FINANCE & MARKETS GLOBAL PRACTICE | FINANCE FOR DEVELOPMENT ISSUANCE PLAN FOR GOVERNMENT SECURITIES Guidance Note April 2015 Background Note1 This guidance note is part of a toolkit on “Issuance Plan for Government Securities” that also comprises an Excel-based analytical tool with a user guide. It complements a series of background notes produced under the World Bank Group Government Bond Market Advisory Services Program to support the development of liquid local currency bond markets. Indhu Raghavan and Anderson Caputo Silva, both of the Finance & Market Global Practice, are the primary authors. This note has benefited immensely from feedback provided by Thordur Jonasson (IMF Monetary and Capital Markets), Samuel Munzele Maimbo (World Bank Finance & Markets Global Practice), Antonio Velandia-Rubiano (World Bank Treasury Financial Advisory and Banking), and Mike J. Williams (International Consultant). It also draws on the collective wisdom of many practitioners and advisers that have worked with us on this topic; any errors remain the authors’ own. The authors also wish to thank Aichin Lim Jones for providing the design and layout of this note. Please send any comments or questions to iraghavan@worldbank.org and asilva3@worldbank.org. . 1 TABLE OF CONTENTS i Table of Contents Abbreviations and Acronyms...................................................................................III 1. Introduction..........................................................................................................1 2. Context..................................................................................................................3 3. Scope.....................................................................................................................7 4. Steps in Developing and Implementing the Issuance Plan..................................11 A. Financing Need..................................................................................................... 11 B. Instrument Selection............................................................................................. 12 C. Organization of Auctions...................................................................................... 18 D. Organization of Maturities................................................................................... 19 E. Liability Management Operations......................................................................... 21 F. Auction Schedule................................................................................................... 21 G. Market Communication....................................................................................... 22 H. Review and Adjustments...................................................................................... 25 5. Key Linkages.......................................................................................................27 A. Cash Management................................................................................................ 27 B. Coordination with the Central Bank..................................................................... 28 6. Conclusion..........................................................................................................29 7. Annex: Illustration of Steps in Developing an Issuance Plan...............................31 References................................................................................................................35 ii TABLE OF CONTENTS Boxes Box 1: Treasury Bill Program..................................................................................... 14 Box 2: Benchmark Building....................................................................................... 15 Box 3: Choice of Settlement and Redemption Dates................................................. 20 Box 4: Benchmark Building in An Environment of Declining Debt Stock................. 26 Figures Figure 1: Government Debt Management – From Design to Implementation............. 5 Figure 2: Instruments Covered by the Issuance Plan.................................................... 8 Figure 3: Institutional Arrangement for the Issuance Plan............................................ 9 Figure 4: Selected Instrument Types and Tradeoffs..................................................... 12 Figure 5: Selected Country Practices in Auction Announcement................................ 23 ABBREVIATIONS AND ACRONYMS iii Abbreviations and Acronyms ABP Annual borrowing plan ATM Average time to maturity ATR Average time to refixing BO Back-office BN Billion DMU Debt management unit DMS Debt management strategy DX Domestic currency EME Emerging market economy GS Government security FO Front-office FX Foreign currency LMO Liability management operation MN Million MO Middle-office MoF Ministry of Finance 1. INTRODUCTION 1 1. Introduction 1. The issuance plan sets out the government’s intentions for the issuance of its debt securities in the domestic capital markets. It includes the bonds and bills to be issued and the timing of issuance, and may include general information on other operations that the government intends to undertake with its debt securities, such as buybacks and exchanges. The issuance plan is part of the government’s annual borrowing plan, which presents information on the government’s total financing strategy, including in the domestic capital markets but also borrowing from commercial banks, multilateral development banks, and the external capital markets. 2. Designing and implementing an issuance plan for government securities (GS) is an ongoing activity for the government debt manager. A well-designed issuance plan takes account of the government’s objectives for financing, managing risk, and developing the domestic market. It considers investor preferences and the macroeconomic environment,2 and is implemented in close coordination with monetary policy.3 The issuer benefits from potential cost-savings and enhanced potential for secondary market liquidity in its instruments. Investors benefit from the greater transparency and predictability that the issuance plan provides as they are better able to plan their investment in GS. 3. This guidance note describes the key considerations for the debt manager and the steps involved in developing and implementing the issuance plan. It is structured as follows: Section 2 provides the context; Section 3 outlines the scope; Section 4 discusses the main steps in developing and implementing the issuance plan; Section 5 describes key linkages between the issuance plan and other relevant activities; and Section 6 concludes. The Annex provides an illustration of the steps discussed in Section 4. 2 Strong macroeconomic fundamentals, including sound fiscal and monetary policies and foreign exchange regimes, provide the issuer greater degrees of freedom in choosing instruments and tenors, and supporting regularity and predictability in implementing the issuance plan. However, debt managers need to make tactical decisions on financing under myriad macro and market conditions. The optimal conditions are country-specific and the ultimate financing choices are based on the debt manager’s judgment and subject to the constraints faced. 3 The note generally attributes the debt management function to the Ministry of Finance (MoF), specifically the Debt Management Unit (DMU), and the monetary policy implementation function to the Central Bank. It is worth noting that the role of the Central Bank in debt management differs across countries; in some cases it houses the debt management function (e.g. Denmark, Sri Lanka) and in others it acts as the agent of the MoF for debt issuance (e.g. Turkey, Romania). 2. CONTEXT 3 2. Context 4. Domestic capital markets have become a major source of financing for EMEs where around 85 percent of government debt outstanding is in the domestic market. The domestic market offers greater flexibility in the amount and timing of government borrowing. As the borrowing is predominantly in the domestic currency (DX) it helps to reduce the currency mismatch between the governments’ assets and liabilities.4 5. Despite the impressive growth of domestic government debt markets in EMEs, most markets are plagued by illiquidity arising from a high degree of debt fragmentation5 and a narrow range of investors. The result is that EME governments (and ultimately tax payers) pay a premium to investors for the risk of their holding relatively illiquid securities. Moreover, lack of liquidity in the secondary market for GS inhibits the building of a reliable government yield curve that could provide a risk-free reference for other borrowers and financial products. 6. GS liquidity6 is dependent on many factors such as the structure and characteristics of the investor base and their incentives to trade, the efficiency of the trading and settlement infrastructure, and the quality of the outstanding debt portfolio. For example, a market dominated by one or two large investors, or one where most investors share the same risk preference and investment horizon, may not see much secondary market activity. There may also be barriers to trading, such as a high cost of financing trading portfolios, transaction taxes, etc. 4 As EME domestic government debt has become an investable asset class for global investors, EME governments are more exposed to global changes and may face volatility in government financing as a result. However, a discussion on how to monitor exposure to non-resident investors and manage associated risks is beyond the scope of this note. 5 In a fragmented market there are a large number of debt securities of small amounts outstanding and different characteristics that make it difficult to actively trade those securities. 6 This note distinguishes between liquidity in the market for GS (“GS liquidity”), which refers to the ability to trade GS with immediacy and without significantly moving the market, and liquidity in the financial system (“systemic liquidity”), which refers to the volume of cash and cash-like instruments available in the financial system. 4 ISSUANCE PLAN FOR GOVERNMENT SECURITIES 7. While many of these factors may not be under the the legal, regulatory, and accounting framework do not direct purview of the government debt manager, s/he offer the flexibility to do so, it would greatly constrain can influence the characteristics of the outstanding the debt manager’s ability to build benchmarks and debt portfolio through the design of the issuance manage risk. Similarly, the operational infrastructure plan, in particular, by issuing benchmark securities. should be able to handle a range of transactions such Benchmark securities are large7 and relatively liquid as issuance, reopening, buybacks, and exchanges. lines8 of GS at key tenors. The large size improves the potential for wider distribution of the security among 10. The structure of the investor base and role of market different types of investors with different incentives intermediaries also influence the instruments, size, to trade, thereby increasing trading opportunities and timing of GS issuance. Certain investor segments and reducing the liquidity premium demanded by may experience seasonal fluctuations in their liquidity the market. With this objective, developed markets profile (e.g. pressures on bank liquidity or outflows and several EME government issuers have adopted a from the pension system) affecting systemic liquidity benchmark issuance policy9 to build sufficiently large and demand for GS. These choices may evolve with lines of GS as a necessary first step to foster secondary structural changes (e.g. entry of foreign investors). market activity. Therefore, the debt manager should undertake a broad analysis of the factors affecting demand 8. With a benchmark issuance policy, the issuer needs for GS and complement it with periodic market to manage the refinancing risk arising from the bullet consultation to support tactical decision-making in maturity10 of the benchmark security and issuers the implementation of the issuance plan. choose from a range of strategies to do this. They may build cash buffers, being mindful of the cost 11. It is ideal that a debt management strategy (DMS) of carry on the cash balance; borrow short-term (or guides the government’s ABP in terms of the choices invest short-term) using cash management tools that in financing, and the associated cost-risk tradeoff.11 help to smooth temporary shortfalls (or surpluses); In such cases where a DMS has been developed, the or use liability management operations (LMOs) strategy targets for key portfolio risk indicators are such as buybacks and exchanges, where a portion an important guide to developing the issuance plan. of the maturing benchmark is redeemed for cash Conversely, the design12 of the issuance plan informs or exchanged for other securities in advance of its the periodic review and update of the DMS. However, maturity, helping to spread out its refinancing. with or without a formal DMS, and in stable or less than ideal market conditions, the debt manager needs 9. The legal, regulatory, and accounting framework to make tactical choices regarding the instruments, size governing debt issuance and redemption, and the and timing of GS issuance. The major activities of the operational infrastructure, should allow the debt debt manager from designing a DMS to developing manager to design an issuance plan that enables both and implementing an issuance plan are illustrated in the financing of the budget and risk management. For Figure 1. example, buying back outstanding debt or building a cash buffer may increase gross borrowing for (portions 12. Developing and implementing an issuance plan is a of ) a given budget cycle, even as it reduces the dynamic exercise that is dependent on periodic new refinancing risk associated with a large redemption. If information regarding market conditions and the policy environment. Global investors are beginning 7 There is a strong correlation between the size/volume outstanding of individual GS and related liquidity, however, the question of what size is sufficiently large to foster secondary market activity is market-specific and discussed further in Section IV.B. 8 A line refers to a single GS with a unique identification (ISIN or country code), coupon rate, and maturity date. 9 Developing benchmark issues and a government debt issuance strategy are discussed in Chapter 4 and Chapter 3, respectively, of Developing Government Bond Markets: A Handbook” as key components of developing efficient government bond markets. 10 When the principal payment comes due at a single point in time. 11 The World Bank and International Monetary Fund implement a program in EMEs to develop a medium-term debt management strategy for a rolling 3-5 year period. The DMS is reviewed and updated annually. 12 Simulations of different issuance plans using Microsoft Excel or other appropriate software help to ensure that the chosen issuance plan is coherent with the ABP and advances the governments’ considerations for development of the domestic GS market. 2. CONTEXT 5 to differentiate between individual EMEs, and the markets in order to attract and retain domestic and integration of the global financial system has made it foreign investor participation in their respective markets. easier for EME domestic capital to be invested abroad. Developing an efficient issuance program for GS is one of Therefore, it is important for EME policymakers to focus the tools available to them to achieve this goal. on improving the microstructure of domestic capital Figure 1: Government Debt Management – From Design to Implementation Design Phase13 Key output Document: Debt Management Strategy Steps in developing a Debt 1. Identify objectives for public debt management and scope of the debt management Management Strategy strategy 2. Identify the current debt management strategy, and cost and risk of the current portfolio • Debt servicing cost (interest/debt outstanding, interest/GDP, interest/revenues) • Refinancing risk (average time to maturity (ATM), percentage of debt maturing in one year) • Interest rate risk (average time to refixing (ATR), percentage of debt refixing in one year) • Foreign exchange risk (ratio of DX vs. FX debt, composition of FX liabilities to FX reserves) 3. Identify and analyze potential funding sources based on relative cost-risk and qualitative factorsa • Multilateral loans, commercial loans, domestic bonds, Eurobonds 4. Identify baseline projections and risk in fiscal, monetary, and market indicators • Projections of exchange rate, capital account, international reserves • Expectations of domestic and global liquidity conditions, market rates, and likely pricing of non-market instruments 5. Review longer-term structural factors • Commodity price vulnerability, access to concessional financing, trends in real effective exchange rate and inflation 6. Assess and rank alternative debt management strategies based on cost-risk tradeoff • Change in cost and risk indicators, feasibility of the strategy, and success of the strategy in meeting the public debt management objectives 7. Review implications of candidate strategies with fiscal and monetary policy, and financial market development • Interactions with fiscal and monetary indicators, debt sustainability indicators, and the debt market 8. Propose a preferred DMS, secure approval for and publish DMS 13 The “Developing a Medium-Term Debt Management Strategy – Guidance Note for Country Authorities” published by the World Bank and International Monetary Fund discusses in detail the steps in developing a debt management strategy. Implementation and follow up to developing a debt strategy are briefly discussed in Section IV: Implementation and Follow-up, Appendix IV: Potential Sources of Financing, and Appendix VIII: Developing a Short-term Borrowing Plan – An Example. 6 ISSUANCE PLAN FOR GOVERNMENT SECURITIES Implementation Phase Key output Document: Annual Borrowing Plan (for total financing) Document: Issuance Plan (for marketable debt financing) including, auction calendar and supplemental information on other GS related operations (e.g. buybacks, exchanges) Steps in developing an 1. Determine financing need to be met by GS issuance in the domestic market (refer Issuance Plan Sections IV.A. and VII.A.) • Proportion and weekly breakdown of gross borrowing requirement to be financed with domestic marketable debt 2. Select instruments (refer Sections IV.B. and VII.B.) • Instrument types and tenors (e.g. 6-month treasury bill, 12-month treasury bill, 3-year bond, 5-year bond) • Number and size of lines (e.g. 2 new lines of 3-year bonds every year with target size of DX 10 billion each) 3. Organize auctions (refer Sections IV.C. and VII.C.) • Auction size (e.g. DX 800 – 1,000 million offered at each auction of the 3-year bond) • Frequency and sequencing (e.g. bills auctioned every week, 10-year bond auctioned every quarter) 4. Organize maturities (refer Sections IV.D. and VII.D.) • Standard maturity months (e.g. 2 lines of 3-year bonds maturing in March and September every year) • Specific maturity dates (e.g. 3-year bond maturing March 5, 2017) 5. Determine liability management operations (refer Sections IV.E. and VII.E.) • Securities and timing of buybacks and exchanges, if any (e.g. 5-year bond maturing October 2014 to be bought back starting April 2014 for up to a maximum amount of DX 5 billion) 6. Develop auction schedule (refer Sections IV.F. and VII.F.) • Timing of each auction, and the instrument and amount to be issued at that auction (e.g. Week of Jan 1, 2014 – offer DX 800 – 1,000 million of 3-year bond maturing on March 5, 2017) 7. Determine frequency, format, and detail of market communication (refer Sections IV.G. and VII.G.) • Announcements: indicative annual auction calendar (e.g. global issuance volume, general plans for LMOs), more detailed quarterly calendar (e.g. specific instruments and indicative volume for the period), more details/adjustments on a monthly/weekly basis (e.g. indicative auction volume for each instrument, instrument for buyback) • Reporting: auction results, monthly and annual reports on issuance plan implementation • Consultation: quarterly or monthly meeting with primary dealers and/or other investors, ad hoc consultation before auctions and on special operations (e.g. LMOs) 8. Review and adjustments (refer Sections IV.H. and VII.H.) • Periodic (e.g. quarterly, monthly/weekly) review of the issuance plan based on market consultation and updates to the gross borrowing requirement and cash flow forecasting 3. SCOPE 7 3. Scope 13. The issuance plan covers marketable debt instruments of the central government issued in the domestic capital markets14 (refer Figure 2). Marketable debt in the external capital markets tends to be issued on a more opportunistic basis making it difficult to be incorporated in a pre-announced issuance plan. However, the ABP may indicate the government’s intention, if any, to raise finance in the external capital markets at a time that it deems appropriate. 14. The issuance plan is typically developed for at least a one-year period, with necessary periodic adjustments (e.g. quarterly, monthly or weekly). While the design of an issuance plan may begin with the budget cycle it will need to be updated on a rolling basis in order to ensure continuity in its implementation. Ideally, the debt manager would consider a medium-term planning horizon in line with the DMS and benchmark building strategy. In particular, the gross borrowing requirement over the medium-term may determine the number of benchmarks that can be issued and rolled over, and the structure and expected growth of the investor base may impact the tenors that can be consistently offered. However, the feasibility of a medium-term planning horizon depends on the availability of reliable forecasts and the stability of fiscal and macroeconomic policy. Therefore, it is necessary to keep this process dynamic. 15. Within the debt management unit (DMU), the front office (FO),15 as the market- facing entity, is best suited to take the lead on developing and implementing the issuance plan, although it will necessarily work closely with other entities (refer Figure 3). The FO interacts with the market to gather information on investor preferences and market liquidity, and perspective on the scope for benchmark building, targeting new investor segments, etc. It is then responsible for periodically updating this information and making necessary adjustments to the issuance plan, in coordination with the MO. 14 While the guidance note discusses DX instruments issued in the domestic market, the steps outlined in Section IV can be extended to FX instruments issued in the domestic market. FX instruments add the element of FX risk management to both debt and cash management operations, and have different implications for domestic financial market development. 15 The terms front office (FO), middle office (MO), and back office (BO) refer to the individual(s) or teams responsible for carrying out the respective functions. 8 ISSUANCE PLAN FOR GOVERNMENT SECURITIES 16. The MO typically leads the development of the exchange of GS are in place. Other relevant entities for DMS and the compilation of financing and cash flow coordination include public sector agencies involved projections, which are inputs for the issuance plan. in forecasting fiscal and macroeconomic indicators, in The FO in turn can provide input to the development approving the budget and ABP, and the central bank and review of the DMS particularly on the feasibility whose policies and operations affect systemic liquidity of attaining portfolio targets based on its view of and the demand for GS. market conditions and issuance plan simulations. The BO ensures that the internal processes and accounting arrangements for issuance, re-opening, buyback and Figure 2: Instruments Covered by the Issuance Plan Public S ctor Gnr l Public Gov rnm nt Corpor tions Annu l Borrowin Pl n C ntr l Public Non- Public Gov rnm nt fin nci l Fin nci l Corpor tions Corpor tions Issu nc Pl n M rk t bl Non- St t C ntr l Public D posit- D bt m rk t bl Gov rnm nt B nk t kin D bt Corpor tions Loc l Oth r Public Dom stic Ext rn l Dom stic Fin nci l Gov rnm nt Corpor tions Ext rn l 3. SCOPE 9 Figure 3: Institutional Arrangement for the Issuance Plan 1. Fin ncin n d 2. DMS t r ts 3. C sh position nd profil MIDDLE FRONT OFFICE OFFICE D v lop nd D v lop nd Monitor th ISSUANCE Impl m nt DMS th Issu nc MARKET PLAN Pl n Ov rs C sh B l nc nd For c stin 4. B nchm rk s curiti s, t nors 5. Tr sur bills, t nors 6. Auction sch dul BACK OFFICE Ov rs Proc ss s nd Accountin Arr n m nts 4. STEPS IN DEVELOPING AND IMPLEMENTING THE ISSUANCE PLAN 11 4. Steps in Developing and Implementing the Issuance Plan A. Financing Need 17. Objective: To determine the proportion of the government’s gross borrowing requirement that needs to be financed through GS issuance in the domestic market, as well as the timing of the financing need. 18. Information required: 18.1. Gross borrowing requirement and DMS targets (if any) for domestic market financing 18.2. Projections of cash flow, ideally (at least) monthly for the next 12 months, and weekly for the next three months 19. Analysis: The government’s projected budget and debt servicing needs, and debt management objectives (e.g. to increase the proportion of DX borrowing, to increase portfolio ATM, etc.) help to determine the desired amount of GS to be issued in the domestic market during a particular period. However, the actual volume of GS that can be issued may be limited by demand side considerations (e.g. the domestic market’s absorption capacity, seasonal liquidity factors, etc.) Therefore, historical analysis of market demand and liquidity trends, and forward-looking market consultation and coordination with the central bank, are necessary to ensure the feasibility of the domestic market financing strategy. A high-level demand side analysis is conducted during the development of the DMS. However, this needs to be fine-tuned during the development of the issuance plan to determine the amount to be offered at each auction/placement of GS. 20. Credible projections of cash flow, i.e. revenue and expenditure, at least on a weekly basis in the short term and monthly for the budget cycle, are necessary to determine the timing of the financing need, which impacts the timing and pace of GS issuance. In the absence of such projections, the debt manager may begin with historical trends in revenue and expenditure flows, complemented by available forward-looking information (e.g. anticipated tax and privatization receipts, inflow from other sources of financing, etc.) Further, the government’s ability to borrow short-term to manage 12 ISSUANCE PLAN FOR GOVERNMENT SECURITIES a temporary cash shortfall and/or invest temporary 23. Analysis: Figure 4 outlines selected instrument types surplus cash will help smooth fluctuations in financing and the tradeoffs they present for issuers and investors. operations and manage unanticipated financing needs. The types and mix of instruments chosen by the debt Cash flow forecasting and management are typically manager reflect the government’s preferred cost-risk beyond the direct responsibilities of the debt manager, tradeoff and investors’ preferences for coupon types but the debt management and cash management and currency. The debt manager would need to manage functions need to share updated information on cash competing objectives, to diversify the GS portfolio at flow projections and planned issuance (refer Section an acceptable cost, using different instrument types V.A.) to attract different investors, and at the same time to reduce fragmentation and promote secondary market B. Instrument Selection activity in GS. Many of these tradeoffs would have been analyzed if the government had developed a 21. Objective: To determine the instrument types, tenors, DMS, but the debt manager should consider them the target size (or volume outstanding) of each line, even in the absence of a DMS exercise. and the number of lines of each tenor to be issued. 24. The tenors of benchmark bonds are again influenced 22. Information required: by debt management objectives to increase portfolio 22.1. Government’s cost-risk preference; DMS ATM, and by cost considerations. Investor preference portfolio targets (if any); desired benchmarks for short-, medium-, or long-term securities, and 22.2. Investor preferences for instruments, tenors, tenors that are strategic (e.g. the 10-year benchmark and volume outstanding GS allows comparison of long-term borrowing 22.3. Long-term view on structural changes such as costs across countries) are also important. A stylized investor preferences and fiscal trends; evolution benchmark building strategy could include GS at of the capital market that may alter desired 1-, 3-, 5-, and 10-year tenors although many EMEs price references/benchmark securities would find it difficult to issue the full range at the Figure 4: Selected Instrument Types and Tradeoffs Instrument type Some advantages Some disadvantages Treasury bill • regular issuance to anchor the • needs to be rolled over more frequently short end of the yield curve • flexible instrument for liquidity and cash management - needs to be rolled over more frequently Fixed-rate bond • reduce interest rate risk for issuer • typically more expensive than floating- • plain vanilla instrument that is rate bond at longer tenors easy to value and trade Floating-rate bond • can help lengthen portfolio ATM • increase interest rate risk for issuer • can help diversify investor base FX-bond • can help diversify investor base • increase currency risk for issuer Bullet maturity bond • plain vanilla instrument that is • refinancing risk over short period easy to value and trade Amortizing bond • principal can be repaid over a • more difficult to value and trade longer period 4. STEPS IN DEVELOPING AND IMPLEMENTING THE ISSUANCE PLAN 13 outset, particularly at the longer end. It is important The longer a security’s remaining time to maturity, the to note that the chosen benchmark tenors are not too more opportunity the debt manager has to build its close to each other (e.g. it may be unnecessary to issue size through issuance/reopening. both a 2-year and 3-year bond when the 3-year bond can provide a 2-year price reference one year after first 27. The target size should also be determined in the context issuance), and do not cannibalize demand from each of the debt manager’s ability to manage refinancing other. It is also important to note that the lengthening risk. Improvements to debt management capacity over of benchmark tenors needs to take place gradually, time, including the ability to undertake buybacks and building upon shorter tenors. For example, it would exchanges, build cash balances in anticipation of a be easier to introduce a 10-year bond and price it if the large refinancing, and better manage temporary cash price for a 5-year bond is available in the market, than surplus and shortfalls, will allow the debt manager to if the longest available tenor in the market is a 3-year progressively refinance larger benchmarks (making bond. The considerations for issuing treasury bills are allowance for periods of market stress). With expected discussed in Box 1 and different benchmark building growth in real gross domestic product and inflation, strategies are discussed in Box 2. government revenues can be expected to increase while the real value of benchmark bonds, typically 25. The target size of each line depends on an assessment of fixed-rate instruments, decreases. Therefore, the the minimum size necessary to foster secondary market relevant consideration for the target size is the debt trading in that line, the security’s tenor or remaining manager’s refinancing ability at the time of maturity time to maturity, and the debt manager’s refinancing (not issuance) of benchmark securities, particularly ability. The minimum size necessary to foster liquidity those of longer tenors. in a particular GS is market-specific and depends on the portion of the outstanding volume likely to be held 28. The number of lines of each tenor is a factor of in trading portfolios versus held-to-maturity portfolios, the target size for that line, the expected volume of and the status of the GS as an on-the-run benchmark. financing from GS issuance in the domestic market Sometimes, the minimum size may be independent of during that period (and in the medium-term) and the the overall size of the market (e.g. the Eurozone, where time taken to reach the target size. The government’s instrument size and liquidity began to converge while gross borrowing requirement in the domestic market individual market sizes differed). determines the number of benchmark lines that can be rolled over and maintained over the medium-term, 26. The debt manager may also consider externally unless the government adopts a policy to maintain generated limits when determining the target size. a certain number of benchmarks for the purpose of Institutional investors may have internal limits on market development even in an environment of low the proportion of outstanding volume of a single GS gross borrowing requirement or budget surplus (refer that they can hold in their portfolio, in which case Box 4). If it takes a long time to build size (due to the a small overall size of the GS may be unattractive size and frequency of individual auctions) there is a for the investor. Certain electronic trading systems risk that the coupon of that benchmark security goes (e.g. Euro MTS) have minimum size requirements off market resulting in low demand for the instrument. for the securities that can be traded on that system. The debt manager may then choose to stop offering Some debt managers aim to have their GS included that line even before its target size is reached in order in benchmark fixed income indices that typically to open a new line, which would become the on-the- have minimum size and/or liquidity requirements run16 benchmark. It is important to note that many for inclusion. While a large size has several benefits, of these choices may evolve over time with structural the debt manager’s ability to build that size depends changes that alter market liquidity and investor on the security’s tenor or remaining time to maturity, preferences, or lead to a sustained increase or decrease and the amount that can be issued at each auction. in the gross borrowing requirement. 16 An on-the-run security is the most recently issued/reopened GS for a particular tenor and is typically the most actively traded GS for that tenor. This is because its coupon is likely to be close to the market rate for that tenor enabling market participants to trade close to par value, which they prefer, and a substantial portion of the security is likely to be held in trading portfolios as opposed to held-to-maturity portfolios. When this security is replaced by a new on-the-run security or as time passes, the old security is likely to see less and less activity in the secondary market. 14 ISSUANCE PLAN FOR GOVERNMENT SECURITIES Box 1: Treasury Bill Program Systematic treasury bill issuance helps to anchor the short Treasury bill issuance must be coherent with the end of the yield curve by providing fresh price references government’s other strategic objectives, such as to increase for short tenors and supporting the development of the ATM or the ATR. It is important to note that these the money market. It offers the debt manager cash are stock indicators that provide a snapshot of portfolio management instruments at very short tenors (e.g. 3 composition and risk at one point in time. They are months and shorter) and additional financing instruments impacted by the stock of treasury bills at the end of the at relatively longer tenors (e.g. 6 – 12 months) to support period rather than gross issuance volume during the regularity and predictability in the bond issuance program. period. Similarly, a temporary increase in the treasury bill The central bank may also use the government’s treasury stock, say for the purpose of short-term cash management, bills as liquidity management instruments in open market during the period need not significantly impact these operations.17 In cases where the central bank issues its indicators at the end of the period. Therefore, it is possible own bills for liquidity management, close coordination for the debt manager to support an active treasury bill is necessary between the DMU and the central bank to program to anchor the short-end of the yield curve ensure that both entities are not competing for market and for cash management, while still ensuring that the demand at the same tenors and during the same times. objective to increase portfolio ATM is met. However, as the debt manager initiates an active treasury bill program Treasury bill issuance must complement and support or introduces new treasury bill tenors, an initial increase the benchmark building program. Weekly or monthly in the treasury bill stock is likely along with an increase issuance of treasury bills may be adjusted in order to in gross financing as the bills are rolled over intra-period. support regularity in bond issuance, as the market might Therefore, the debt manager should clarify the objectives relatively more easily absorb fluctuations in the volumes and expected impact of this program to investors and of short-term instruments. Treasury bills may also be other stakeholders. reopened for the same reason as for reopening bonds, i.e. to increase size and potential liquidity, and reduce fragmentation in the treasury bill market. 17 Countries have established different arrangements between the treasury and central bank in order to harmonize the issuance of debt securities by the government, clarify the different purposes of issuance, i.e. budget financing and monetary policy implementation, and share costs. 4. STEPS IN DEVELOPING AND IMPLEMENTING THE ISSUANCE PLAN 15 Box 2: Benchmark Building The market ultimately determines which securities • Aligning benchmark launch with the redemption of attain benchmark status, i.e. are actively traded and existing benchmarks offering investors an opportunity serve as market references, highlighting the importance to reinvest redemption proceeds of market consultation before designing a benchmark • Ensuring that market demand for the benchmark is building strategy. A security is likely to become a market not cannibalized by other similar securities benchmark if: • Sequencing the launch of benchmarks of different tenors – from shorter to longer – to support pricing of • There is demand for that security longer tenors • The coupon is competitively set reflecting market rates • Utilizing liability management and cash management • The target size is reached quickly before the coupon tools to support regularity and pace of issuance/re- goes off-market openings To meet the above criteria the debt manager must time There are at least two ways in which countries build the launch and re-openings of a benchmark well, benchmarks, with different advantages and disadvantages: Method Advantages Preconditions / Examples Disadvantages Issue a new benchmark An efficient use of An active secondary Norway opens a new only at a long tenor limited financing needs market that facilitates benchmark with 11 years to build price references price formation of to maturity every two at different tenors outstanding instruments years. and offers investors access to/exit from bonds at different maturities A mature market with the capacity to price a long tenor bond Issue new benchmarks at Offers primary market Sufficient financing need Singapore opens new several key tenors reference prices at key to support benchmarks benchmarks with original tenors at different tenors maturities of 2, 5, 10, Investor base with 15, 20 and 30 years at varying investment different frequencies. horizon 16 ISSUANCE PLAN FOR GOVERNMENT SECURITIES Norway opens a new benchmark line every two years with 11 years remaining till maturity. For example, NST471 maturing in 2015 was first launched in 2004 and reopened over the course of 2004-05. It then serves as a market reference for the period equivalent to its remaining time to maturity, i.e. in 2005 it is the 10-year benchmark, in 2006 the 9-year benchmark, in 2007 the 8 year benchmark and so on. A new benchmark with 11 years till maturity is launched in 2006 and reopened over the course of 2006-07. This strategy requires a mature market that is able to accurately price the 11-year bond and periodically offer fresh prices for the bonds outstanding. Singapore launches new benchmark lines at strategic tenors of 2, 5, 7, 10, 15, 20 and 30 years at different frequencies. It would be important to keep track of the benchmarks outstanding before launching new bonds. For example, in 2012 two new benchmarks of original maturity 2-year and 30-year were launched. However, the outstanding instruments provided references for 15, 10, 7 and 5 years as well. Similarly, a 5-year benchmark could be provided by launching a new instrument of original maturity 5-year, as was the case in 2008, 2009, and 2011, or based on the remaining maturity of outstanding instruments such as the 7-year benchmarks launched in 2008 (N708100S) and 2010 (N710100Z), which became 5-year references in 2010 and 2012. Interestingly, in 2011 Singapore announced that it would discontinue the issuance of 7-year benchmarks. The obvious challenge with this strategy is the accumulation of refinancing of several benchmarks. For example, in 2013 the debt manager would have to refinance two bonds, the first of original maturity 10-year (NX03100Z) and the second of original maturity 5-year (N508100V). 4. STEPS IN DEVELOPING AND IMPLEMENTING THE ISSUANCE PLAN 17 18 ISSUANCE PLAN FOR GOVERNMENT SECURITIES C. Organization of Auctions investors are also likely to bid more cautiously (i.e. at lower prices) in future auctions. 29. Objective: To determine the auction size (amount offered at each auction), frequency, and sequencing of 32. Too frequent auctions could adversely impact auctions of different instruments. secondary market development by providing a constant supply of GS in the primary market and obviating 30. Information required: the need for market participants to seek the securities 30.1. Market absorption capacity based on historical in the secondary market. It can also undermine the and forward-looking analysis of systemic potential role of market-makers. At the same time, liquidity and market demand particularly in EMEs where secondary markets are underdeveloped, it may be important to provide a 30.2. Availability of tools to manage refinancing certain regular supply of GS in the primary market, risk, e.g. cash buffers, short-term borrowing, for market-makers to satisfy quoting obligations and buybacks and exchanges, etc. other investors to execute their planned investment 30.3. Market development objectives such as building strategy. The debt manager needs to strike the right benchmarks, promoting better price formation balance in consultation with the market. Auction at auctions, fostering secondary market activity, frequency is also impacted by the need to build the etc. size or outstanding volume of benchmarks quickly relative to the life cycle of the benchmark.18 Building 31. Analysis: There is a tradeoff between auction size and benchmark size quickly supports the security’s frequency. More frequent auctions imply a smaller liquidity and reduces the liquidity premium that the auction size and vice versa. And the maximum auction market demands. For this reason, countries have even size is limited by the market’s absorption capacity at chosen to syndicate the launch of benchmarks (e.g. a given auction. It is important to offer a sufficiently several European countries; Mexico starting in 2011) large amount at each auction in order to promote in order to issue them with a sufficiently large size, and competitive price formation, particularly in an auction subsequently reopened them using auctions. 19 where the coupon is set. A small supply at each auction relative to demand could artificially inflate the price 33. The organization of auctions refers both to the pace and depress the yield/coupon for a security if investors of issuance and the sequencing of auctions of different have limited alternative investment opportunities. instruments, i.e. bonds, treasury bills, cash management While investors expect and manage interest rate risk, bills. Large fluctuations in GS issuance amounts an artificially depressed yield/coupon could reduce make it challenging to build benchmarks quickly and the attractiveness of a security as investors prefer provide regular primary market reference prices. It to transact close to par value in order to minimize can also substantially increase investors’ reinvestment portfolio revaluation and mark-to-market losses. risk. While seasonal swings in systemic liquidity and On the other hand, excessive supply at an auction financing needs are important considerations, the debt could give some market participants high bargaining manager should look for ways to support more stable power and increase the risk of auction failure. issuance by considering measures such as primary The appropriate auction size needs to be carefully dealer systems, where appropriate, LMOs, and cash calibrated by observing auction results for the degree management operations, supported by periodic of competition and potential for price distortion. If market consultation. These measures help to balance there is uncertainty in the overall size of the auction market demand and financing needs with objectives to build benchmarks quickly. 18 Life cycle of an on-the-run benchmark is defined as the period between the first time it is issued and when it is replaced with a bond of equivalent tenor bearing a different coupon and maturity date. 19 The World Bank Government Bond Market (Gemloc) Advisory Services Handbook on ‘Domestic Syndications’ discusses the use of this placement mechanism in the domestic market. 4. STEPS IN DEVELOPING AND IMPLEMENTING THE ISSUANCE PLAN 19 34. The debt manager may choose to offer and settle D. Organization of Maturities different instruments and tenors on the same day/ 36. Objective: To manage the refinancing risk arising from week or different days/weeks. Offering several building benchmarks by organizing the redemption instruments and tenors on the same day could simplify months and dates of various benchmark lines. administrative processes. Debt managers also choose to offer several instruments at a given auction in 37. Information required: order to retain the flexibility to issue instruments that attract more demand. However, auctioning too many 37.1. Benchmark tenors, target size, and number of instruments on the same day could fragment market lines of each tenor to be issued demand for each instrument and inhibit competitive 37.2. Projections of government cash flow/balance pricing; it also adds an element of uncertainty that and expectations of systemic liquidity through investors may find unattractive. Market consultation the budget cycle ahead of an auction should help gauge demand for particular instruments, tenors, and amounts, reducing 38. Analysis: Organizing the redemption dates is a first the need to retain flexibility by offering several step in managing refinancing risk and complements instruments at the same time. Different benchmark other tools such as buybacks, exchanges, and cash tenors could be offered in different weeks in order to buffers. In order to do so, the debt manager needs avoid cannibalization of demand and help sequence to have the flexibility to choose the redemption date the launch of benchmarks. of a line independent of its date of first issuance.20 There may be “good” months and “good” weeks or 35. Auctioning bonds before treasury bills in a given week days within a month to refinance large benchmarks, could help debt managers to support a more stable based on seasonality in systemic liquidity (e.g. pension auction calendar for bonds by considering the bond contribution periods) and government receipts (e.g. auction results for that week and adjusting financing tax receipt periods). Redemption dates, especially of from treasury bills, if necessary. The market is likely large benchmarks, could be chosen to fall in those to be more flexible about absorbing varying amounts months/weeks/days when the government is likely to of short-term treasury bills than about fluctuations have surplus cash and/or be able to issue substantial in the amount of bonds offered. The scale of cash amounts of GS to refinance maturing benchmarks. management operations, i.e. issuing very short- term bills, typically 3-month or shorter, and repo 39. The redemption dates of multiple lines of the same operations, would necessarily be based on the results tenor could be spaced out equally in order to provide of financing operations, i.e. issuing bonds and longer- more regular reference points on the yield curve and term treasury bills. There may be a further case for prevent cannibalization of demand for one security by separating the auctions of debt management and cash the other. For example, if the debt manager supports management instruments in different days of the week two lines of 3-year bonds every year, organizing their in order to make the purpose of these operations clear redemption dates six months apart would ensure to the market. that there is not a longer period without a 3-year price reference in the market, and that the two lines are sufficiently different in terms of their remaining time to maturity such that they do not compete with each other for investor demand. The debt manager could further align redemption dates with expected settlement dates of future auctions thereby reducing the need for/scale of short-term cash management operations and minimizing reinvestment risk for investors as discussed in Box 3. 20 In other words, the debt manager should have the ability to issue long-coupon securities and reopen them. 20 ISSUANCE PLAN FOR GOVERNMENT SECURITIES 40. Once the debt manager has decided on the standard line must be adjusted for that year. If the standard organization, or pattern, of redemptions, actual organization were consistently respected, the market redemption dates must be chosen carefully during the would eventually become familiar with and confident transition to this pattern to prevent new lines from about the availability of benchmark lines in different bunching with existing debt. If an existing line is maturity buckets and the shape of the redemption maturing in a month/week that has been chosen for profile, supporting investors’ ability to design and a new line, the redemption month/week for the new execute investment strategies. Box 3: Choice of Settlement and Redemption Dates In developing the issuance plan the debt manager can and bills were auctioned on different days in a week, make strategic choices regarding the settlement dates of there could be a case for aligning the settlement dates of auctions when there is a cash inflow and redemption dates both instruments to the same date. Aligning settlement of outstanding GS when there is a cash outflow. dates would simplify cash management by the DMU and liquidity management by the central bank as there Aligning redemption dates with expected future is one inflow per week from new issuance, assuming that settlement dates of auctions the alignment produces a greater total rollover percentage Aligning redemption dates of GS with expected (netting) than if there were two linked redemption/ settlement dates of future auctions facilitates better settlement dates in that week. If however, settlement management of cash as well as refinancing risk (for the and redemption are not matched and resulting in net issuer) and reinvestment risk (for the investor). From the cash flows, then it may be preferable to deal with two issuer’s perspective, future redemptions are supported settlement dates and the resulting (smaller) cash flows on by expected cash inflow from new issuance; similarly, each date. large redemptions may be the best time to launch new From the investors’ perspective, they have the same benchmarks as investors look to reinvest their cash opportunity to reinvest cash in the primary market. From from the redemptions. From the investors’ perspective, the central bank’s perspective, again, this could reduce it offers the opportunity to immediately reinvest cash the volume of liquidity management that it may need from redemption of GS back into the primary market. to carry out as it would be dealing with the net result This opportunity is more valuable for investors when of total redemption and settlement for that week. From money markets are not well-functioning or the secondary the issuer’s perspective, the opportunity to launch large market is particularly illiquid. From a monetary policy benchmarks linked to large redemptions remains. perspective, it could help reduce the scale of liquidity management that the central bank may need to carry out If the market were under stress, making it necessary as the change in market liquidity would be the net result for multiple auctions, this could disrupt the planned of the redemption and new issuance. alignment of the settlement dates. There is also the question of transition to a steady state from current Aligning settlement dates of treasury bond and practice, which would need to be carefully planned to treasury bill auctions accommodate the current redemption profile during the Combined with the practice of aligning redemption dates transition. with expected future settlement dates, if treasury bonds 4. STEPS IN DEVELOPING AND IMPLEMENTING THE ISSUANCE PLAN 21 E. Liability Management Operations LMOs, e.g. benchmark GS that are maturing within 12 months and/or securities that are larger/smaller 41. Objective: To consider the use of LMOs such as than certain thresholds. Specific information on the buybacks and exchanges, determine the securities and securities and timing of operations is often provided timing of LMOs, and their interaction with regular to the market closer to the transaction date. issuance/reopening of GS. 45. Planned LMOs need to be incorporated into the 42. Information required: issuance plan in order to assess their interaction with 42.1. Purpose of using LMOs, e.g. to mitigate regular issuance/reopening of GS and their impact on refinancing risk, to improve portfolio portfolio targets. For example, an exchange is likely to composition, to provide liquidity to the market, be more successful if the destination bond is a recently etc. issued benchmark with a fresh price reference, or a recent auction of a treasury bill could help to price 42.2. Infrastructure and staff capacity to execute an illiquid source bond with the same remaining time LMOs; market intermediaries’ and investors’ to maturity. Therefore, the debt manager needs to capacity to participate in LMOs carefully choose the specific securities and timing of 42.3. GS redemption profile and details of benchmark LMOs based on progress in the implementation of building strategy the issuance plan and the profile of investors that are expected to participate in these operations.21 43. Analysis: The choice of whether to use LMOs and which type are influenced by debt management F. Auction Schedule objectives, risk management needs, and DMU capacity and infrastructure. Although LMOs constitute 46. Objective: To produce an auction schedule for GS to operations in the secondary market for GS, they be issued in the domestic market. impact the issuance plan and need to be closely planned 47. Information required: with regular issuance/reopening of GS in the primary market. LMOs can help to mitigate refinancing risk 47.1. Outputs of Steps 1. – 5. of the Implementation and improve portfolio composition. They have also Phase (refer Figure 1) been utilized during times of market stress to provide 47.2. Analytical tool to simulate different auction liquidity to market participants that may have urgent schedules cash needs, and to provide fresh transaction prices when secondary market trading is limited. LMOs can 47.3. DMS portfolio targets (if any) further support building benchmarks faster through exchanges of old securities for newer benchmarks or 48. Analysis: Ideally, the auction schedule should be by creating a financing need from buybacks, which is generated for at least a one year period. This schedule particularly useful in an environment of low financing or a subset, say for the next quarter or month, may needs. be periodically updated with the availability of new information and disseminated to the market with 44. The most common reason for executing LMOs is necessary adjustments and details (refer Section to reduce refinancing risk. The debt manager could IV.G.) In this process, the debt manager consolidates consider buying back or exchanging a benchmark that information on the financing needs, the chosen is close to maturity in order to spread its refinancing instruments, the organization of auctions and over time. Portfolio composition and liquidity in the maturities, and planned LMOs. Modeling of the GS market could be improved through buybacks various inputs and their interactions in a spreadsheet or exchanges of small, illiquid securities for newer can be extremely useful to generate the auction schedule benchmark securities. The debt manager may set and to assess its impact on the redemption profile criteria to indicate the securities that are eligible for and risk indicators.22 Simulating different auction 21 A more detailed discussion of the mechanics and considerations for successfully designing and executing LMOs is provided in the World Bank Government Bond Market Advisory Services (Gemloc) Handbook on ‘Liability Management Operations.’ 22 To facilitate the simulation of different auction schedules, the Toolkit includes an Excel-based analytical tool accompanied by a user guide. 22 ISSUANCE PLAN FOR GOVERNMENT SECURITIES schedules by modifying the inputs can help the debt G. Market Communication manager to choose the optimal schedule to meet both 51. Objective: To determine the frequency, format, and financing and market development objectives. This is details of market communication to ensure that the an iterative and dynamic process based not only on issuance plan is appropriate for and successful in new market information and budget execution, but meeting the government’s objectives. on the implementation of the issuance plan itself. 52. Information required: 49. The optimal auction schedule is both country-specific, in that it depends on the debt manager’s objectives, 52.1. Planned auction schedule and LMOs, priorities, capacity, and available options, as well as periodically updated situation-specific, in that it needs to be adapted to temporary or structural changes in the market and 53. Analysis: A system of primary dealers and market- the economy. In choosing the auction schedule, the makers provides a formal arrangement to gather debt manager needs to consider both quantitative market intelligence on liquidity conditions and indicators on the portfolio composition and risk, the investor preferences, the best timing for the launch of redemption profile, etc., and qualitative factors such new benchmarks, benchmark sizes that would support as support to benchmark building and GS liquidity. secondary market liquidity, profiles of end-investors Simulations of the auction schedule and its impact and potential new investors, and information that the on the redemption profile and risk indicators provide market still seeks from the DMU. However, a primary a basis for internal discussion between the FO and dealer/market-maker system is not the only way to do the MO (typically in the context of a formal auction so. In the absence of a formal primary dealer/market- committee) to prioritize different objectives and maker arrangement, the debt manager would need to tradeoffs. periodically interact with key market intermediaries and investors. In either case, the interaction itself can 50. If the debt manager has developed a DMS, assessing be formalized through monthly meetings, investor the cost-risk tradeoffs between different financing surveys, etc., and supplemented with less formal strategies, the resulting portfolio targets provide meetings/calls. The debt manager may also need to high-level guidance for choosing the optimal auction coordinate closely with the securities exchange or schedule. However, simulations of the auction the providers of clearing and settlement services if schedule also attempt to fine tune the volume and such entities play an active role in the GS market. timing of GS issuance to each auction and the pace Information on systemic liquidity conditions and the of issuance within the year, i.e. front-loading or back- impact of the DMU’s operations on systemic liquidity loading or more or less stable issuance each month. may need to be coordinated closely with the central This is to ensure that resulting cash balances are bank. sufficient to cover financing needs at least on a weekly basis, or otherwise to ensure that any shortfall can be 54. Information provided to the market regarding the covered by short-term cash management operations. issuance plan should be calibrated based on striking Therefore, the debt manager needs to make several a balance between being transparent and predictable tactical decisions about the monthly/weekly auction about the issuance plan, and maintaining flexibility schedule in consultation with the cash management to adjust the issuance plan with changing needs function, the central bank when appropriate, and the and market conditions. The debt manager needs to market. If the simulations of the auction schedule carefully choose the amount and timing of information indicate that at the end of the year the portfolio that is disseminated to the market. The objective is to composition will be close to the annual targets (if any) offer a degree of transparency and predictability about and/or approaching the medium-term targets, then the supply of GS (instruments, tenors, amounts, and the debt manager can be confident that the chosen timing), which will allow market intermediaries and auction schedule is consistent with the DMS. investors to plan their operations. At the same time, 4. STEPS IN DEVELOPING AND IMPLEMENTING THE ISSUANCE PLAN 23 the debt manager’s credibility depends on adhering 56. Information on the issuance plan and outstanding to announced operations. Therefore, it would be debt portfolio may be disseminated bilaterally to prudent to offer only as much transparency as the market participants during periodic meetings with debt manager is capable of supporting and gradually the DMU, on the DMU’s webpage, and/or the increase capabilities to be more predictable.23 country’s Bloomberg/Reuters page. Dissemination on a wider platform, such as the DMU’s webpage 55. The debt manager can maintain some flexibility by or Bloomberg/Reuters page has the advantage of providing only general information at the beginning providing information not only to active participants of the budget cycle (e.g. global issuance amount, in the GS market, but also potential domestic and benchmark tenors, purpose of LMOs and criteria for global investors and industry analysts covering the choosing the securities, etc.) and follow up with the market. Some countries publish minutes of meetings exact securities and issuance amounts (still providing with the market to ensure that everyone has the same an indicative range, if necessary) at the beginning information. Periodic reports on operations offer of each quarter or month or the week before the the debt manager a chance to showcase progress auction in the announced auction schedule for that towards the implementation of the issuance plan, as period (refer Figure 5 for selected country practices well as to explain the reasons for any deviations from in auction announcement). It is sometimes possible the announced issuance plan. This can help market to indicate how the issuance plan would change in a participants to evaluate the quality of debt management particular event, e.g. a different budgetary outcome operations after discounting for unexpected changes than anticipated. in fiscal or monetary indicators. Figure 5: Selected Country Practices in Auction Announcement24 Country Auction announcement Information disclosed Brazil Administrative order is released before Objective, issuance date, amount to be each auction offered, maturity Egypt Posted on the website of the Ministry Security type, auction/settlement/maturity of Finance dates, nominal amount, coupon Germany Issue is announced six working days Announcement of the issue: maturity, before (except for inflation-linked issuance volume, time schedule for auction securities for which the announcement is flexible) the auction Invitation to submit bids: coupon, maturity, interest payment, date, volume, Invitation to submit bids is published time schedule for auction one working day before the auction Hungary Announced five days before the Bills: auction/maturity/payment dates, auction` offering amount Bonds: auction date, details of the bond offered for sale, offering amount 23 The debt manager may still want to state, e.g. in the formal documentation, that the announced auction schedule is only indicative and that it retains the right to adjust it; but it should avoid doing so as much as possible. 24 The table provides a snapshot of country practices in auction announcement taken from the World Bank Government Bond Market (Gemloc) Working Document on Country Practices on Auction Procedures. 24 ISSUANCE PLAN FOR GOVERNMENT SECURITIES India Press release to announce the sale a Amount of bills on offer few days (typically one week) before the auction, reported widely in print media and wire agencies Malaysia Announced at least five business days Tender opening/tender closing/issue/ before the issue via the Fully Automated maturity dates, stock code, stock short System for Issuing/Tendering (FAST), name, coupon rate in major newspapers, Bloomberg, and Reuters Poland Bills: announced the Friday before the Type of security, maturity, value of the Monday auction offer, description of terms of issue, time and place for submitting bids Bonds: announced the Monday before the Wednesday auction Singapore Announced five business days before Tenor, total amount offered, minimum for bonds, and three business days denomination, non-competitive tender before for bills; on the SGS website amount, issue/ISIN codes, issue/ and in major newspapers settlement/maturity dates, method of sale, coupon rate and coupon payment dates for bonds Turkey Announced on the Treasury website at Auction number, auction/settlement/ least one day prior to auction maturity dates, maturity, security/issuance type, coupon, ISIN code United Kingdom Conventional and index-linked Gilts: Auction/issue/settlement/maturity/ announced on the Tuesday of the week interest dates, bidding convention, preceding a scheduled auction interest adjusted accrued interest payable with bid, auction close, title, nominal Bills: announced with the results of amount for auction, nominal outstanding the previous auction after auction, parent ISIN/SEDOL codes, reference index applicable to first issue date, index ratio, index payable, next interest date, when issued trading (commences/closes), when issued ISIN/ SEDOL code, TIDM (for trade reporting) 4. STEPS IN DEVELOPING AND IMPLEMENTING THE ISSUANCE PLAN 25 H. Review and Adjustments requirement increased or tax revenues were delayed, or if there were adverse shocks to systemic liquidity), 57. Objective: To periodically review the issuance plan the debt manager might need to increase gross and incorporate new information. issuance, accelerate the pace of issuance, or adjust 58. Information required: the instrument mix, providing advance information to the market as and when possible. In situations 58.1. Up-to-date information on the implementation where the gross borrowing requirement has decreased of the issuance plan unexpectedly within the budget cycle (or against the 58.2. Periodically updated information on projections medium- to long-term projections) the government of budget, cash flow/balance, at least for the faces a policy decision whether to continue with the next three months implementation of the issuance plan as it is to support market development objectives (refer Box 5 for a 58.3. Periodic market intelligence on interest rates, discussion on benchmark building in an environment investor preference and demand, and market of declining debt stock). liquidity 61. While being responsive to changes in market 59. Analysis: Developing and implementing the issuance conditions, the debt manager must also look for plan is a dynamic process with feedback loops ways to support the implementation of the issuance involving budget execution, macroeconomic policies, plan, such that progress is made towards financing and domestic and global market conditions, besides and market development objectives. For example, the ongoing implementation of the issuance plan instituting a primary dealer system, where appropriate, itself. Since one of the key objectives of developing with a framework of incentives and obligations, could and disseminating an issuance plan is to offer greatly facilitate the implementation of the issuance predictability to the market, any adjustments need plan by ensuring certain demand in the primary to be carefully calibrated and communicated to the market. Short-term financing requirements beyond market as and when possible. The debt manager the planned issuance of benchmark securities could may also need to follow internal procedures for the be satisfied with adjustments to treasury bill issuance, approval and communication of adjustments to the through cash management operations, or the use issuance plan. Therefore, the debt manager can only of cash buffers. LMOs, especially buybacks, could be as dynamic as the legal, regulatory and institutional be used to create a financing need during a period framework allow. of low cash needs to support planned issuance of certain volumes. If the gross borrowing requirement 60. If market conditions are such that the issuance increased or there were an adverse shock to domestic of longer maturities at reasonable cost is severely liquidity, the debt manager could reduce pressure on constrained, the debt manager will necessarily have to the domestic market and rates by borrowing externally adjust the issuance plan to reflect such constraints. If or drawing on contingent lines of credit. fiscal and macroeconomic projections were updated during the budget cycle (e.g. if the gross borrowing 26 ISSUANCE PLAN FOR GOVERNMENT SECURITIES Box 4: Benchmark Building in An Environment of Declining Debt Stock Countries sometimes experience a structural change in financing. Such countries may adopt a policy to issue debt their fiscal situation (e.g. OECD countries in late-1990s/ explicitly for market development purposes. The challenge early-2000s), with a period of small primary deficits or that these countries face is to support benchmark building fiscal surplus leading to low financing needs. Other at different tenors and to adequately invest surplus cash to countries may be resource rich (e.g. Norway, Kazakhstan) minimize the cost of carry. In this context, debt managers or may have been fiscally prudent for a sustained period can adopt several measures depending on the purpose: (e.g. Singapore, Hong Kong), obviating the need for debt Purpose Measures Manage low financing • Create additional financing need using buybacks of outstanding GS to improve need portfolio composition • Consolidate benchmarks into fewer lines and tenors, and with smaller size • Adopt more efficient benchmark building methodologies (refer Box 3) Support GS liquidity • Reduce auction frequency and extend reopening periods • Use LMOs and/or derivatives to support GS liquidity Invest surplus financing • Develop an investment strategy to invest temporary surplus cash at market interest rates (a structural surplus would usually be subject to a different investment and governance framework) • Use surplus financing to build a cash reserve for capital transactions, contingencies, etc.25 25 Asset accumulation by the government raises several new challenges in terms of cost of carry, governance issues, and potential distortionary effects on asset prices that are beyond the scope of this guidance note, but which need to be carefully considered by the government. 5. KEY LINKAGES 27 5. Key Linkages A. Cash Management 62. Cash forecasting and cash management capabilities of the government are critical to how well the debt manager can design and implement the issuance plan, and how sensitive the issuance plan should be to volatility in financing needs. They are significant for the pace of GS issuance and benchmark building, and for minimizing the cost of carry on cash balances that the government may choose to maintain. 63. Most EMEs face challenges in forecasting cash for a sufficiently long period, say for the next three months, with a certain degree of reliability. The challenges often go beyond the direct responsibilities of the DMU. However, the debt manager can highlight the importance of adequate and reliable cash forecasts and coordinate with relevant agencies to obtain necessary information. Such coordination needs to take place within MoF, between the FO and the unit responsible for cash forecasting and management, as well as between MoF and those responsible for budget execution elsewhere in the government ministries. Weekly cash flow projections should be generated and updated at least for the next three months to identify whether the issuance plan will sufficiently support budget financing and debt servicing or, if it needs to be adjusted and/or if the debt manager needs to tap other sources of funding to satisfy cash needs in the short term. 64. The debt manager’s and the cash manager’s judgment on the feasibility and appropriateness of cash management operations are important inputs to refining the issuance plan. In addition to compiling reliable forecasts, the unit responsible for cash forecasting and management needs to develop, in coordination with the debt manager, short-term borrowing instruments. For example, cash management bills and repos to manage a temporary cash shortfall, or invest short-term surplus cash using (collateralized) deposits or reverse repos at close to market rates. This is necessary to smooth the government’s cash balance, which allows a lower average level of cash balance, and to minimize the cost of carry on the government’s cash balance. The strength of cash management capabilities greatly influences the degree of regularity and predictability that the debt manager can provide in implementing the issuance plan. 28 ISSUANCE PLAN FOR GOVERNMENT SECURITIES B. Coordination with the Central Bank 67. In some instances where the central bank issues its own instruments for liquidity management, the MoF/ 65. Coordination between MoF/DMU and the central DMU and central bank have reached an agreement bank is mutually beneficial to their respective to divide the short-term maturity spectrum for their functions. The implementation of the issuance plan respective securities. For example, the central bank and associated cash management operations can issues bills at maturities of one month or shorter while complement the central bank’s liquidity management the MoF/DMU issues treasury bills of maturities operations with sufficient coordination. Operational longer than one month. In other cases, the central coordination is also important to avoid competing bank has agreed to use securities issued by MoF/DMU issuances from the government and the central bank to carry out open market operations with the proceeds at similar tenors (or at similar times of the day or sterilized in a government account at the central week). If there is an overarching understanding of bank. MoF/DMU securities also serve as collateral for these issues between MoF/DMU and the central bank central bank repo operations. then coordination becomes easier. 68. Proceeds from government debt issuance are typically 66. The central bank is an important source of deposited at the central bank in a treasury single information for the debt manager regarding systemic account or TSA. If the government chooses to liquidity conditions and monetary policy operations maintain a cash buffer as part of its risk management that impact the implementation of the issuance plan. strategy, it would aim to increase the size of the TSA For example, the debt manager may wish to time the balance. The size of this balance, how it is remunerated launch of benchmarks during periods of sufficient and the impact on the central bank’s balance sheet, systemic liquidity. In return, the debt manager could and how the cost of maintaining this cash buffer could share information on the maturity structure of the be shared between MoF and the central bank are all government debt portfolio, the planned timing and important matters for close coordination between the size of borrowing, and planned cash management two entities. operations that are likely to impact systemic liquidity and monetary policy implementation. 6. CONSLUSION 29 6. Conclusion 69. Developing and implementing an issuance plan for GS is an important ongoing activity for EME debt managers, with implications for the government’s cost of financing, managing risks in debt servicing, supporting monetary policy implementation and financial stability, and promoting financial sector development. It is based on the principle of offering greater transparency and predictability to the market on the government’s debt issuance, while building and maintaining the DMU’s credibility with respect to debt management operations. A well-designed issuance plan takes into account the government’s objectives, investor preferences and the macroeconomic environment. Implementing an issuance plan is a dynamic process that requires close coordination with investors and market intermediaries, with other public sector agencies responsible for fiscal and macroeconomic projections, and with the central bank. With consistency in planning and implementation over a medium- to long-term horizon, the government as the issuer can hope to reach a better cost-risk tradeoff in its financing activities and contribute to financial sector development and stability. 7. ANNEX: ILLUSTRATION OF STEPS IN DEVELOPING AN ISSUANCE PLAN 31 7. Annex: Illustration of Steps in Developing an Issuance Plan Background • The government’s debt management objectives include issuing regular benchmark securities and gradually lengthening the tenors of the benchmarks offered; issuing and maintaining a steady volume of shorter-term (less than one year) treasury bills; and gradually increasing the proportion of gross financing met from DX fixed-rate GS issuance in the domestic market. • Debt rollover will be financed through issuance of GS in DX in the domestic market • A portion of the budget deficit (including interest payments) will be financed through issuance of GS in DX in the domestic market • During the previous year, the government raised around DX 40.0 bn through GS issued in the domestic market. The gross financing need this year in DX in the domestic market is larger but systemic liquidity is expected to be favorable, helping to satisfy the increased financing needs. • During the last year the debt manager has been able to issue between 500 mn and 1.0 bn at each auction; auctions are held weekly with T+2 settlement A. Financing Need • Gross financing need for 2014 in the domestic market from issuance of GS = 46.0 bn, of which • Portion of budget financing (including interest payments) = 18.0 bn • Debt refinancing = 28.0 bn 32 ISSUANCE PLAN FOR GOVERNMENT SECURITIES B. Instrument Selection • Treasury bills: 6-month, 12-month • Treasury bonds; fixed rate in DX: 3-year, 5-year, 7-year Instrument Target Number Total financing Notes size of lines over the year supported over a year 6-month 1.0 bn 6 6.0 bn Gross issuance is 12.0 bn with the intra-period rollover of maturing lines 12-month 1.5 bn 6 9.0 bn 3-year 3.5 bn 4 14.0 bn 5-year 5.0 bn 2 10.0 bn 7-year 7.0 bn 1 4.0 bn Demand for this tenor is expected to be lower than the desired target size Total 43.0 bn Additional 3.0 bn needs to be raised by either adjusting the size of some benchmarks or opening an additional line of 3-year or 5-year bond C. Organization of Cuctions • An indicative pattern of auctions of different instruments may be announced to the market with the actual auction calendar announced periodically Week of the Month Instrument offered Week 1 6-m, 3-y Week 2 12-m, 5-y Week 3 6-m, 3-y Week 4 12-m, 5-y or 7-y (offered once or twice a quarter, possibly in the fifth week of five-week months) 7. ANNEX: ILLUSTRATION OF STEPS IN DEVELOPING AN ISSUANCE PLAN 33 D. Organization of Maturities • The different lines of each tenor are arranged systematically such that the redemption of large benchmarks does not bunch in any given year. • This organization represents a steady state and it would need to be adjusted during the transition to this steady state to avoid bunching of redemptions with already outstanding GS. Instrument Size Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 6-month 1.0 FLEXIBLE 12-month 1.5 1.5 1.5 1.5 1.5 1.5 1.5 3-year 3.5 3.5 3.5 3.5 3.5 5-year 5.0 5.0 5.0 7-year 7.0 7.0 Total 1.5 1.0 5.0 6.0 1.5 4.5 1.5 7.0 5.0 6.0 1.5 4.5 E. Liability Management Operations • Large benchmarks maturing within the next 12 months would be considered for buybacks during times of relatively lower cash needs • The DMU will begin with buyback transactions, since they are simpler to execute than exchanges 34 ISSUANCE PLAN FOR GOVERNMENT SECURITIES F. Auction Schedule • An auction schedule is generated for the next year with the planned instruments, amounts and timing of issuance and after modeling the various inputs in a spreadsheet (such as the analytical tool that is part of the Toolkit); the planned auction schedule for the first quarter is provided below • The issuance week for each instrument is based on the organization of auctions • The maturity month of each instrument is based on the organization of maturities • The planned auction amounts for each week are calibrated to promote competitive price formation, and to be within market absorption capacity • A new line is launched when the target size of the previous line is expected to be reached Week of 6-m 12-m 3-y 5-y 7-y Total # Maturity Amount Maturity Amount Maturity Amount Maturity Amount Maturity Amount Amount 1 Jul-14 400 Mar-17 500 900 2 Jul-15 400 Apr-19 500 900 3 Jul-14 300 Mar-17 500 800 4 Jul-15 400 Apr-19 750 1,150 5 Jul-14 300 Mar-17 500 800 6 Jul-15 400 Aug-21 500 900 7 Aug-14 400 Mar-17 500 900 8 Jul-15 300 Apr-19 500 800 9 Aug-14 300 Mar-17 500 800 10 Mar-15 400 Apr-19 750 1,150 11 Aug-14 300 Mar-17 500 800 12 Mar-15 400 Aug-21 500 900 13 Oct-14 400 Mar-17 500 900 Total 2,400 2,300 3,500 2,500 1,000 11,700 G. Market Communication • The following information is provided for the month of February 2014 • Indicating that the DMU maintains the right to adjust this calendar with a week’s advance notice to the market • Providing a range for the planned issuance amount for the 7-year instrument maturing August 2021 to maintain Week of 6-m 12-m 3-y 5-y 7-y Total Maturity Amount Maturity Amount Maturity Amount Maturity Amount Maturity Amount Amount 3-Feb Jul-14 300 Mar-17 500 800 10-Feb Jan-15 400 Aug-21 500-750 400 17-Feb Aug-14 400 Mar-17 500 900 24-Feb Jan-15 300 Apr-19 500 800 CHAPTER TITLE 35 H. Review and Adjustments • The planned auction schedule is reviewed periodically, every quarter and every month before publishing the quarterly/ monthly auction calendar • Further adjustments, if any, are announced the week before the auction • Planned LMOs may also be announced, say one or two weeks, before the operation, indicating a maximum amount for the chosen instrument that the DMU wishes to buy back or exchange REFERENCES 37 References 1. “Developing a Medium-Term Debt Management Strategy – Guidance Note for Country Authorities,” The World Bank and International Monetary Fund, February 24, 2009. [tags: guideline, debt management strategy] 2. “Developing Government Bond Markets: A Handbook,” The World Bank and International Monetary Fund, 2001. [tags: guideline, government bond market] 3. “Developing the Domestic Government Debt Market: From Diagnostics to Reform Implementation,” The World Bank, 2007. [tags: guideline, government bond market] 4. “Domestic Syndications,” World Bank Group Government Bond Market Advisory Services Program Background Note, May 2015. [tags: government bond market, syndication] 5. “Bond Buybacks and Exchanges,” World Bank Group Government Bond Market Advisory Services Program Background Note, May 2015. [tags: government bond market, liability management] 6. “Market Liquidity: Research findings and selected policy implications,” Bank for International Settlements, May 1999, Basle. [tags: government bond market, liquidity] 7. “Public Sector Debt Statistics: Guide for compilers and users,” International Monetary Fund, 2013. [tags: guideline, debt statistics] 8. Garcia-Kilroy, Catiana, “Instrument choice in the implementation of the debt management strategy,” World Bank Government Bond Market (Gemloc) Background Paper for the Implementing Government Debt Management Strategies course, 2007. [tags: instrument choice, benchmark building, liquidity] 9. Gravelle, Toney, “Buying Back Government Bonds: Mechanics and other considerations,” Bank of Canada Working Paper, 1998. [tags: liability management, benchmark building, liquidity] 10. Gray, Simon, “Government Securities: Primary issuance,” Handbooks in Central Banking No.11, Bank of England Centre for Central Banking Studies, July 1997. [tags: primary market, issuance techniques] 38 ISSUANCE PLAN FOR GOVERNMENT SECURITIES 11. J. P. Morgan, “Debt and Fiscal Indicators,” April 2012. [tags: debt statistics] 12. Ladekarl, Jeppe, Sara Zervos, “Housekeeping and Plumbing: The investability of emerging markets,” World Bank Policy Research Working Paper 3229, March 2004. [tags: investor base, benchmark building, liquidity] 13. McCauley, Robert, Eli Remolona, “IV. Special feature: Size and liquidity of government bond markets,” BIS Quarterly Review, November 2000. [tags: instrument size, liquidity] 14. Mohanty, M.S., “Improving liquidity in government bond markets: what can be done?” BIS Papers No. 11 on “The development of bond markets in emerging economies,” 2002. [tags: liquidity, government bond market microstructure] 15. Monetary Authority of Singapore, “Singapore Bond Market Guide 2012.” [tags: investor guide, international experience] 16. Akcadag, Olga, World Bank Government Bond Market (Gemloc) Working Document: “Country Practices on Auction Procedures,” 2012. [tags: auction announcement procedures, international experience]