opportunity. Arbitrage is the ability to obtain taxexempt bond proceeds and invest the funds in higher yielding taxable securities, which often results in a profit. Part vii provides additional information on available resources, services and programs to. The munease software allows users to traverse effortlessly between modules. Bond arbitrage compliance is the responsibility of the city treasurers office. Comply with both the arbitrage rebate and yield restriction regulations take into account all gross proceeds pay on time verify the bond yield understand the spending exceptions remember a bond year election consider the impact of a refunding. Written policies and procedures a team assigned to manage the compliance process record retention arbitrage rebate and yield restriction compliance. Arbitrage rebate payments are due to the irs at least every five years from the date the bonds were issued. If the issuer makes the rebate payment once all of the bond proceeds have been spent, it does not have to track making any future computations. Arbitrage rebate services arbitrage compliance specialists, inc. The two sets of rules that apply to determine whether bonds are arbitrage bonds are. General information on the federal arbitrage rebate requirements. This means that even if an issuer is permitted to invest in higher yielding investments under the yield restriction rules, it may have to rebate those arbitrage earnings to the u. Under the arbitrage rebate and yield limitation regulations, interim payment of excess earnings above the bond yield are required to be paid to the united states.
Parts ii and iii describe the yield restriction and arbitrage rebate requirements. Prior asset management accounting, tax accounting, governmental accounting, or arbitrage rebate experience is a plus. New software package provides help on arbitrage rebate rules. An issuer may apply the arbitrage rebate requirement to an issue that otherwise. One method of calculating arbitrage rebate is the investment method, which considers, by date and amount, the cash inflow and outflow for each investment made with bond proceeds.
Mar, 2012 provides for a continuing focus on the investment of bond proceeds and the use of bondfinanced property. How to perform an arbitrage rebate calculation phibious. A municipal bond issued for the purpose of investing the proceeds in securities with higher yields than those paid by the municipal bond. This means that even if an issuer is permitted to invest in higher yielding investments under the yield restriction rules, it may have to rebate those arbitrage earnings to. Specially developed computer software means any programs or routines used to cause a computer to perform a desired task or set of tasks. Under this method, an arbitrage payment made on one computation date is future valued to the next computation date to determine the amount of arbitrage rebate owed on that. Division of capital assets management dcam arbitrage.
We have provided arbitrage rebate and yield compliance services to issuers located throughout the country and have performed our calculations under federal tax code interpretations as set forth in arbitrage certificates prepared by many of the countrys leading bond counsel firms. Municipal bond arbitrage, also called municipal bond relative value arbitrage, municipal arbitrage, or just muni arb, generally consists of building a leveraged portfolio of highquality, taxexempt municipal bonds and simultaneously hedging the duration risk in that municipal bond portfolio by shorting the equivalent taxable corporate bonds. Because rebate payments for a bond issue are required to be made at least every five years, a common reason for a rebate overpayment is that positive arbitrage i. This document contains final regulations that provide guidance on the recovery of overpayments of arbitrage rebate on taxexempt bonds and other taxadvantaged bonds. Arbitrage rebate is the dollar profit earned from positive arbitrage, which.
Under the arbitrage rebate rules, unless an issuer elects to pay a penaltyinlieuof rebate which is rarely done, an issuer investing bond proceeds and earning a positive net yield on that investment may be required to rebate i. All other taxexempt, privateactivity bond programs must compete with. The amtec arbitrage rebate and yield restriction calculations process includes, but is not limited to, the following. Buy an asset building, software, land, loans to government units cost of issuance to pay. Whereas, the city desires to contract for arbitrage rebate services. These regulations are outlined in section 148 of the internal revenue code of 1986 and are often referred to as the arbitrage regulations. Arbitrage rebate refers to the amount of excess interest earnings issuers of taxexempt bonds earn through investing bonds proceeds in higher yielding taxable investments that must be rebated back to the federal government.
The preceding sentence shall not apply to any qualified veterans mortgage bond. Arbitrage rebate practice math verification practice commercial defeasance verification established professionals. Compliance with complex arbitrage rebate rules can divert the staff of taxexempt bond issuers. A pooled financing issue is an issue of arbitrage bonds. What we now call rebate was once the payment of excess earnings on investments of taxexempt single family mortgage bond proceeds that issuers made to the federal government instead of giving mortgagors a rebate on their mortgage interest payments. The verification typically includes verification of the sufficiency of escrow cashflows to fund debt service requirements of the refunded issue, verification of the yield on the bonds, and verification of the yields on any yield restricted escrow funds. What we now call rebate was once the payment of excess earnings on investments of taxexempt single family mortgage bond proceeds that. Arbitrage bond is a debt security with a lower interest rate issued by a municipality prior to the call date of the municipalitys existing higherrate security. Such requirements detail that any profit or arbitrage be rebated or paid back to the federal government the treasury department.
A bond which is part of an issue shall be treated as an arbitrage bond if the requirements of paragraphs 2 and 3 are not met with respect to such. Tam200224003 11202003 whether the series a and b bonds are a single issue under section 1. It performs a wide variety of interest calculations including tics, sizing calculations, refunding analyses, and arbitrage rebate calculations. Arbitrage bond financial definition of arbitrage bond. Types of acceptable documentation copies are an arizona drivers. Since taxexempt bond transactions are either subject to arbitrage rebate or are yield restricted based on the arbitrage yield subject to certain exemptions, calculating the issue price correctly is critical to. Over the past 31 years, acs has developed the most accurate and efficient processes for maintaining an issuers comprehensive compliance program.
Arbitrage is the term used to define the profits gained by investing proceeds derived from lowinterestrate debt into higheryielding investments or securities. Treasury bonds that are used to prerefund an outstanding issue prior to the outstanding issues call date. The balance of the issue price is treated as a separate nonconstruction issue that is subject to the rebate requirement unless it meets another exception to arbitrage rebate. Our verifications are performed using customized software and a process that. Treasury posted the notice of award and has selected two contractors. Without these rules, issuers could simply issue hundreds of millions of bonds for little or no public purpose and profit from the difference in the taxexempt bond.
An arbitrage bond is any bond issue whose proceeds are invested, over the term of the bond issue, at a rate of return that is materially higher that the interest rate on the bonds. An arbitrage is the profit that can be made from investing lowyielding taxexempt debt proceeds into higheryielding taxable investments. Arbitrage bond a municipal bond issued at a lower interest rate than another municipal bond. Develop an understanding for new irs issue price regulations and how that impacts arbitrage calculations. Compliance with complex arbitrage rebate rules can divert the staff of taxexempt bond issuers from important organizational responsibilities. Sacks also introduced a stateoftheart bond year slicing optimization financial model used solely by our firm. Together we offer clients timely, accurate reports on arbitrage rebate liabilities and opinions on compliance with internal revenue code and regulations.
Arbitrage is any interest or value earned over the declared yield of a taxexempt bond issue as defined by internal revenue code section 103 and section 148. Another method of calculating arbitrage rebate is the disbursement method, which considers, by date and amount, the cash outflow for each payment from bond proceeds. Section 148 arbitrage reasonable expectations artifice or. Arbitrage rebate services contract city of scottsdale. A debt security with a lower interest rate issued by a municipality prior to the call date of the municipalitys existing higherrate security. Our primary goal is to create a compliance program tailored to meet each. Or in the case of municipal bonds, arbitrage is the difference between the interest expense paid by the bond debt issuer and the earnings from the invested.
Or in the case of municipal bonds, arbitrage is the difference between the interest expense paid by the bond debt issuer and the earnings from the invested proceeds. Risk, treasury, retirement and payment services pfm. Yield restriction rules the yield restriction rules limit the investment yield that may be earned on bond proceeds. These final regulations provide the deadline for filing a claim for an arbitrage rebate overpayment and certain other rules. The funds from the second bond are invested in treasury securities until the call date of the first bond, when they are used to pay for the first bonds redemption. Our office maintains strong relationships with corporate trust banks, bond attorneys and financial advisors, enabling us to offer quality consultation and ongoing support in any matter relating to verification services, postissuance compliance, arbitrage rebate, and related irs forms. Determination of the quantitative value of a spending exception when one account has generated a rebate liability. Arbitrage under section 148, an arbitrage bond is not tax exempt. Our team is responsible for providing a number of public finance related services including escrow cash flow verification, bond yield verification, arbitrage rebate compliance, commercial mortgage loan defeasance, assistance with form 990schedule k, and postissuance bond compliance to. Rebate payments are required when the proceeds of the debt issue are above the bond yield and is considered a tax on the profit.
The selected method will then be used to calculate the issue price for the bonds which, in turn, determines the arbitrage yield. The following questions and answers highlight some of the concerns that issuers and users of taxexempt financing must keep in mind to avoid the pitfalls surrounding arbitrage earnings. Proceeds from the issuance of the lowerrate bonds are invested in treasuries until the call date of the higherinterest bonds. Acs professional staff expertly handle all facets of bond compliance and arbitrage services as required by the internal revenue code. American municipal taxexempt compliance amtec is an independent tax compliance specialty firm and a qualified minority and small business enterprise mbesbe. Understand the basics of federal arbitrage rules and arbitrage rebate learn what a government needs to do to calculate arbitrage, including negative arbitrage, for each bond transaction. A purchaser can select only the needed modules, and purchase other modules later as the need arises. Munease is flexible and can be structured to meet your needs and budget. Arbitrage is the ability to obtain taxexempt bond proceeds and invest the funds in higher yielding taxable securities, resulting in a profit. Arbitrage bonds arbitrage calculation get in touch. Together we offer clients timely, accurate reports on arbitrage rebate liabilities and opinions on.
Arbitrage services go beyond calculations and reports. Snap rebate calculation agent response virginia department of. On the last day of each bond year during which there are amounts allocated to gross proceeds of an issue. Arbitrage rebate analyst in harrisburg, pennsylvania. The yield restriction rules under code section 148a, and. The program, which is based on the microsoft windows operational system, is designed to help municipal finance professionals analyze the legal and economic aspects of refunding bond transactions. Generally, taxexempt bond issues issued on or after september 1, 1986 are subject to the arbitrage rebate requirements.
Taxexempt bonds questions and answers on arbitrage rebate. Strong proficiency in ms office applications particularly excel, word and powerpoint. As an issuer of taxexempt bonds, or an obligated party in a taxexempt issue, binghams expertise can help you navigate the complexities of arbitrage rebate compliance. We know arbitrage, routinely provide training to governmental finance officers on arbitrage rebate and postissuance compliance issues.
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