Ministry of the Economy and Finance Department of the Treasury - Directorate II

Transcription

1 Annex to the Public Debt Director Decree N of June the 7 th 2004 Ministry of the Economy and Finance Department of the Treasury - Directorate II SPECIALISTS IN GOVERNMENT BONDS 1 January December 2005 Updated to June 2004 Specialists in Government Bonds are Primary Dealers on Government Bond Wholesale Regulated Markets who undertake, jointly with the Department of the Treasury - Directorate II, to guarantee a high level of efficiency and transparency on the Italian Government Bonds market. 1. Requirements In order to meet the specific needs of Public Debt management, the Ministry of the Economy and Finance draws up a specific list, called "Elenco degli Specialisti in titoli di Stato" (List of Specialists in Government Bonds), of the Primary Dealers on the Wholesale Regulated Secondary Markets who apply for a listing 1. To obtain the "Specialist" status, a number of market activity and structural requirements must be met and maintained. The market requirements are: a) a market share of at least 3% of the total Government bonds issued on an annual basis on the primary market (paragraph 2.1); 1 Article 3 of the Regulations concerning Government Bond Wholesale Markets - Decree 219 of 13 May

2 b) efficient participation in the secondary market (paragraph 2.2); The structural requirements are: c) a net regulated capital of at least euro 38,734,267 (paragraph a); d) being qualified as a Primary Dealer on the Italian Government Bond Wholesale Regulated Market (paragraph b); e) an appropriate organisational structure able to guarantee Government bond placement (see paragraph 2.4.2). 2. Evaluation of Specialists The activity of the Specialists is monitored by the Ministry of the Economy and Finance, according to the criteria set out in the following paragraphs. In particular, the Ministry deems Specialists to be satisfactory if: 1. they take part in every placement auction and achieve their annual quota with market shares that are not concentrated on a small number of auctions and/or instruments; 2. they do not determine any distortion to auction prices; 3. they contribute to the efficiency of the secondary market and do not interfere with orderly trading; 4. they make useful proposals for taking decisions regarding Public Debt issues and management; 5. they comply with the confidentiality obligation on the information to which Specialists are entitled to have access to. 2.1 The Primary Market Attaining the minimum annual primary market share of 3% of the bonds issued by the Ministry of the Economy and Finance on the primary market is a necessary condition for retaining the status of Specialist. The market share is calculated taking into account the financial features of the bonds, i.e. by weighing the nominal amount allotted in each auction with a given weight (see table 1). The date used for calculation of the market share is the auction settlement date. 2

3 TYPE Table 1: Weighting factor to calculate volume of winning bids on the Government Bond Primary Market BOT 3 months BOT 6 months BOT 12 months CTZ 24 months 3 years 5 years 10 years 15 years 30 years WEIGHTING CCT Each Specialist scores points in proportion to the market share, which can never exceed 3 points. More specifically, the points awarded equal the quota subscribed minus the annual minimum quota (3%), by applying the following formula: where P o = Q o - 3 P o is the score, up to 3, awarded to the Specialist; and Q o is the primary market quota of the dealer whose performance is being assessed. For example: a. a dealer who subscribes a primary market quota of 4.49% scores the following points: = 1.49 b. a dealer who subscribes a quota equal to or above 6% scores 3 points. 2.2 The Secondary Market With regard to the activity on the Secondary Market, the following parameters are used: 1. number of quoted bonds - (for a minimum of 6 hours); 2. bid-ask spread - (standardised for each bond); 3. volumes traded on the cash market; 4. volumes traded on the repo market; 5. contribution to overall market efficiency. 3

4 Points are awarded as follows: Parameter 1 and 2: 1 point shall be awarded to the Specialist who ranks first while the others receive a score proportional to the performance of the best performing dealer. Parameter 3: 0.5 points (0 point) are awarded to the Specialist whose average daily performance is above (below) the average daily performance of the non-specialist Primary dealers and Candidate Specialist dealers; Parameter 4: 0.5 points to the Specialist who ranks first, while the others score proportionally to the performance of the best performing Dealer. Parameter 5: 0.25 points to the Specialist who ranks first, while the others receive a proportional score based on the analysis conducted by the Bank of Italy - Ufficio Supervisione sui Mercati (Market Supervision Office) - of the contribution they have made to the overall efficiency of the Government Bond Market. These points are awarded at the end of each year. 2.3 Exchange Operations 0.75 points are awarded to the Specialist subscribing the highest quota issued annually by the Treasury, while the others will be awarded points proportional to the performance of the best dealer. The Treasury shall not take account of the quota awarded to any dealer who fails to deliver the bonds in time for settlement. Such failure may even determine the removal of the dealer from the List of Government Bond Specialists. 2.4 Organisational Structure Minimum general requirements a. Possession of a net regulated capital of at least euro 38,734,267. The net regulated capital shall be determined according to the prudential requirements set by the competent supervision authority. The declaration must be made in accordance with Annex A of this document. If the regulated capital falls below the aforementioned minimum, the dealer shall be removed from the List of Specialists. b. Primary Dealer status on regulated Italian Government Bond Markets. Loss of Primary Dealer status automatically entails removal from the List of Specialists. 4

5 2.4.2 The possession of an appropriate organisational structure for placing government bonds shall be evaluated on the basis of the following: Distribution operations: this is evaluated up to a maximum score of 0.5 points, of which 0.25 are awarded on the basis of the volumes traded on the OTC market and 0.25 on the basis of the volumes trading on the regulated Government Bond market dedicated to final investors. Operations on the OTC market will be evaluated on the basis of the screen-based system figures that will make it possible to validate the contracts negotiated. Until the OTC operations are available on a screen-based format which certifies their validity, volumes traded must be communicated by in Excel format defined jointly by the Treasury and the Bank of Italy. It should be noted that in this case account is taken of the figures provided on condition that a statement attesting their truthfulness is issued, which may also take the form of selfcertification (Annex B). Specialist Dealers that do not distribute off the regulated markets shall score 0 points. Specialist Dealers that fail to submit the documentation required to support the evaluation of off-regulated market distribution score points. 2.5 Scoring points For the two-year period the Ministry of the Economy and Finance shall award points to each Specialist using the system indicated below (table 2). Table 2 - Evaluation of the Specialists Parameters Points Primary Market Annual quota >= 3% Quota awarded -3 (max 3) Secondary market Quoted Bonds Bid-ask spread Overall volumes traded on the MTS Repo Contribution to the overall efficiency of the market 1 point max. 1 point max. 0/0.5 points proportional to the Primary Dealers' average performance 0.5 points max points max. Exchange Operations Annual quotas awarded 0.75 points max. Organisational Structure Distribution activity 0.5 points max. 5

6 On the basis of its overall evaluation, at the end of each year, the Ministry will draw up the final ranking of Specialists, and publish the top five positions on the Ministry's Internet site. Furthermore, also the ranking based on the two-year period will be drawn up. The Ministry reserves the right, when deemed necessary, to change the evaluation criteria described in the present document. In that case, the final ranking shall be drawn up by taking into account the points awarded to each Dealer in each observation period. 2.6 Reasons for exclusion Every two years the Ministry ensures that the eligibility requirements to retain Specialist status set out in the foregoing paragraphs are still being met. Before the end of the biennium, exclusion from the List is automatic if any of the eligibility requirements referred to in paragraph 1, subparagraphs a, c and d are no longer met. Exclusion may also occur when a Specialist Dealer acts in a way that jeopardises the efficiency of the secondary market and orderly trading, also on the basis of the analyses of the Bank of Italy-Market Supervision Office (Banca d'italia - Ufficio Supervisione sui Mercati). Exclusion may be decided for serious reasons, such as: - participating in auctions in a way which interferes with a normal and orderly outcome, which may also be due to errors resulting from technological shortcomings, such as inputting prices that trigger the automatic protection mechanism. Specialist Dealers shall be objectively monitored using an indicator drawn up by the Treasury on the basis of the bids made at auctions; - trading on Government Bond Wholesale Regulated Markets without financial significance and not intended as genuine market trading; - trading on Government Bond Wholesale Regulated Markets on behalf of third parties; - failing to pay or deliver securities on the settlement date in transactions in which the Ministry is the counterparty, and whenever such failure is significant in respect of securities traded on the Government Bond Wholesale Regulated Markets. - execution of financial operations for local authorities that do not respond to the Law in force. The Ministry will notify the dealer of any conduct deemed prejudicial to orderly trading; if such conduct persists, the dealer shall be removed from the List. 6

7 Specialists removed from the List can not apply to be enrolled for one year from the date of exclusion. 3. Privileges for Specialists Specialists enjoy the following privileges: 1. Exclusive access to the reopening option following medium-long term Bond and 6-month BOT auctions for an amount normally equal to 10% (25% in case of the first tranche of medium and long-term Bonds) of the amount offered in the auction exclusive right to participate in buy-back auctions (using the Fondo Ammortamento ); 3. exclusive right to be considered for selection as: a. lead managers for syndicated euro issues; b. dealers for the United States dollar-denominated benchmark programme; c. dealers for buy-back operations using the Fondo Ammortamento ; It is an essential condition for the Specialist to perform constantly in a satisfactory manner, but in itself this is not sufficient to qualify for the award of the operations referred to in point 3 above. The Ministry shall also take account of the Specialist's capacity to make proposals and conduct analyses, and possession of an appropriate organisational and distribution structure, in order to guarantee the successful outcome of syndicated transactions. Candidate Specialists may also be invited to take part in these activities if they have promoted the operations in question, are in possession of an appropriate organisational structure, are able to significantly improve the outcome of placements and their performance is considered satisfactory. 4. preference for participation in other currency issues and derivative operations. 2 Each Specialist has the right to buy bonds at the marginal price (or at the weighted average price in the case of BOTs). The maximum amount available to each Specialist is proportional to the overall market share obtained in the last three auctions (including the one to which the reopening refers) by each Specialist with respect to the amount subscribed by Specialists only. Currently, such an option expires at 12:00 AM of the first business day after the auction. If one or more Specialist do not exercise their options, the residual amount shall be available to the others and distributed proportionally following the same criteria. However, bonds assigned in such additional placements will not be taken into account for the determination of the primary market requirements. 7

8 4. How to qualify as a Specialist Primary Dealers operating on Government Bond Regulated Wholesale Markets for at least four months, and who have demonstrated their total compliance with the obligations relating to the maintenance of that status, may submit applications (see Annex C ) from January to October each year. The start of the 12- month observation period will be communicated by Direzione II - Ufficio II, within 60 days, after investigations have been conducted to ascertain that the eligibility requirements are met. During the observation period, the Candidate Specialists must: subscribe to a 3% primary market share, on an annual basys (paragraph 2.1) by regularly participating in the placement auctions in a manner that does not interfere with regular trading; have a satisfactory performance on the secondary market (paragraph 2.2); demonstrate continuity of performance both on the primary and secondary market. The observation period may be extended if any operational difficulty arises during the course of it. 5. Switching specialist status In response to an acceptable request, the Ministry may authorise the transfer of Specialist status from one dealer to another, provided that they both belong to the same group. This request shall be accepted upon production, by the transferee, of the following: 1. Evidence that it belongs to the same group as the transferor; 2. A minuted copy of the resolution authorising the transfer of Specialist status and any other document highlighting the reasons for the transfer request; 3. Evidence that it has a net regulatory capital of at least euro 38,734,267 (see Annex A); 4. Authorisation to deal on Government Bond Regulated Markets as a Primary Dealer; 5. Evidence that it has successfully passed the Bank of Italy tests for the operation of the Screenbased Auction system and that it has signed the auction convention for the placement of the securities with the Bank of Italy (Servizio di Politica Monetaria e del Cambio - Via Nazionale Roma - Italia); The incoming Specialist dealer will be given the same position in the Ministry of the Economy and Finance ranking previous held by the outgoing dealer. As for the reopening options of medium- and long-term bonds and 6 month BOTs, the entitlement quota shall be zero if the outgoing operator's ABI code changes in the transfer process. 8

9 Upon receiving and checking the aforementioned documentation, the Ministry of the Economy and Finance notifies the applicant of its decision as soon as possible, and at all events within a maximum of sixty days. 9