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GOVERNMENTSECURITIES

DEALERSHIP

GovernmentSecuries(GS)

GSareuncondionalobligaonsofthesovereignstate.Itisbackedbythefulltaxingpowerofthesovereignty.Therefore,GSarepraccallyfreefromdefault.

ThePhilippinegovernmentacvelyissuestwokindsofGS:TreasuryBillsandTreasuryBonds,so-calledbecauseitistheBureauofTreasury(BTr)thatoriginatestheirsaletotheinvesngpublicthroughanetworkoflicenseddealersthroughaucons.

GovernmentSecuries(GS)

ROPBondsaretheforeigncurrency-denominatedGSissuedbythePhilippinegovernmentwhichare

infrequentlyissuedandareoriginatedthroughthe

processofsecuriesunderwring.

StagesintheLifeofaGS

Distribu(on

sellingdownofGStoinstuonalandretailinvestors

Trading

secondarymarketturnoverofGSamongGSEDsandothersecuriesdealers

Origina(on

primarymarketofferingofGStoGSEDs

SecuriesDealer

Asecuriesdealerisafinancialinstuonorganizedusuallyasacorporaonorapartnershipwhoseprincipalbusinessistobuyandsellsecuries,whetherregisteredorexemptfromregistraon,forthedealersownaccountorfortheaccountofclients.

Asecuriesdealer,beforedealinginsecuries,isrequiredtoobtainalicensefromSECpursuanttotheRevisedSecuriesAct.

GovernmentSecuriesEligibleDealer(GSED)

AGSEDisanSEC-licensedsecuriesdealerbelongingtoaserviceindustrysupervised/regulatedbygovernment(SEC,BSP,orInsuranceCommission)whichhasmetthe:

(a)P100mnunimpairedcapitalandsurplusaccount;

(b)thestatutoryraosprescribedfortheindustry,and

(c)hastheinfrastructureforanelectronicinterfacewiththeAutomatedDebtAuconProcessingSystem(ADAPS)andtheofficialRegistryofScriplessSecuries(RoSS)bothoftheBTrusingBridgeInformaonSystems(BIS),andacknowledgedbytheBTraseligibletoparcipateintheprimaryauconofgovernmentsecuries.

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Stage1:Originaon

UnderwringofsecuriesforROPs

Primarymarketaucons: DutchAuconforFXTNs EnglishAuconforT-BillsandFXTNreissues

AuconsforT-billsandFXTNsareheldonaweeklybasis: everyotherMondayforT-Bills; everyotherTuesdayforFXTNs

SelementtakesplaceT+2daysaeraucondate

OfferSize:T-BillsPHP8.5billion

FXTNsPHP8.5billion

SecuriesUnderwringforROPs

DepartmentofFinance

UnderwringTeam

GSEDs

Sec.DealersandInvestors

PrimaryMarketAuconofGS

DepartmentofFinance

BureauoftheTreasury

GSEDs

Securies

Dealers

Banks

Instuonal

Investors

DutchAucon(UniformPrice)

UsedbytheBTrtoauconFXTNs Isapurelycompe((vebiddingprocess CouponrateforFXTNtobeissuedshallbeset Auconparcipantssubmittheff:BidYieldBidVolume

ThehighestyieldacceptabletotheBTrshallbetheawardedcouponratefortheFXTNbeingissued.


UniformPriceorDutchAuconisamethodofpeggingauniformcouponrateofaTreasuryBond

atthestop-outlevelofarrayedamountsofbid

withthecorrespondingyieldratetendered.

Convenonally,theratemustbedivisiblebyone-eighthof1%.


Example:Auconofanewissueof7-yearFXTNswithanoffersizeofPHP7.0billion

n Ban kA - P 2. 0bn - 9 .75 %n Ban kB - P 2. 0bn - 9 .62 5%n Ban kC - P 3. 0bn - 9 .85 %n Ban kD - P 2. 0bn - 9 .74 5%n Ban kE - P 2. 0bn - 9 .70 %

Awardedcouponis9.75%.Compevestop-outis50%.

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EnglishAucon(PriceDiscriminaon)

ThePriceDiscriminaonorEnglishAuconisamethodinwhichsuccessfulcompevebidders

paythepricetheyhavebid,andallthewinning

biddersmaypaydifferentprices.


UsedbytheBTrtoauconT-BillsandFXTNreissues

Compe((veandnon-compe((vebiddingallowed

Forcompevebids,bothyieldandvolumearesubmiedbyGSED.

n AwardedYield=YieldSubmiedbyGSED

Fornon-compevebids,onlyvolumeissubmiedbyGSED.

n AwardedYield=AverageYieldDuringAucon

CompeveBid

Acompevebidisatendertobuyanamountofgovernmentsecuriesatayieldrateperannum

thataGSEDbelieveswillwrestanawardforthe

GSEDbyout-biddingotherGSEDsintheprimary

marketauconofgovernmentsecuries.

Non-CompeveBid

ANon-CompeveBidisatendertobuyaspecifiedamountofgovernmentsecuries,bya

GSEDintheprimaryauconofgovernment

securies,withoutindicanganyyieldrate,onthe

understandingthattheawardshallbeattheweightedaverageyieldrateofthecompeve

bidsawardedatthesameaucon.


Example:Anewissueof91-dayT-BillswithanoffersizeofPHP2.0billion.

Non-compevebids

n BankA - P500mn

n BankB - P500mn

Compevebids

n BankA - P550mn - 6.124%

n BankB - P300mn - 6.00%n BankC - P150mn - 6.245%

n BankD - P400mn - 6.30%

AuconResults:

High - 6.25%

Average - 6.125%(fornon-compbids)

Low - 6.00%

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AuconGuidelines

Thecut-offmeforsubmissionofbidstotheBTrduringaucondateis1pm.

AminimumamountofP10mnmaybetenderedbyaGSEDperbid.

Amaximumofseven(7)compevebidsandone(1)non-compevebidpertenormaybe

tenderedbyaGSED.

AutomatedDebtAuconProcessingSystem

(ADAPS)

ADAPSisanelectronicmodebywhichtheNaonalGovernmentsellsgovernmentsecuriestoa

networkofGSEDswhicharelinkedtotheBTr

throughBIS

AuconSelement

SelementofGStakesplace2daysaeraucondate.

GSEDmusttransferfundselectronicallytotheDDAof

theTreasurerofthePhilippinesmaintainedwithBSP.

Uponreceiptofthefunds,theBTrwilltransferthe

newlyissuedsecuritytothePrincipalSecuriesAccount

oftheGSEDintheRegistryofScriplessSecuries(RoSS).

ThisselementprocedureiscalledDvP-RTGS(Delivery

versusPayment-RealTimeGrossSelement)

RegistryofScriplessSecuries(RoSS)

TheRoSSistheofficialrecordofabsoluteownership,legalorbeneficialtleorinterestinGS.

PurchaseofGSsecuritycredited

SaleofGSsecuritydebited

GSEDsmaintainPrincipalSecuriesAccountinRoSS.

OthersecuriesdealersmaintainClientSecuriesAccountinRoSS.

Non-AuconSelement

AsecuritytransferviatheRoSSduetoanon-aucon(secondarymarket)GStransaconbetweentwoGSEDsmayonlybeeffectedif,attheendoftradinghours,thereexistsa

matchedtrade(confirmedbybothpares).

ThematchedtradewillthenbereferredtotheBSPforselement(debitDDAofGSED-buyerandcreditDDAofGSEDseller.

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Non-AuconSelement

ThisprocesscompletesthesecondarymarkettradeandeffecvelyconformswiththeG-30

RecommendaonsofDvPthroughNengbut

Same-DaySelement.

Over-the-Counter(OTC)orTapMethod

TheOTCorTapMethodisanothermodeoforiginangGSforspecificinvestors,namelythe

GovernmentOwnedandControlled

Corporaons(GOCCs),theLocalGovernment

Units(LGUs),andtheTaxExemptInstuons

(TEIs),e.g.,pensionfunds,GSIS,SSS,etc.

Itisnon-compe((veandisopeneveryday.


TheapplicableyieldratesforT-BillsissuedtoGOCCs,LGUs,andTEIsshallbebasedontherateoftheimmediatelyprecedingT-Billaucon.

GOCCslowestacceptedyieldrate

LGUsweightedaverageyieldrate

TEIs90%oftheweightedaverageyieldrate


FXTNsissuedtoGOCCs,LGUs,andTEIsshallbepricedbasedonthecurrentmarketyield.

GOCCsandLGUsapplicablecouponratebasedoncouponratecorrespondingtotheauconed

FXTN

TEIsapplicablecouponratebasedon90%ofthecouponratecorrespondingtotheauconedFXTN

InterprengtheISIN

PIBD0507B435

CodeforPhilippines

CodeforFXTN

TenorofGS

MaturityYear

MonthofIssuance

GSSeries

Uponissuance,eachGSisassigneda

uniqueISINwhichactsasitsidenfierandis

internaonallyaccepted.

InterprengtheISIN

PIBD0507B435

InthePhilippinebondmarkets,ashortcutisassignedforeachFXTNseries.IntheaboveISIN:5-43.

ISINforotherGS

PIBLT-bills PIIDRTBs PIBZZeroes PIPN-PNs

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Stage2:Trading

Systema(cdealershipandposioningofGS

SecondarymarketdealingofGSamongandbetweenGSEDs,banks,investmenthouses,insurancecompanies,mutualfunds,andotherfinancialinstuons.

PrimaryraonalefortradingistostrategicallyprofitandmanageexposuresbyacvelybuyingandsellingGSinthesecondarymarket

SecondaryMarketTradingofGS

GovernmentSecuri(es

EligibleDealerGSED)

GovernmentSecuri(es

EligibleDealerGSED)

GovernmentSecuri(es

EligibleDealerGSED)

OtherBanksand

FinancialIns(tu(ons

OtherBanksand

FinancialIns(tu(ons

OtherBanksand

FinancialIns(tu(ons

TwoParestoaGSTransacon

QuongParty(Market-Maker)nThepartygivingthetwo-wayprice

CallingParty(Price-Taker)nThepartyaskingfortheprice

Note:Thecallingpartyhastodealatthepriceofthequongparty.

QuongBank/Market-Maker

ForPHP50mn91-dayT-Bills

Iquote:6.56.25

BIDOFFER

TwoWayPrice

QuongBanksTwo-WayQuote

BidRateof6.5n RateatwhichquongbankiswillingtoBUY91-dayT-Bills

OfferRateof6.25n RateatwhichquongbankiswillingtoSELL91-dayT-Bills

Bid-OfferSpreadof0.25%or0.0025n Differencebetweenbidandofferyieldn Traderstrytoquotenarrowerspreadtoencedeals

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InterprengBasisPoints

1basispoint=0.01ofa%point 10basispoints=0.10ofa%point 100basispoints=1.00ofa%point

Example:The6.5/6.25two-wayquotehasabid-offerspreadequalto25basispointsor0.25ofa%

point.

CallingPartysPerspecve

BidRateof6.5nRateatwhichcallingpartymaySELL91-dayT-

Bills

OfferRateof6.25nRateatwhichcallingpartymayBUY91-dayT-

Bills

BidandOfferQuotaonsforGS

IndicaveQuoteAnindicavequoteisnotafinalpriceandmaybechangedbythequongpartyduringthecourseofatrade;maybedealtatonlyoncethequongpartyhasfirmeduphis/herprice.

FirmQuoteAfirmquoteisatypeofquotaonwherethequongpartyhasgivenadefiniteandfinalpriceinwhichthecounterparesmaydealat.

FinancialMarketQuotaons

Ratesarequotedbybanksdirectlytocustomers,otherfinancialinstuons,andotherbanksintheinterbankmarket.

Ratesarealsoquotedthroughbrokers.

MarketinformaonserviceproviderssuchasReuters,MoneylineTelerate,Bloomberg,etc.,alsocarryratequotaonsontheirscreens,althoughtheseareonlyindicaveandnotdealingprices.

TakingProfitfromGSDealership

RuleofThumb:BuyHigh-SellLow

BankAbuys5-yearFXTNfromBankXat8.375 BankAsellssame5-yearFXTNtoBankYat8.25 Spreadof12.5basispointsbetweenbuyingand

sellingyieldistheprofitofBankA

8.375 8.25

BankX BankA BankY

Pricevs.YieldQuotaons

ForT-Bills,FXTNs,andRTBsn QuotaonsaremadeonaYieldbasis

ForROPBondsn QuotaonsaremadeonaPricebasis

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QuongBank/Market-Maker

ForUSD1.0mnROP31

Iquote:101101.625

BIDOFFER

TwoWayPrice

TakingProfitfromGSDealership

RuleofThumb:BuyLow-SellHigh

BankAbuysROP31fromBankXat101.50 BankAsellssameROP31toBankYat101.625.

101 101.625

BankX BankA BankY

SecondaryMarketGSSelement

SecuriesTransferViaRegistryofScriplessSecuries(RoSS)ViaThirdPartyCustodian

SelementCashSelement(notveryfrequent)CheckSelement(subjecttocheckclearing)AutomacDebitArrangementRealTimeGrossSelement(RTGS)

3rdPartyCustodianship

BSPCircular392,Seriesof2003,mandatesthatallPesoorforeigncurrencydenominatedsecuries

soldtoinvestorsmustbedeliveredtoaBSP-

accreditedcustodianforsafekeeping.

TheCircularprohibitsthebankand/oritsaffiliateswhichissuedand/orsoldthesecuritytoactas

custodianforthesamesecurityitissuedand/orsold.


BenefitsofBSPCircular392(InvestorProtecon)FullcontrolandpossessionofthesecuriespurchasedIndependentvalidaonoftheexistenceofsecuries

purchased

RegularreporngofsecuriesholdingsCapabilitytochoosemostcompevecounterpares

incaseofsale,pledge,transfer,andlendingof

securies


WhatsecuriesarecoveredbyBSPCircular392?Allsecuriessoldbybanksonawithoutrecourse

basismustbedeliveredtoaBSP-accredited

custodianforsafekeeping.

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BSPAccreditedCustodiansDeutscheBankStandardCharteredBankBankofthePhilippineIslands(BPI)Cibank,N.A.HongKongandShanghaiBankingCorporaon(HSBC)PhilippineDepositoryandTrustCorporaon(PDTC)

GSDocumentaon

ConfirmaonofPurchase(COP) ForRoSSTransfers

ConfirmaonofSale(COS) ForRoSSTransfers

SelementInstrucons Custodian-specific

SafekeepingReceipt PriortoBSPCircular392

DealingThroughBrokers

BANKA5.7/86.30

BANKB6.1/86.1/4

BANKC6.06.35

Broker6.1/86.35

FinancialMarketDealingEthics

Confidenality

Dealingforpersonalaccounts

Entertainmentandgis

Usingbrokers

Pricequotaons

Namedisclosure,switching,andpassingofnames

Stage3:Distribuon

Selling-downofGStoinstuonalandretailclients

ClientstypicallyhavenobargainingpowerfortheGS

theyarepurchasing

Oneoftheywaysinwhichbankscangetridof

problemGS

Clientsarerequiredtogettheservicesofa3rdparty

custodiantosafekeeptheirGSholdings.

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References

TreasuryCerficaonProgram(TCP)MoneyMarketModuleAteneo-BAPInstuteofBanking

BureauoftheTreasury(BTr)Website

BloombergProfessional

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