Press material on the performance of the primary dealer system in the 1st half of 2000, the league table of primary dealers, and on the Hungarian Government Securities Online (the website of the Government Debt Management Agency).
What is the primary dealer system of government securities?
The primary dealer system of government securities was set up in January 1996. The main objectives of the system are to provide a solid basis for deficit financing, reduce the costs of financing through the improvement of market mechanisms, and facilitate the expansion and transparency of the secondary market. Investment companies and credit institutions that are registered in Hungary may become primary dealers after they have signed a dealer’s agreement with the Government Debt Management Agency. Pursuant to this agreement, dealers have an exclusive right to participate at the auctions of government bonds and discount Treasury bills. Furthermore, apart from the Hungarian Treasury’s branch network and the Hungarian Postal Service, dealers are the only parties that are allowed to sell retail government securities.
Currently, there are 16 dealers in the system. Six of them have also undertaken, under a separate contract, to place and sell retail government securities. These six dealers sell government securities to the general public via 369 sales branches.
What kind of role plays the primary dealer system in the sale of government securities?
Government securities worth HUF 1564 billion in total were sold over the first 6 months of 2000. Out of that 86% was purchased by primary dealers from the issuer. The Treasury branch network and the Postal Service had a share of 14% in the gross HUF sales. (1)
The primary dealer system was capable of meeting almost the total financing requirement of the central government, the social security funds and the extra-budgetary funds in the first half of the year, with the dealers’ purchases accounting for 95% of the total domestic net sales (2) of HUF 299 billion (the Treasury’s branch network and the Postal service had a share of 5%). This share shows that primary dealers play a major role in deficit financing, and that dealers have been doing their job properly for over 4 and a half years now.
It is another, similarly important, responsibility of primary dealers to quote prices for a specific government securities. This requirement is meant to ensure the liquidity (3) and transparency of the secondary market for government securities. At present, primary dealers quote bid and offer prices for 26 different types of government bonds and 7 discount Treasury bills on a regular basis. In the first half of 2000, more than 90% of the secondary market sales of government securities (4) was conducted by primary dealers. This is a remarkable achievement, considering that the trading volume in the secondary market is growing year by year. After their substantial demand was satisfied early in the year, foreign investors’ activity in the secondary market was only moderate throughout the period. Despite this fact the secondary market turnover rose by 2 percentage points by June 2000 as compared to the first half of 1999.
What changes have taken place in the primary dealer system?
In order to reduce the systemic risk of the secondary market the ÁKK aimed at continuously strengthening the primary dealer system and initiated changes being in line with these efforts. The primary dealer system entered a new phase of development on April 1, 2000. At least three primary dealers are required to quote prices for publicly issued government securities in a minimum amount of HUF 100 million. In price quotation, the minimum face value of benchmark bonds (5) was increased from HUF 100 million to HUF 200 million. The bottom limit of regulatory capital that is required from primary dealers rose to HUF 2 billion, followed by the increase of the prescribed liquid assets limit to HUF 800 million. A successful reform of the issuance system resulted in a more reliable price quotation system since the higher lot size is easier to meet if there are fewer government security series combined with higher sales volumes.
The number of credit institutions among the dealers grew from 1 to 6. This increase is attributable to the fact that credit institutions have been allowed to provide full range of investment services since 1999.
Effective as of May 8, 2000, another change has been made to the system of primary dealers. The MMTS system of the Budapest Stock Exchange has become the sole medium of price quotations made by primary dealers, as opposed to the former system of having two different systems for price quotation (then, dealers had to quote prices both on the BSE’s MMTS and on Reuters’ system). This contributes to the standardization of the government securities market, the concentration of information and an improved efficiency of price quotation.
At the end of the six month transitional period Deutsche Bank Rt and Kereskedelmi és Hitelbank Rt received, instead of their ‘Primary Dealer Applicant’ status, a full membership on July 1, 2000.
What is the rationale behind the continuous improvement of the primary dealer system?
1. Firstly, the primary dealer system of government securities needs to be further
improved. It means that the requirements specified for the investment companies and banks
involved must be refined in such a manner that ensures that investors receive the highest quality
services whenever they turn to a primary dealer.
2. Secondly, the need to maintain investors’ confidence and the long-term interest of the Hungarian
capital market requires primary dealer companies to conduct substantial turnover, have a strong
financial standing and good reputation. Hungary’s accession to the Eropean Unionimplies
that the Hungarian government securities market will be open to the major Western investment
banks. It means that we have to become prepared for a time when the group of Hungarian
primary dealers will include major foreign-based members as well. The Government Debt
Management Agency makes efforts to gradually set limits and requirements for domestic primary
dealers that will bring them up to the standards of major European investment companies. The
purpose is to make sure that Hungarian market players can compete with European companies
when the market finally opens up.
3. Thirdly it is the interest of the issuer to have reliable, strong counterparties acting in an efficient
and competitive market. To that end, the Government Debt Management Agency makes efforts to
set general conditions that induces primary dealers to trade in the market actively. Their more
active participation will prevent an excessive concentration in the market.
What is the significance of ranking primary dealers by their shares in primary sales?
The table showing the dealers’ shares in the primary market is officially prepared semi-annually. The Government Debt Management Agency uses this information for verifying the dealers’ compliance with their contractual obligation to buy 3% of the total volume at auctions. (6) This table is the basis for the league table of primary dealers that is published quarterly to better inform investors. The 3 % limit is meant to maintain competition between dealers. This way, financing costs that reflect the market judgment are guaranteed for the issuer through the currently used auction technique.
For dealers, the league table shows the quantity of their accepted bids, it suggests how accurately they can estimate the returns that evolve at auctions and the size and capital base of their clients. The primary market league table shows how actively primary dealers are involved in the trading of government securities. Therefore it helps investors to choose the best primary dealer to handle their investments in government securities. A dealer’s top position in the table might contribute to the improvement of that dealer’s overall business reputation.
What method is used to set up the league table?
The Government Debt Management Agency uses different weights for government securities for calculating primary dealers’ shares in the primary market. This method makes comparable the purchased amounts of securities with different maturities. Securities shorter than 1 year have a weight less than 1, while the weight of securities longer than a year is more than 1 for the purpose of calculating shares (the weights do not proportionally increase with longer terms of maturity). Consequently, if a dealer purchases the same volumes of 2-year and 5-year bonds, it is the 5-year securities that add more to that dealer’s share. If the amount of government securities purchased by a dealer at an auction is multiplied by the appropriate weights, and the result is expressed as a percentage of the total sales volume weighted by maturity terms, the resulting figure will be the share of that dealer.
In line with traditions the league table of primary dealers acquiring the biggest share in the primary market is published this year as well. On the basis of the proposals for improving the reputation of the league table two prizes are awarded. One of the prizes is given to the primary dealer reaching the biggest share at government security auctions (summarized share in the primary market of Hungarian Government Bonds and Discount Treasury Bills). The other prize is received by the most dynamically growing company, that could increase its primary market share the most compared with the same period of last year. Both prizes refer to the period from 1 July, 1999 to 30 June, 2000.
What was the reason for setting up the Hungarian Government Securities Online?
As the direct access to the market and market information is getting easier it might substantially contribute to the growth opportunities of money and capital markets which often compete with each other because of globalization. The same applies to the Hungarian government securities market that has considerably improved thanks to the establishment of the primary dealer system. The sales and marketing strategy of the Government Debt Management Agency is aimed at full transparency that is a precondition of effective operations in the government securities market, i.e. a deficit financing safety.
Complementing the primary dealers’ services, the widely used Internet with its unique culture is an ideal solution for those who want to make use of the above benefits.
Furthermore, transparency is a rightful requirement on behalf of the Hungarian citizens and investors since people might want to know how public funds are used, and they can also become acquainted with the costs and expenses of deficit financing. Information on the government securities market is of crucial importance for economic agents since such information provide orientation in relation to important issues such as returns on financial investments, borrowing costs, the reputation of the country’s economy, etc. Monopolizing that information (public goods) and/or distributing them against compensation would interfere with the principle of providing level playing field for market participants.
Finally, it should not be forgotten that the Government is in a competitive situation in attracting investors’ savings. Major financial intermediaries are already offering Internet-based services, or they are present in the world wide web at least. Therefore, in order not to be at a competitive disadvantage we too need to set up an electronic manual on the Internet that provides guidance on the government securities market and the related processes.
What are the main objectives of the website?
The primary purpose of the website is to give would-be and existing participants of the government securities market wide-ranging access to such information (‘depth’ of information) and provide up-to-date, timely information through easy access (‘time dimension’ of information). Of course, there are already more direct solutions for promoting the market and sales even in Hungary, such as trading with securities via the Internet. However, the issue of Hungarian government securities via the Internet is something to be achieved in the future, although such attempts have already been made in foreign countries (Spanish government securities).
In designing the contents and structure of the homepage, we have tried to ensure that certain target groups (7) identified by us can effectively reach the pages that might hold interest for them. One of the main advantages of information flow via the Internet is its interactive nature. Interactivity makes it possible for us to fine-tune the menus prepared for the various target groups on a continuous basis.
The world wide web offers quick, brief and a wide-range of information that might attract those potential investors’ and other interested parties’ attention to us to which we have not been able to get through by conventional means of communication. As for the communication with other target groups that already know us, even a minimal use of Internet solutions contributes to higher quality information.
Our homepage has an English version as well. The link to the English version is on the introductory page. The arrangement of information corresponds to the categorization of the Hungarian target groups (only the retail investors’ category is missing). This is the cheapest and most effective way of keeping in touch with investors from the developed countries (8), who buy government securities denominated in either HUF or a foreign currency.
The homepage can be found at WWW.ALLAMPAPIR.HU
How the website changes the structure of ÁKK’s publications?
Both monthly and quarterly publications can be found on the website, presumably earlier than in hardcopies, because the time spent on printing and mailing can be spared.
Despite this fact the monthly publication is still regularly disseminated in hardcopies as well, while the quarterly publication shall be printed semi-annually, but the quarterly data are put on the net. This decision is based on easier and quicker electronic publication opportunities.
1. The total amount of government securities sold in Hungary in the period.
2. The gross sales in the period, less loan repayments and the amount of government securities that
mature and are redeemed.
3. Liquidity shows how readily a government instrument may be sold and bought in the secondary
4. It includes the stock market and OTC trading volumes transacted through the KELER’s system.
5. Benchmark government bonds: Fixed-rate government bond series that are being issued at a
given moment. A government bond is considered as a benchmark until a bond series that has the
same maturity term as the original term of that government bond is issued. The effective date for
such shift in the benchmark is the second business day (T+2) preceding the issue of the new bond
6. Pursuant to the primary dealers’ agreement, all primary dealers are required to purchase 3% of
the total government bond and discount Treasury bill volume sold in the given half-year period.
7. The target groups are as follows: retail investors (based on the amount of money to be invested),
institutional investors, media, foreign investors and analysts. Except in the case of the last group,
investors have been further categorized according to whether they are familiar or not familiar with
the government securities market. Accordingly, those who visit the homepage for the first
time may read a tutorial that gives them basic information that they will not have to ‘struggle’
through again when visiting the site for the next time. The entire domain of the homepage may be
searched by content.
8. It is in these countries (EU members, USA, etc.) that Internet access is the most widely spread and
has the lowest rates.