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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.

GOVERNMENT SECURITIES DEALERSHIP

Government SecuriAes (GS)

Stages in the Life of a GS

Origina(on
primary market oering of GS to GSEDs

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.

Trading
secondary market turnover of GS among GSEDs and other securiAes dealers

Distribu(on
selling down of GS to insAtuAonal and retail investors

SecuriAes Dealer

Government SecuriAes Eligible Dealer (GSED)

A securiAes dealer is a nancial 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 dealers 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.

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 ocial 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.

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Stage 1: OriginaAon

SecuriAes UnderwriAng for ROPs

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

Department of Finance

UnderwriAng Team

GSEDs Sec. Dealers and Investors

Sealement takes place T+2 days acer aucAon date Oer Size: T-Bills PHP8.5 billion FXTNs PHP8.5 billion

Primary Market AucAon of GS

Department of Finance

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 :
Bid Yield Bid Volume

Bureau of the Treasury

SecuriAes Dealers Banks InsAtuAonal Investors

GSEDs

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

Dutch AucAon (Uniform Price)

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%.

Example: AucAon of a new issue of 7-year FXTNs with an oer size of PHP7.0 billion
n Bank A - n Bank B - n Bank C - n Bank D - n Bank E -

P2.0bn - P2.0bn - P3.0bn - P2.0bn - P2.0bn -

9.75% 9.625% 9.85% 9.745% 9.70%

Awarded coupon is 9.75%. CompeAAve stop-out is 50%.

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English AucAon (Price DiscriminaAon)

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 dierent prices.

English AucAon (Price DiscriminaAon)

CompeAAve Bid

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

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.

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

English AucAon (Price DiscriminaAon)

A Non-CompeAAve Bid is a tender to buy a specied 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.

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

Non-compeAAve bids
n n

Bank A Bank B Bank A Bank B Bank C Bank D

- - - - - -

P500mn P500mn P550mn P300mn P150mn P400mn - - - - 6.124% 6.00% 6.245% 6.30%

CompeAAve bids
n n n n

AucAon Results:

High Average Low

- - -

6.25% 6.125% (for non-comp bids) 6.00%

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AucAon Guidelines

The cut-o 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.

Automated Debt AucAon Processing System (ADAPS)

AucAon Sealement

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

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)

Registry of Scripless SecuriAes (RoSS)

Non-AucAon Sealement

The RoSS is the ocial record of absolute ownership, legal or benecial 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.

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

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Non-AucAon Sealement

Over-the-Counter (OTC) or Tap Method

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

The OTC or Tap Method is another mode of originaAng GS for specic 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

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

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

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

Upon issuance, each GS is assigned a

unique ISIN which acts as its idenAer and is internaAonally accepted.

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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 nancial insAtuAons. Primary raAonale for trading is to strategically prot and manage exposures by acAvely buying and selling GS in the secondary market

Secondary Market Trading of GS

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

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

Government Securi(es Eligible Dealer (GSED)

Other Banks and Financial Ins(tu(ons

Other Banks and Financial Ins(tu(ons

Other Banks and Financial Ins(tu(ons

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

QuoAng Bank/ Market-Maker

QuoAng Banks Two-Way Quote

Bid Rate of 6.5

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

For PHP50mn 91-day T-Bills I quote: 6.5 6.25

Oer Rate of 6.25

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

BID OFFER Two Way Price

Bid-Oer Spread of 0.25% or 0.0025

n Dierence between bid and oer yield n Traders try to quote narrower spread to enAce deals

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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

Calling Partys PerspecAve

Bid Rate of 6.5

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

Bills

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

Oer Rate of 6.25

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

Bills

Bid and Oer QuotaAons for GS

Financial Market QuotaAons

IndicaAve Quote
An indicaAve quote is not a nal 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 rmed up his/her price.

Rates are quoted by banks directly to customers, other nancial 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.

Firm Quote
A rm quote is a type of quotaAon where the quoAng

party has given a denite and nal price in which the counterparAes may deal at.

Taking Prot from GS Dealership

Price vs. Yield QuotaAons

Rule of Thumb: Buy High-Sell Low

For T-Bills, FXTNs, and RTBs

n QuotaAons are made on a Yield basis

Bank X
8.375

Bank A
8.25

Bank Y

For ROP Bonds

n QuotaAons are made on a Price basis

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 prot of Bank A

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QuoAng Bank/Market-Maker
For USD1.0mn ROP31 I quote: 101 101.625

Taking Prot from GS Dealership

Rule of Thumb: Buy Low-Sell High

Bank X

101

Bank A
101.625

Bank Y

BID OFFER Two Way Price

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

Secondary Market GS Sealement

3rd Party Custodianship

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

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 aliates which issued and/or sold the security to act as custodian for the same security it issued and/or sold.

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

3rd Party Custodianship

3rd Party Custodianship

Benets of BSP Circular 392 (Investor ProtecAon)

Full control and possession of the securiAes purchased Independent validaAon of the existence of securiAes

What securiAes are covered by BSP Circular 392?

All securiAes sold by banks on a without recourse

purchased Regular reporAng of securiAes holdings Capability to choose most compeAAve counterparAes in case of sale, pledge, transfer, and lending of securiAes

basis must be delivered to a BSP-accredited custodian for safekeeping.

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3rd Party Custodianship

GS DocumentaAon

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)

ConrmaAon of Purchase (COP)

For RoSS Transfers

ConrmaAon of Sale (COS)

For RoSS Transfers

Sealement InstrucAons
Custodian-specic

Safekeeping Receipt

Prior to BSP Circular 392

Dealing Through Brokers

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

Stage 3: DistribuAon

CondenAality Dealing for personal accounts Entertainment and gics Using brokers Price quotaAons Name disclosure, switching, and passing of names

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 3rd party custodian to safekeep their GS holdings.

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References

Treasury CerAcaAon Program (TCP) Money Market Module Ateneo-BAP InsAtute of Banking Bureau of the Treasury (BTr) Website Bloomberg Professional

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