Strengthening primary – dealer systems Key pricing and bidding obligations of primary dealers during auctions: South African experience Callie Hugo 0828060740 callie.hugo@gmail.com
Well-functioning secondary market for government bonds an essential prerequisite for effective primary dealer framework. Pillars for developing local currency bond markets ▪ Macro economic environment ▪ Money market ▪ Primary market ▪ Investor base ▪ Secondary markets ▪ Custody and Settlements ▪ Debt market regulation
Secondary market for government bonds in South Africa evolved through various phases over period of 10 plus years 1970/80s — Unstructured market ▪ Issuance in domestic bond market was dominated by government and semi-government debt. ▪ NT issued bonds at par, periodically when needed, on an open-ended tap basis. ▪ No benchmark bonds or market rates existed, very little transparency. ▪ SARB initiated establishment of the Bond Market Association (BMA) – a self-regulatory organisation. ▪ Prescribed investments.
Secondary market for government bonds in South Africa evolved through various phases 1989/early 90s — More structure ▪ NT created benchmark bonds across the yield curve in order to improve liquidity through buy backs and consolidation of smaller issues. ▪ Transparency improved with information about the borrowing requirement, maturity structures & new instruments made available. ▪ Establishment of NT Tax and Loan accounts. ▪ SARB acting as market-maker – improving the liquidity and marketability of government bonds. ▪ SARB a leading participant in the bond derivatives market.
Secondary market for government bonds in South Africa evolved through various phases Mid/late 90s – formalising the bond market ▪ BMA was granted an exchange licence in 1996 and transformed into the Bond Exchange of South Africa (BESA), which was taken over by JSE in 2009. ▪ BESA adopted the G30 recommendations on clearing and settlement and established the Universal Exchange Corporation (UNEXcor) Sept 1994. ▪ Start of immobilisation and dematerialisation of all equity, bonds and most money market instruments. ▪ Settlement was gradually reduced from every 2nd Thursday to T + 3. ▪ April 1998, 12 primary dealers appointed (9 currently). SARB’s role reduced to conducting auctions on behalf of the NT.
Secondary market for government bonds in South Africa evolved through various phases Money market initiatives ▪ Structured operational coordination between SARB/NT via SCBFM/FMS since 2007 and since 2015, regular cash-coordination meetings between FMD and NT. ▪ SAMOS introduced in March 1998 — RTGS and DvP. ▪ Since introduction of repo-based refinancing system in March1998, regular refinements to enhance money market (including interbank). ▪ Before March 1998, SARB conducted repos/carries for liquidity management and bond funding. ▪ Interest rate benchmark and reference interest rate reforms in domestic market (August 2018). file:///C:/Users/calli/Desktop/Consultation%20Paper%2030%20August%202 018%20(1).pdf
Weekly bond auction-preparations and procedures Auctions and bidding obligations ▪ SARB as funding agent currently conducts all bond and Treasury bill auctions on behalf of NT. ▪ PDs must participate actively at government bond auctions by bidding at market related yields on a competitive basis. ▪ SARB – joint responsibility for oversight and surveillance of bond market. ▪ The minimum bid requirement at each bond auction is a percentage ration calculated as follows: 1 divided by the number of the primary dealers, plus 2 percentage points rounded to the nearest 1%. Where 10 PDs are appointed, each dealer is compelled to bid for at least 12% at an auction. ▪ The minimum bid requirement is applicable for each bond on auction.
Weekly bond auction-preparations and procedures ▪ A single PD may take up the full amount of each bond auctioned. ▪ Yield bids must be submitted in multiples of 0.005%. ▪ The number of bids that may be submitted by a PDs is not restricted. ▪ Bids should be for amounts of R10 million and multiples of R5 million, and increasing in increments of R5 million thereafter, except for the bonds which the National Treasury, SARB and PDA have agreed on different amounts. ▪ Tenders are to be submitted electronically using the Bloomberg auction system from 10h00 up to 11h00 of the day of the auction. Should technical problems arise that prevent one or more PD from submitting their bids via Bloomberg, the Auction Emergency Procedures are agreed between the SARB, the NT and PDs will be followed.
Weekly bond auction-preparations and procedures Research, decision, approval and auction announcement process ▪ Auctions are conducted on a weekly basis (every Tuesday) as per auction calendar. ▪ On Wednesday before the following week’s auction NT will call each primary dealer – surge for market information and where PDs sees demand on the curve. ▪ NT conduct internal meeting – using information from PDs, risks management unit and own research to decide which bonds and the amount to issue. ▪ Auction letter prepared – signed by delegated officials at NT and forwarded to SARB. ▪ SARB will announce auction on Bloomberg and inform PDs. ▪ PDs have week to prepare for the auction.
Weekly bond auction-preparations and procedures Auction process ▪ Nominal and inflation-linked bond auctions are conducted as single price (Dutch) auctions. All bidders are allotted bonds at single yield (or price), known as the clearing yield or price. Bids are ranked in ascending order of yield (descending order of price). Clearing yield might be higher than ‘best’ bid in auction. ▪ Initially auctions were conducted as multiple price auctions (American). Participants are allotted bonds at individual bid yield/price, with bids ranked in ascending order of yield (descending order of price). Change was initiated to address the negative consequences of the so- called “winners curse”. ▪ Non-competitive auctions introduced as incentive for PDs and to enhance effectiveness in the framework (20% in auctions and 30% for ETP trading).
Screen on allocation process ▪
Non-comp take up NON COMP TAKEN UP R2 032 Stock on tender Auction date 19-Mar-19 Non Comp taken: Non Comp taken: Non Comp taken: PRIMARY DEALER Dealer Allotted amount 50 % NON COMP AVAILABLE DAY 1, 19-Mar-19 at the 11:00 cut-off DAY 1, 20-Mar-19 at the 11:00 cut-off DAY 2, 21-Mar-19 at the 11:00 cut-off Settle on Settle on Settle on Fri, 22-Mar-19 Mon, 25-Mar-19 Tue, 26-Mar-19 ABSA 100 20 CITI BANK 0 0 DEUTSCHE 0 0 HSBC 0 0 INVESTEC BANK 0 0 JP MORGAN 95 19 NEDBANK 422 84 ABN AMRO 0 0 RAND MERCHANT BANK 210 42 STANDARD BANK OF SA 123 25 R 950 R 190 R 0 R 0 R 0 TOTAL 0 AVERAGE RATE TENDERED 9,4300% % non-comp take-up 0%
Weekly bond auction-preparations and procedures ▪ Auction rules and bidding obligations only partially contributing to “efficient pricing”. ▪ “Seven pillars” important for a fair and effective market, adding to credibility and transparency. ▪ Demand for government bonds critical in participation rate and bid levels. ▪ Continuous monitoring of secondary market by surveillance authorities important to understand drivers of the market and to always ‘know where market’ is and to enable National Treasury to exert discretion (eg. switch auctions and Treasury bill auctions).
Weekly bond auction-preparations and procedures ▪ Credible interest rate benchmarks (and reference rate interest rates) of utmost importance to ensure transparency and pricing aligned to market and economic fundamentals. ▪ Corporate bond market can only develop if the government bond yield curve is credible and if there are credible reference interest rates. ▪ Cannot isolate pricing in bond markets from effective monetary policy implementation and central bank liquidity management
There is no sphere of human thought in which it is easier to show superficial cleverness and the appearance of superior wisdom than in discussing questions of currency and exchange. S ir W ins to n C hurchill H o us e o f C o m m o ns S eptem ber 28 , 1949 Thank you
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