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E-Bidding Innovation: Ohio Begins Online Interim-Fund Auctions

From the Bond Buyer – Chicago, IL (September 28, 1999)

by Mary Wisniewski

The Ohio Treasurer’s office next week will usher in a new era of electronic bidding when it becomes the first issuer to use its own private-label Website to conduct an online auction of state investment dollars.

State treasury officials have no plans at this time to use the private Website, the first established for an issuer, to take competitive bids on its debt, but that could be the next step. “We’re going to wait and see how this works,” said Treasury spokesman Tim Clark.

And while the state has no immediate plans to use the site for bond sales, two other municipal issuers are planning to establish similar sites for their bond deals soon after Ohio.

The state will use its Website, www.BidOhio.com, to take bids on its interim funds from banks via the Internet. The site was designed by MuniAuction and marks a new venture for the Pittsburgh-based financial advisory firm that has completed several such sites for financial advisers.

Ohio Treasurer Joseph Deters said that he believed BidOhio will result in a higher, more competitive yield on the Treasury’s interim funds. “We conservatively estimate increased earnings for Ohio taxpayers in the range of $500,000 annually,” Deters said in a statement released Monday.

“The primary advantage is this introduces direct competition where there was none before,” said Myles Harrington, MuniAuction’s president.

The effect a proliferation of such issuer sites could have on relationships between issuers and their advisers was uncertain. Financial advisers asked about the issue said they don’t believe the Websites pose a threat to their business with issuers.

“It’s just one very small part of the process, taking bids on a deal,” said one financial adviser. “They will still need investment advisers and financial advisers for assistance in structuring.”

Harrington did not name the issuers, but said neither they nor the Ohio Treasurer’s office use independent financial advisers, “so it’s not like some financial adviser is losing an opportunity here.”

In general though, market players said that issuers stand to benefit from the Websites.

“It has the potential to be a good program and make things easier with electronic bidding,” said Martin Vogtsberger, vice president and manager of public finance at Fifth Third/The Ohio Co..

“I would imagine that for the larger issuers it’s a good idea because then they have greater access and control,” one financial adviser said. “But I’m not sure it will be used far and wide.”

Issuers wanting a private Website pay an up-front fee for customized development and training and an ongoing fee for service. Harrington said MuniAuction is still negotiating with Ohio on its fees.

Ohio’s first online auction will offer $42.5 million in interim treasury funds to be used to purchase six-month certificates of deposit in amounts up to $5 million, with a minimum bid of $100,000. Online auctions will be held each month.

Deters said he decided to use BidOhio after finding that several programs involving interim Treasury funds were either underused or not getting the best return on the dollar.

“The chief problem was that the bidding process in use was not competitive,” Deters said. “Banks would place minimum bids with the knowledge that, regardless of their offer, each would receive part of the month’s deposit.”

Deters also complained that the old system, dependent on banks submitting bids by fax or hand-delivery, was cumbersome, inefficient and impractical for some banks.