Draft: June 8, 2003 Developing Efficient Market Infrastructure and Secondary Market of Government Bonds in Developing Countries



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7Conclusion


A proper set of the demand and supply sides of a bond market is a primary prerequisite for bond market liquidity. A well-organized market infrastructure is often secondary to them.

Public awareness/consensus about the roles of a government bond market is a key to reduce the overall trading costs of government bonds. Trading per se is neutral to total returns, and never pays for trading costs without additional risk. Therefore, it is critical to keep trading costs low for market liquidity. Due to a public goods nature of capital markets, a public support is essential to bring down the direct costs of trading.

Key market infrastructures for market efficiency are market making obligations in a dealers’ market and an expanded repo market, followed by an electronic trading system, an electronic clearing, settlement, and depository, and position-neutral accounting and taxation. As the market develops, the policymaker needs to introduce advanced risk management and arbitrage facilities into its government bond market, while balancing between market efficiency and increasing systemic risks.

“Mediocre” investors are an indispensable basis for liquidity. They need brokers for active trading. Interdealer brokers should be considered as a liquidity enhancement measure if a market size justifies them. Under emerging market environments, human intermediation by salespeople equipped with some electronic devises is expected to remain effective in creating and maintaining liquidity in the secondary markets of government bonds.




Appendix 1
Fixed-Income Products and Types of Electronic Transaction Systems





Auction

Automated Bond System

Inter-dealer

Multi-dealer

Single-dealer

Treasury


TAAPSLinkR

TreasuryDirect

 

 

 



 

 

 



 

 

 



 

 


BondDesk Group

BondGlobe

ValuBond

XBond


 

 

 



 

 

 



 

 

 



BrokerTec Global, LLC

eSpeed, Inc.

Garban-Intercapital plc

Tradesoft

 

 

 



 

 

 



 

 

 



Bloomberg BondTrader

Fixed Income Securities, Inc.

Spear, Leeds & Kellogg

TradeWeb LLC

 

 

 



 

 

 



 

 

 



Autobahn Electronic Trading

Bear Stearns & Co. Inc.

Credit Suisse First Boston

FiDirectX

G.X.Clarke & Co.

Goldman, Sachs & Co.

GoveRate/Odd-Lot Machine

J.P. Morgan eXpress

Merrill Lynch Capital Markets

Mizhuho Securities, Inc.

Morgan Stanley

Ragen MacKenzie Incorporated

Tradebonds.com


Agency


Grant Street Group

 

 



 

 

 



 

 

 



 

Automated Bond System

BondDesk Group

BondGlobe

ValuBond


XBond

 

 



 

 

 



BrokerTec Global, LLC

eSpeed, Inc.

Garban-Intercapital plc

Tradesoft

 

 

 



 

 

 



Bloomberg BondTrader

Fixed Income Securities, Inc.

Spear, Leeds & Kellogg

TradeWeb LLC

 

 

 



 

 

 



Autobahn Electronic Trading

Credit Suisse First Boston

FiDirectX

G.X.Clarke & Co.

Goldman, Sachs & Co.

GoveRate/Odd-Lot Machine

J.P. Morgan eXpress

Merrill Lynch Capital Markets

Ragen MacKenzie Incorporated

Tradebonds.com



Corporate


DealComposer

Grant Street Group

 

 

 



 

 

 



 

 

 



 

Automated Bond System

Bloomberg Spread Execution System

BondDesk Group

BondGlobe

BondHub.com

MarketAxess

ValuBond

XBond


 

 

 



 

BrokerTec Global, LLC

eSpeed, Inc.

EuroMTS Limited

Garban-Intercapital plc

GFI

TheMuniCenter



Tradesoft

 

 



 

 

 



Bloomberg BondTrader

Bondpage.com

Fixed Income Securities, Inc.

MarketAxess

Spear, Leeds & Kellogg

SWX Eurobonds

TradeWeb LLC

 

 



 

 

 



Autobahn Electronic Trading

Credit Suisse First Boston

FiDirectX

G.X.Clarke & Co.

Goldman, Sachs & Co.

GoveRate/Odd-Lot Machine

J.P. Morgan eXpress

Merrill Lynch Capital Markets

Ragen MacKenzie Incorporated

Tradebonds.com

Lehman Live

RetLots Caboto



Asset-backed

 

 

 



 

Bloomberg Spread Execution System

BondHub.com

CreditTrade

XBond


GFI

 

 



 

SWX Eurobonds

 

 



 

 

 

 



 

Mortgage-backed

 

 

 



 

BondDesk Group

BondHub.com

XBond

 


BrokerTec Global, LLC

Garban-Intercapital plc

GFI

 


Fixed Income Securities, Inc.

TradeWeb LLC

 

 


Autobahn Electronic Trading

FiDirectX

Goldman, Sachs & Co.

Tradebonds.com



Money Market


Grant Street Group

American Express Credit Corporation

Prescient Markets, Inc.

 

 



BondDesk Group

 

 



 

 


Garban-Intercapital plc

 

 



 

 


Bloomberg Money Markets Platforms

Fixed Income Securities, Inc.

Global Link

 

 



Autobahn Electronic Trading

Credit Suisse First Boston

Goldman, Sachs & Co.

Merrill Lynch Capital Markets

Tradebonds.com


Municipal


Bloomberg Municipal System

Grant Street Group

 

 

 



 

Automated Bond System

BondDesk Group

BondGlobe

BondHub.com

ValuBond

XBond


eSpeed, Inc.

Garban-Intercapital plc

GFI

Hartfield, TItus & Donnelly LLC



TheMuniCenter

 


Bondpage.com

BondWave


Fixed Income Securities, Inc.

i-Deal LLC

Spear, Leeds & Kellogg

 


eBondTrade

GoveRate/Odd-Lot Machine

Lehman Live

Merrill Lynch Capital Markets

Morgan Stanley

Tradebonds.com



Repo



Grant Street Group

 

 



 

 


 

 

 



 

 


BrokerTec Global, LLC

eSpeed, Inc.

Eurex Repo

Garban-Intercapital plc

GFI


 

 

 



 

 


Lehman Live

Morgan Stanley

 

 

 



Europeans*


BondVision

Direct-Issue Limited

 

 

 



 

 

 




Bloomberg Spread Execution System

BondGlobe

CreditTrade

debtdomain.com

Direct-Issue Limited

Eurex


Eurex Bonds GmbH

Helaba


MarketAxess

 

 



BrokerTec Global, LLC

CoredealMTS Ltd.

eSpeed, Inc.

Eurex Repo

EuroMOT

EuroMTS Limited



Garban-Intercapital plc

GFI


MOT

MTS Amsterdam

MTS Associated Markets

MTS France

MTS German Market

MTS Ireland

MTS Portugal SGMR,SA

MTS S.p.A.

MTS Spain

Tradesoft



Bloomberg BondTrader

Confederacion Espanola de Cajas de Ahorros

LoanX, Inc.

MarketAxess

SWX Eurobonds

TradeWeb LLC

 

 

 



 

 


Merrill Lynch Capital Markets

Autobahn Electronic Trading

Goldman, Sachs & Co.

Credit Suisse First Boston

FiDirectX

J.P. Morgan eXpress

RetLots Caboto

Banco Portugues de Investimento SA

dbconvertibles.com

SEB Merchant Banking

 


Derivatives


 

 


Blackbird

Chicago Board of Trade



 

 


 

 


 

 


Loans


DebtX

HanoverTrade.com

lexc.com


CreditTrade

debtdomain.com

lexc.com


 

 

 



 

 

 



 

 

 



Others


DealComposer

 

 



 

 

 



BondDesk Group

BondGlobe

Creditex, Inc.

MarketAxess

ValuBond

 


Garban-Intercapital plc

GFI


Tradesoft

 

 



 

MarketAxess

TradeWeb LLC

 

 

 



 

Autobahn Electronic Trading

dbconvertibles.com

FiDirectX

J.P. Morgan eXpress

Merrill Lynch Capital Markets

RetLots Caboto



Compiled from "Review of Electronic Transaction Systems for Fixed-Income Markets", The Bond Market Association, December 2001

* European securities are not classified into sovereign, corporate, etc.




Bibliography

Campbell, John Y., and Froot, Kenneth A., 1993, “International Experiences with Securities Transaction Taxes”, NBER Working Paper Series, National Bureau of Economic Research

Committee on the Global Financial System, 1999, "CGFS issues recommendations for the design of liquid markets", CGFS Publications No. 13, Bank of International Settlement

Chakravarty, Sugato, and Asani Sarkar, 1999, “Liquidity in U.S. Fixed Income markets: A Comparison of the Bid-Ask Spread in Corporate, Government and Municipal Bond Markets”

CPSS-IOSCO, 2001, Recommendations for Securities Settlement Systems, Bank for International Settlements

Dattels, Peter, 1995, “The Microstructure of Government Securities Markets”, IMF Working Paper WP/95/117, International Monetary Fund

Endo, Tadashi, 2000, “Corporate Bond Market Development”, International Finance Corporation

Fabozzi, Frank J., ed., 1997, Securities Lending and Repurchase Agreements, Frank J. Fabozze Associates

Habermerier, Karl, and Kirilenko, Andrei, 2001, “Securities Transaction Taxes and Financial Markets”, IMF Working Paper

Hammond, Suzanne et al., 1994, Securities transaction taxes : false hopes and unintended consequences, ed. Suzanne Hammond; Catalyst Institute

Hong, Gwangheon, and Arthur Warga, 1998, “An Empirical Study of Bond Market Transactions”, The Bond Markets Association

Hubbard, R. Glenn, 1993, “Securities Transactions Taxes: Tax Design, Revenue, and Policy Considerations”, Tax Notes 985-1000

Inoue, Hiroshi, 1999, “G7 Shokoku no Kokusai Shijou --- Shijou Ryudousei no Kanten kara Mita Nihon Shijou no Tokuchouten”, Working Paper Series 99-J-2, The Bank of Japan

Klock, Mark, and D. Timothy McCormick, 1998, “The Impact of Market Maker Competition on Nasdaq Spreads”, NASD Working Paper 98-04, National Association of Securities Dealers

Miyanoya, Atsushi, Hitotaka Inoue, and Hideaki Higo, 1999, “Nihon no Kokusai Shijou no Microstructure to Shiou Ryuudousei”, Working Paper Series 99-J-1, The Bank of Japan

OICV-IOSCO, 1999, “The Influence of Market Makers in the Creation of Liquidity”, Report by the Emerging Markets Committee of the International Organization of Securities Commissions

Liebowitz, S. J., and Margolis, Stephen E., 1998, “Network Externalities (Effects)”, http://wwwpub.utdallas.edu/~liebowit/palgrave/network.html

Lee, Sang, 2000, “Online Bond Trading: If you Build It, They Will Come?”, CELENT, Boston

Lee, Sang, 2001, “Celent’s Guide to Electronic Bond Trading Systems”, CELENT, Boston

Lee, Sang, 2002, “e-Bond Trading in the US: What Goes Up Must Come Down?”, ”, CELENT, Boston

Rhee, S. Gho, 1998, Institutional Impediments to the Development of Fixed-Income Securities markets: An Asian Perspective”, OECD/World Bank Workshop on the Development Of Fixed-Income Securities Markets in Emerging Market Economies

Schinasi, Garry J., and R. Todd Smith, 1998, “Fixed-Income Markets in the United States, Europe, and Japan: Some Lessons for Emerging Markets”, IMF Working Paper WP/98/173, International Monetary Fund



The World Bank and International Monetary Fund, 2001, Development Government Bond Markets: A Handbook


1 This note was originally presented to the Third Regional Workshop on Development of Government Bond Market in t Middle East & North Africa that was held in Tunis, Tunisia on June 17-18, 2002, and the Fourth Regional Workshop on Development of Government Bond Market in Sub-Saharan Africa that was held in Johannesburg, South Africa on November 10-12, 2003, and subsequently revised. The views here are those of the author and do not necessarily reflect the views of the World Bank.

2 For more detailed analyses and discussion on the peculiarities of emerging markets, please refer to my note “Capital Market Profile peculiar to Developing Economy”.

3 If the issuers (the governments) and the investors shared the savings equally, the calculated savings will be a half of those in the table, which are 25% of the prevailing spreads.

4 Institutional investors often pay a premium for bonds of particular issuers (“names” in the market jargon) that are scarcely available in the market if other elements of a bond are equal for the purpose of investment portfolio diversification.

5 The structure of a bond may have specific tax, accounting and/or regulatory implications to the issuer and/or investors.

6 Market impact is the effect of the positions bought or sold on the price paid or received for a security. If an order lot is large relative to the actual liquidity, the order will be executed only at a price low or high enough to meet the required volume of demand for or supply of the security. The difference between the executed and initially quoted prices is called the market impact or price impact.

7 This discussion assumes that a country has at least several outstanding issues of government bonds. In a country with one or two outstanding issues, a call market or batch trading system may work better.

8 Ngiam, Kee-Jin and Lixia Loh, “Developing Debt Markets in Singapore: Rationale, Challenges and Prospects”, Asia-Pacific Development Journal, Vol 9, No. 1, June 2002. The Government of Singapore expanded the repo market participants but limited it to financial institutions. This is probably because Singapore, which has graduated from a developing country status, has a large number of foreign financial institutions on an on-shore or off-shore basis.

9 Such criteria should be objective and fair to avoid discriminating against classes of market players and introducing competitive distortions, and should be clearly stated and publicly disclosed so as to improve certainty and transparency.

10 For example, the central bank provides no liquidity to broker/dearlers.

11 Direct participants in clearing and settlement systems like commercial banks settle across the books of a settlement institution (usually a central bank), while indirect participants like broker-dealers settle across the books of direct participants.

12 In a conventional net settlement of interbank funds, a single settlement failure could affect settlement of other transactions that were netted and are supposed to concurrently settle. In RTGS, every transaction is settled individually on a continuous, transaction-by-transaction basis throughout the processing day, so that settlement of each transaction is unrelated to that of other transactions, and transactions are processed one after another from early in the day; and, therefore, whole payment system is much less prune to systemic risk.

13 Hold-in-custody or letter repo, delivery-out repo, tri-party repo, four-party repo, and buy/sells and sell/buys.

14 http://www.bondmarkets.com/research/ecommerce/ecommercedraft.shtml

15 No reliable data of the market share of ETSs is available, because ETSs do not want to disclose their market shares. Salomon Smith Barnet estimated screen-broked trading at more than 40% of US Treasury bonds in 2000 (Salomon, 2000), and an interdealer broker reckoned in October, 2002 that more than 90% of Yen/US$ forex, and more than and 15-20% of JGBs were being screen-broked.

16 In the United States, for example, FASB Nos. 107 and 113 require corporations including financial institutions to disclose their financial asset holdings on a mark-to-the-market basis.

17 See Footnote Error: Reference source not found

18 My argument in this section was developed through my email discussions with Mr. Naoki Yokoyama, Chairman of SBI Asset Management Co., Ltd. in Tokyo, Japan.




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