The Financial Express

New opportunities in on-exchange trading of government securities

New opportunities in on-exchange trading of government securities

Government Securities (G-Secs) are securities issued by the government to borrow from financial market to meet its fiscal deficit. They are considered safe investments, as investors are guaranteed return of both interest and principal. This is done usually in the form of bonds, but it may include notes, bills, and so on. In Bangladesh G-Sec comprises Treasury Bonds and Bills (T-Bond & T-Bill).

The bond market (also called debt market or credit market) is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. Its primary goal is to provide long-term funding for public and private expenditures.

The bond market has largely been dominated by the United States, which accounts for about 39 per cent of the market. As of 2017, the size of the worldwide bond market (total debt outstanding) is estimated at $100 trillion. The bond market is part of the credit market, with bank loans forming the other main component. The global credit market in aggregate is about three times the size of the global equity market. Global market authorities are giving emphasis on trading of international debt securities (IDS) who have a matured domestic debt securities (DDS) market.

Bangladesh is one of the fastest growing economies of the world. The size of the economy is around Tk 25.45 trillion and current (2019-20) budget size of the country is Tk 5.23 trillion. Projected gross domestic product (GDP) growth for the year is 8.2 per cent.

During the 2018-19 fiscal year, T-bonds issued amounted to Tk 364.75 billion, which is almost 7.00 per cent of the national budget. The primary market yield curve of T-bond is 7.55 per cent to 9.29 per cent at different tenures (02-20 years) whereas secondary market yield curve for G-Sec stands 6.50-9.48 per cent. In 2018-19 fiscal, secondary market turnover is Tk 183.09.82 billion, out of outstanding balance of G-Sec Tk 1.99 trillion (market capitalisation of G-Sec) which shows a poor turnover velocity ratio (0.09 per cent) and indicates poor liquidity situation in secondary market.

Vibrant trading of G-Secs in secondary market may create price discovery of G-Secs at the time of issuance as well as increase demand of G-Secs in primary market; reduce cost of government (lowering coupon rate) borrowings if there is increase in demand in primary market; provide product diversification towards portfolio management where investors will find a safe zone to take more risk in equity market; and play a vital role in restoring the market confidence to make a stable capital market in Bangladesh.

All outstanding and newly issued tradable government securities are eligible to be traded in the exchanges. Technically to make it available in exchanges platforms, a tripartite committee [involving Bangladesh Securities and Exchange Commission (BSEC), Bangladesh Bank (BB) and Dhaka Stock Exchange (DSE)] is working to expedite the process and the committee has recommended some technical workflows along with execution of detailed plan/guidelines with takeaways. And, it is proposed that all outstanding and newly issued tradable government securities would be traded on the automated, anonymous, order-driven system of the stock exchanges.

It is observed that the on-exchange trading of debt securities is given priorities in BIS [Bank of International Settlements] statistics on international debt issuance. BIS statistics show four main factors of differentiation between domestic and international markets: Currency, Primary market, Secondary market and Governing law.

Historically, bonds registered and traded outside the country are governed by foreign law and denominated in foreign currency. Bonds issued in local market typically tend to be issued in local currency under the local law.

There are three major technical workflows in terms of "G-Sec Trading Model" which may be followed step by step to make a vibrant secondary G-Sec market in Bangladesh. They are  as follows:

G-SEC TRADING MODEL-I: This model permits trading of G-Secs at designated trade venues following Bangladesh Bank-centric post-trade operation (reporting model). It follows the central bank's clearing and settlement where BB will settle both securities and funds through member dealer (MD) accounts lying with the BB's MI [management information] module. Trading of G-Secs under this model may follow any of the options below:

In this reporting model, clearing and settlement will be done following a number of steps. They include: Trade details from Exchange to BB, BB's notification of consummated trade details to respective depository bank (DB) about their obligations, downloading of obligation and pay-in advice of funds/securities, instructions to DB to make funds available by pay-in time, instructions to DB to make securities available by pay-in-time, checking pay-in of funds, checking pay-in of securities, pay-out (transfer) of funds from buyer's account to seller account, pay-out (transfer) of securities from seller to buyer, BB's informing of DBs about securities settlement and BB's informing of DBs about fund settlement.

G-SEC TRADING MODEL-II: This model permits the trading of securities at designated trade venues in compliance with Central Counterparty (CCP)-centric post-trade operations. It may follow the CCP's clearing and settlement and any or designated bank-wise fund settlement. Trading of G-Secs may be done following steps below:

● BB will allow CCP to use MI Module to act as its member to open accounts for collateralisation, general investors, broker-based trading, and margin based trading for each client;

● The client may enjoy multilateral netting for securities and fund;

● G-Sec holdings in the account will be available in the CCP network;

● The broker will place buy/sell orders on behalf of member dealers/investors for G-SECs;

● The broker will be responsible for settlement of both funds and securities through clearing member.

G-SEC TRADING MODEL-III: This model permits trading of any securities at any trading venue following the CCP-centric post-trade operations. It may follow the CCP's clearing and settlement. Trading of G-Secs may be done following steps below:

● Central Depository Bangladesh Limited (CDBL) and MI Module will be interconnected;

● Broker-centric trading;

● Margin-based trading for each client;

● The client will enjoy multilateral netting for securities and fund;

● The broker will be responsible for settlement of both funds and securities through clearing member.

Key takeaways for investors of on-exchange trading of G-Secs are:

● T-Bonds and T-Bills are units of G-Secs issued by Bangladesh Bank and securitised as tradable assets;

● A bond is referred to as a fixed income instrument since bonds traditionally pay a fixed interest rate (coupon) to debt holders;

● Bond prices are inversely correlated with interest rates: when rates go up, bond prices fall and vice versa;

● Bonds have maturity dates at which point the principal amount must be paid back in full.

Development of an active debt market in Bangladesh will have far-reaching benefits in deepening financial infrastructure. It will help attract foreign investors to the country, and provide an important incentive for local investors to better manage their asset allocation process.

A deep and liquid domestic G-Sec market facilitates monetary policy transmission, finances infrastructure projects and promotes capital market development. Moreover, the government's debt instruments provide additional tools to the central bank for liquidity management while enabling banks to comply with regulatory requirements.

M Imam Hossain is the team leader at CCP Project and deputy general manager at DSE.

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