Primary issuance techniques promoting secondary market development Example of the Hungarian Government Debt Management Agency ( – stylized factswww.akk.hu by Werner Riecke

The main guiding principles for government securities market development Simplicity Transparency Liquidity

Choice of Instruments (case of Hungarian Government Debt Management Agency) Treasury bills 3 and 12 months tenor Treasury bonds fixed coupon bullet bonds 3, 5, 10, 15 years tenor Let the market create more complex instruments if there is a demand for.

Example: amortizing bond = four bullet bonds Other examples: Bullet bond = Zero coupon bond + Annuity Variable rate bond = successive series of T- bills Secondary market prefers fixed income instruments!

Transparency Regular Issuance Primary placement through auctions Publication of the auction calendar Refrain from private placements Refrain from captive measures Use of re-openings and buy backs (also through auctions) – later on switching auctions

Auction calendar (auctions, settlement and redemption dates)

Market structure Issuer: GDMA on behalf of MoF Settlement infrastructure: Central Securities Depository and Clearing House Primary dealers (nowadays mainly banks) binding bid-offer price quotations Investors – Hungary’s early success in government securities market development is rooted in the presence of institutional investors (insurance, investment funds, compulsory and voluntary funded pension schemes) appearance of foreign investors in the local currency bond market

Secondary market turnover

price/yield discovery in multiple price auctions, dealing with the “winners’ curse” We are not setting a cut-off price or yield, we decide on the amount to be accepted Decision based on bidding curve chart (visual) Wee may however decide to deviate from the amount originally offered by +/- 33.3% to Reduce the “tail” – difference between average and minimum accepted price or maximum accepted and average yield

Accepting less dampens the difference between average and minimum accepted price, accepting more, when bidding curve is more flat accepting 2.5 million of bids amountaccepting 2.0 million

Creating a yield curve: use X-Y (scatter) instead of line chart

Set up a database with all matured, issued and planned instruments and transactions Click on a government security ID shows its cash flow table

10Y fixed coupon bond, 6.75% annual coupon, face value HUF10000, odd first coupon date

Database contains all instruments ever issued by GDMA including securities, loans, swaps, local currency and FX denominated one Excel workbook for each instrument, including transactions operated through an Excel-Access framework Used for planning, reporting, imput for Monte Carlo simulation to establish benchmarks

AKK is exclusively responsible for managing Central Government’s debt. Public debt and external debt data compiled by central bank – national Bank of Hungary Thank you for your attention. Werner Riecke