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GOVERNMENT SECURITIES DEALERSHIP
GOVERNMENT SECURITIES
DEALERSHIP
Government SecuriAes (GS) ¨   ROP Bonds are the foreign currency-denominated GS issued by the
Government SecuriAes (GS) ¨   ROP Bonds are the foreign currency-denominated GS issued by the

Government SecuriAes (GS)

Government SecuriAes (GS) ¨   ROP Bonds are the foreign currency-denominated GS issued by the Philippine

¨ ROP Bonds are the foreign currency-denominated GS issued by the Philippine government which are infrequently issued and are originated through the process of securiAes underwriAng.

SecuriAes Dealer

¨A securiAes dealer is a financial insAtuAon organized usually as a corporaAon or a partnership whose principal business is to buy and sell securiAes, whether registered or exempt from registraAon, for the dealer’s own account or for the account of clients.

¨A securiAes dealer, before dealing in securiAes, is required to obtain a license from SEC pursuant to the Revised SecuriAes Act.

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Government SecuriAes (GS)

¨GS are uncondiAonal obligaAons of the sovereign state. It is backed by the full taxing power of the sovereignty. Therefore, GS are pracAcally free from default.

¨The Philippine government acAvely issues two kinds of GS: Treasury Bills and Treasury Bonds, so-called because it is the Bureau of Treasury (BTr) that originates their sale to the invesAng public through a network of licensed dealers through aucAons.

Stages in the Life of a GS Origina(on primary market offering of GS to GSEDs

Stages in the Life of a GS

Origina(on primary market offering of GS to GSEDs
Origina(on
primary market offering of GS to GSEDs
Trading secondary market turnover of GS among GSEDs and other securiAes dealers
Trading
secondary market turnover of GS among GSEDs and other securiAes dealers

Distribu(on

selling down of GS to insAtuAonal and retail investors

Government SecuriAes Eligible Dealer (GSED)

¨A GSED is an SEC-licensed securiAes dealer belonging to a service industry supervised/regulated by government (SEC, BSP, or Insurance Commission) which has met the :

¤(a) P100mn unimpaired capital and surplus account;

¤(b) the statutory raAos prescribed for the industry, and

¤(c) has the infrastructure for an electronic interface with the Automated Debt AucAon Processing System (ADAPS) and the official Registry of Scripless SecuriAes ( RoSS ) both of the BTr using Bridge InformaAon Systems (BIS), and acknowledged by the BTr as eligible to parAcipate in the primary aucAon of government securiAes.

Stage 1: OriginaAon

¨UnderwriAng of securiAes – for ROPs

¨Primary market aucAons:

¤Dutch AucAon – for FXTNs ¤English AucAon – for T-Bills and FXTN reissues

¨AucAons for T-bills and FXTNs are held on a weekly basis:

¤every other Monday for T-Bills; ¤every other Tuesday for FXTNs

¨Sealement takes place T+2 days acer aucAon date

¨Offer Size: T-Bills – PHP8.5 billion FXTNs – PHP8.5 billion

Primary Market AucAon of GS Department of Finance SecuriAes Dealers Bureau of the Treasury Banks
Primary Market AucAon of GS
Department
of Finance
SecuriAes
Dealers
Bureau of
the Treasury
Banks
InsAtuAonal
GSEDs
Investors

Dutch AucAon (Uniform Price)

¨Uniform Price or Dutch AucAon is a method of pegging a uniform coupon rate of a Treasury Bond at the stop-out level of arrayed amounts of bid with the corresponding yield rate tendered.

¨ConvenAonally, the rate must be divisible by one- eighth of 1%.

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SecuriAes UnderwriAng for ROPs GSEDs Sec. Dealers and Investors Department UnderwriAng of Finance Team

SecuriAes UnderwriAng for ROPs

GSEDs Sec. Dealers and Investors
GSEDs
Sec. Dealers
and Investors

Department

UnderwriAng

of Finance

Team

Dutch AucAon (Uniform Price)

¨ Used by the BTr to aucAon FXTNs

¨ Is a purely compe((ve bidding process

¨ Coupon rate for FXTN to be issued shall be set

¨ AucAon parAcipants submit the ff:

¤ Bid Yield ¤ Bid Volume

¨ The highest yield acceptable to the BTr shall be the awarded coupon rate for the FXTN being issued.

Dutch AucAon (Uniform Price)

¨Example: AucAon of a new issue of 7-year FXTNs with an offer size of PHP7.0 billion

nBank A

-

P2.0bn -

9.75%

nBank

B -

P2.0bn -

9.625%

nBank C

-

P3.0bn -

9.85%

nBank D

-

P2.0bn -

9.745%

nBank

E -

P2.0bn -

9.70%

¨Awarded coupon is 9.75%. CompeAAve stop-out is

50%.

English AucAon (Price DiscriminaAon) ¨   Used by the BTr to aucAon T-Bills and FXTN

English AucAon (Price DiscriminaAon)

¨ Used by the BTr to aucAon T-Bills and FXTN reissues

¨ Compe((ve and non-compe((ve bidding allowed

¨ For compeAAve bids, both yield and volume are submiaed by GSED.

n Awarded Yield = Yield Submiaed by GSED

¨ For non-compeAAve bids, only volume is submiaed by GSED.

n Awarded Yield = Average Yield During AucAon

Non-CompeAAve Bid ¨   A Non-CompeAAve Bid is a tender to buy a specified amount
Non-CompeAAve Bid ¨   A Non-CompeAAve Bid is a tender to buy a specified amount

Non-CompeAAve Bid

Non-CompeAAve Bid ¨   A Non-CompeAAve Bid is a tender to buy a specified amount of

¨A Non-CompeAAve Bid is a tender to buy a specified amount of government securiAes, by a GSED in the primary aucAon of government securiAes, without indicaAng any yield rate, on the understanding that the award shall be at the weighted average yield rate of the compeAAve bids awarded at the same aucAon.

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English AucAon (Price DiscriminaAon) ¨   The Price DiscriminaAon or English AucAon is a method
English AucAon (Price DiscriminaAon) ¨   The Price DiscriminaAon or English AucAon is a method

English AucAon (Price DiscriminaAon)

English AucAon (Price DiscriminaAon) ¨   The Price DiscriminaAon or English AucAon is a method in

¨The Price DiscriminaAon or English AucAon is a method in which successful compeAAve bidders pay the price they have bid, and all the winning bidders may pay different prices.

CompeAAve Bid ¨   A compeAAve bid is a tender to buy an amount of
CompeAAve Bid ¨   A compeAAve bid is a tender to buy an amount of

CompeAAve Bid

CompeAAve Bid ¨   A compeAAve bid is a tender to buy an amount of government

¨ A compeAAve bid is a tender to buy an amount of government securiAes at a yield rate per annum that a GSED believes will wrest an award for the GSED by out-bidding other GSEDs in the primary market aucAon of government securiAes.

English AucAon (Price DiscriminaAon)

¨

Example: A new issue of 91-day T-Bills with an offer size of PHP2.0 billion.

¤Non-compeAAve bids

 
 

n

Bank A

-

P500mn

n

Bank B

-

P500mn

 

¤CompeAAve bids

 

n

Bank A

-

P550mn

-

6.124%

n

Bank B

-

P300mn

-

6.00%

n

Bank C

-

P150mn

-

6.245%

n

Bank D

-

P400mn

-

6.30%

¨

AucAon Results:

 

¤High

 

-

6.25%

¤

Average

 

-

6.125% (for non-comp bids)

¤Low

 

-

6.00%

Automated Debt AucAon Processing System (ADAPS) ¨   ADAPS is an electronic mode by which
Automated Debt AucAon Processing System (ADAPS) ¨   ADAPS is an electronic mode by which
Automated Debt AucAon Processing System (ADAPS) ¨   ADAPS is an electronic mode by which

Automated Debt AucAon Processing System (ADAPS)

Automated Debt AucAon Processing System (ADAPS) ¨   ADAPS is an electronic mode by which the

¨ ADAPS is an electronic mode by which the NaAonal Government sells government securiAes to a network of GSEDs which are linked to the BTr through BIS

Registry of Scripless SecuriAes ( RoSS )

¨The RoSS is the official record of absolute ownership, legal or beneficial Atle or interest in GS.

¨Purchase of GS – security credited

¨Sale of GS – security debited

¨GSEDs maintain Principal SecuriAes Account in RoSS .

¨Other securiAes dealers maintain Client SecuriAes Account in RoSS .

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AucAon Guidelines

¨The cut-off Ame for submission of bids to the BTr during aucAon date is 1pm.

¨A minimum amount of P10mn may be tendered by a GSED per bid.

¨A maximum of seven (7) compeAAve bids and one (1) non-compeAAve bid per tenor may be tendered by a GSED.

AucAon Sealement

¨ Sealement of GS takes place 2 days acer aucAon date.

¨ GSED must transfer funds electronically to the DDA of the Treasurer of the Philippines maintained with BSP.

¨ Upon receipt of the funds, the BTr will transfer the newly issued security to the Principal SecuriAes Account of the GSED in the Registry of Scripless SecuriAes ( RoSS ).

¨ This sealement procedure is called DvP -RTGS (Delivery versus Payment-Real Time Gross Sealement)

Non-AucAon Sealement

¨A security transfer via the RoSS due to a non- aucAon (secondary market) GS transacAon between two GSEDs may only be effected if, at the end of trading hours, there exists a matched trade (confirmed by both parAes).

¨The matched trade will then be referred to the BSP for sealement (debit DDA of GSED-buyer and credit DDA of GSED seller.

Non-AucAon Sealement ¨   This process completes the secondary market trade and effecAvely conforms with
Non-AucAon Sealement ¨   This process completes the secondary market trade and effecAvely conforms with

Non-AucAon Sealement

Non-AucAon Sealement ¨   This process completes the secondary market trade and effecAvely conforms with the

¨This process completes the secondary market trade and effecAvely conforms with the G-30 RecommendaAons of DvP through Nemng but Same-Day Sealement.

Over-the-Counter (OTC) or Tap Method

¨ The applicable yield rates for T-Bills issued to GOCCs, LGUs, and TEIs shall be based on the rate of the immediately preceding T-Bill aucAon.

¨ GOCCs – lowest accepted yield rate

¨ LGUs – weighted average yield rate

¨ TEIs – 90% of the weighted average yield rate

InterpreAng the ISIN

PIBD0507B435 Code for Philippines Tenor of GS Month of Issuance Code for FXTN Maturity Year
PIBD0507B435
Code for Philippines
Tenor of GS
Month of Issuance
Code for FXTN
Maturity Year
GS Series

Upon issuance, each GS is assigned a unique ISIN which acts as its idenAfier and is internaAonally accepted.

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Over-the-Counter (OTC) or Tap Method

¨The OTC or Tap Method is another mode of originaAng GS for specific investors, namely the Government Owned and Controlled CorporaAons (GOCCs), the Local Government Units (LGUs), and the Tax Exempt InsAtuAons (TEIs), e.g., pension funds, GSIS, SSS, etc.

¨It is non-compe((ve and is open everyday.

Over-the-Counter (OTC) or Tap Method

¨ FXTNs issued to GOCCs, LGUs, and TEIs shall be priced based on the current market yield.

¨ GOCCs and LGUs – applicable coupon rate based on coupon rate corresponding to the aucAoned FXTN

¨ TEIs – applicable coupon rate based on 90% of the coupon rate corresponding to the aucAoned FXTN

InterpreAng the ISIN

PIBD0507B435

¨In the Philippine bond markets, a shortcut is assigned for each FXTN series. In the above ISIN: “5-43”.

¨ISIN for other GS

¤PIBL – T-bills ¤PIID – RTBs ¤PIBZ – Zeroes ¤PIPN - PNs

Secondary Market Trading of GS Government Securi(es Eligible Dealer (GSED) Government Securi(es Eligible Dealer
Secondary Market Trading of GS Government Securi(es Eligible Dealer (GSED) Government Securi(es Eligible Dealer

Secondary Market Trading of GS

Government Securi(es Eligible Dealer (GSED)

Government Securi(es Eligible Dealer (GSED)
Government Securi(es Eligible Dealer (GSED) Government Securi(es Eligible Dealer (GSED)

Government Securi(es Eligible Dealer (GSED)

 

Government Securi(es Eligible Dealer (GSED)

Government Securi(es Eligible Dealer (GSED)
Government Securi(es Eligible Dealer (GSED) Other Banks and

Other Banks and

 
 

Financial Ins(tu(ons

Other Banks and Financial Ins(tu(ons

Other Banks and Financial Ins(tu(ons
Other Banks and Financial Ins(tu(ons Other Banks and Financial Ins(tu(ons

Other Banks and Financial Ins(tu(ons

 
 
QuoAng Bank/ Market-Maker “For PHP50mn 91-day T-Bills I quote: 6.5 – 6.25” BID – OFFER
QuoAng Bank/ Market-Maker
“For PHP50mn 91-day T-Bills
I quote: 6.5 – 6.25”
BID – OFFER
“Two Way Price”

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Stage 2: Trading

¨Systema(c dealership and posiAoning of GS

¨Secondary market dealing of GS among and between GSEDs, banks, investment houses, insurance companies, mutual funds, and other financial insAtuAons.

¨Primary raAonale for trading is to strategically profit and manage exposures by acAvely buying and selling GS in the secondary market

Two ParAes to a GS TransacAon

¨ QuoAng Party (Market-Maker)

n The party giving the two-way price

¨ Calling Party (Price-Taker)

n The party asking for the price

¨ Note: The calling party has to deal at the price of the quoAng party.

QuoAng Bank’s Two-Way Quote

¨Bid Rate of 6.5

nRate at which quoAng bank is willing to BUY 91-day T-Bills

¨Offer Rate of 6.25

nRate at which quoAng bank is willing to SELL 91-day T-Bills

¨Bid-Offer Spread of 0.25% or 0.0025

nDifference between bid and offer yield nTraders try to quote narrower spread to enAce deals

InterpreAng Basis Points

¨1 basis point = 0.01 of a % point ¨10 basis points = 0.10 of a % point ¨100 basis points = 1.00 of a % point

¨Example: The 6.5/6.25 two-way quote has a bid- offer spread equal to 25 basis points or 0.25 of a % point.

Bid and Offer QuotaAons for GS

¨ IndicaAve Quote

¤ An indicaAve quote is not a final price and may be changed by the quoAng party during the course of a trade; may be dealt at only once the quoAng party has “firmed up” his/her price.

¨ Firm Quote

¤ A firm quote is a type of quotaAon where the quoAng party has given a definite and final price in which the counterparAes may deal at.

Taking Profit from GS Dealership

¨Rule of Thumb: “Buy High-Sell Low”

Bank X Bank A Bank Y
Bank X
Bank A
Bank Y

8.375

8.25

¨Bank A buys 5-year FXTN from Bank X at 8.375 ¨Bank A sells same 5-year FXTN to Bank Y at 8.25 ¨Spread of 12.5 basis points between buying and selling yield is the profit of Bank A

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Calling Party’s PerspecAve

¨Bid Rate of 6.5

nRate at which calling party may SELL 91-day T- Bills

¨Offer Rate of 6.25

nRate at which calling party may BUY 91-day T- Bills

Financial Market QuotaAons

¨ Rates are quoted by banks directly to customers, other financial insAtuAons, and other banks in the interbank market.

¨ Rates are also quoted through brokers.

¨ Market informaAon service providers such as Reuters, Moneyline Telerate, Bloomberg, etc., also carry rate quotaAons on their screens, although these are only indicaAve and not dealing prices.

Price vs. Yield QuotaAons

¨For T-Bills, FXTNs, and RTBs

nQuotaAons are made on a Yield basis

¨For ROP Bonds

nQuotaAons are made on a Price basis

QuoAng Bank/Market-Maker “For USD1.0mn ROP31 I quote: 101 – 101.625” BID – OFFER “Two Way
QuoAng Bank/Market-Maker
“For USD1.0mn ROP31
I quote: 101 – 101.625”
BID – OFFER
“Two Way Price”

Secondary Market GS Sealement

¨ SecuriAes Transfer

¤ Via Registry of Scripless SecuriAes ( RoSS ) ¤ Via Third Party Custodian

¨ Sealement

¤ Cash Sealement (not very frequent) ¤ Check Sealement (subject to check clearing) ¤ AutomaAc Debit Arrangement ¤ Real Time Gross Sealement (RTGS)

3 rd Party Custodianship

¨Benefits of BSP Circular 392 (Investor ProtecAon)

¤Full control and possession of the securiAes purchased ¤Independent validaAon of the existence of securiAes purchased ¤Regular reporAng of securiAes holdings ¤Capability to choose most compeAAve counterparAes in case of sale, pledge, transfer, and lending of securiAes

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Taking Profit from GS Dealership

¨Rule of Thumb: “Buy Low-Sell High”

Bank X Bank A Bank Y
Bank X
Bank A
Bank Y

101

101.625

¨Bank A buys ROP31 from Bank X at 101.50 ¨Bank A sells same ROP31 to Bank Y at 101.625.

3 rd Party Custodianship

¨ BSP Circular 392, Series of 2003, mandates that all Peso or foreign currency denominated securiAes sold to investors must be delivered to a BSP- accredited custodian for safekeeping.

¨ The Circular prohibits the bank and/or its affiliates which issued and/or sold the security to act as custodian for the same security it issued and/or sold.

3 rd Party Custodianship

¨What securiAes are covered by BSP Circular 392?

¤All securiAes sold by banks on a “without recourse basis” must be delivered to a BSP-accredited custodian for safekeeping.

3 rd Party Custodianship

¨BSP Accredited Custodians

¤Deutsche Bank ¤Standard Chartered Bank ¤Bank of the Philippine Islands (BPI) ¤CiAbank, N.A. ¤Hong Kong and Shanghai Banking CorporaAon (HSBC) ¤Philippine Depository and Trust CorporaAon (PDTC)

Dealing Through Brokers

BANK B 6.1/8 – 6.1/4 BANK A 5.7/8 – 6.30 BANK C 6.0 – 6.35
BANK B 6.1/8 – 6.1/4
BANK A 5.7/8 – 6.30
BANK C 6.0 – 6.35

Broker 6.1/8 – 6.35

Financial Market Dealing Ethics

¨ConfidenAality

¨Dealing for personal accounts

¨Entertainment and gics

¨Using brokers

¨Price quotaAons

¨Name disclosure, switching, and passing of names

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GS DocumentaAon

¨ConfirmaAon of Purchase (COP)

¤For RoSS Transfers

¨ConfirmaAon of Sale (COS)

¤For RoSS Transfers

¨Sealement InstrucAons

¤Custodian-specific

¨Safekeeping Receipt

¤Prior to BSP Circular 392

Safekeeping Receipt ¤   Prior to BSP Circular 392 Stage 3: DistribuAon ¨   Selling-down of

Stage 3: DistribuAon

¨Selling-down of GS to insAtuAonal and retail clients

¨Clients typically have no bargaining power for the GS they are purchasing

¨One of they ways in which banks can get rid of “problem” GS

¨Clients are required to get the services of a 3 rd party custodian to safekeep their GS holdings.

References

¨Treasury CerAficaAon Program (TCP) Money Market Module – Ateneo -BAP InsAtute of Banking

¨Bureau of the Treasury ( BTr) Website

¨Bloomberg© Professional

12/5/11

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