With volume for equity trading at an all-time low, the CSE Council is rushing plans to develop a healthy secondary market for government bond trading, while the Finance Ministry is readying a plan to introduce the primary dealers concept to provide badly needed liquidity and ensure transparency.
CSE Chairman Akis Kleanthous has said the development of a transparent, efficient and competitive secondary market for government bonds, and corporate bonds is one of the main objectives of the Exchange.
That’s why the Exchange has created a new category for bonds, in parallel to the separation of the market into a Main, Parallel, Alternative and Investment companies, which came into effect from September 6, 2004.
The objective is to attract the 800 or so legal and private individuals investing in government bonds to the CSE where they will be able to trade their bonds in a transparent, efficient and competitive environment, Kleanthous told the Financial Mirror.
The 800 names on the CSE target list appear to be flush with liquidity and eager to snap up government bonds, in sharp contrast to the dismal volume transacted daily on the CSE for equity trading.
During the most recent auction for 2 and 5-year bonds and 13 and 52-week Treasury Bills held on August 26, the government received bids
totaling CYP 222.19 mln, but decided to accept only CYP 90.5 mln worth of bids.
Thus in one trading day, the bond market’s volume of trade matched 3 years of trading in equities, considering that the average daily volume transacted on the CSE currently hovers about CYP 200.000.
Banks, Life Insurance companies, Provident and Pension Funds, cash-rich corporations and wealthy individuals as well as a growing number of people with savings looking for a better return than bank deposits comprise the main category of bond traders in Cyprus.
The CSE’s good intentions are however not enough to attract bond traders to the Exchange, considering the lack of proper pricing now on offer on government bonds, which are listed on the CSE.
Enter the Finance Ministry and the Central Bank who are determined to help the development of a secondary market. The Finance Ministry is already working on the concept of drafting legislation, introducing primary dealers who will be responsible to provide liquidity, offer competitive bid-offer spreads and act as market makers for the government bonds.
The idea is to give 5-6 major institutions, of which 2-3 at least will preferably be foreign owned or managed, the exclusive right to purchase the bonds from the government directly and then become market makers in the secondary market, by offering competitive and transparent bid-offer spreads.
In view of the small size of the market, Finance Ministry officials are also believed to be contemplating to offer a fixed commission to the primary dealers as an additional incentive for them to assume the role of market makers and provide liquidity at competitive prices at all times.
In the event that trading in government bonds becomes successful, then the concept may be extended to corporate bonds and eventually to the shares listed in the CSE Main Market, where as is the case in many countries abroad, the concept of market makers is operating successfully.
The Central Bank and the Finance Ministry will also need to become more organised by holding regular auctions for bonds and T-bills as opposed to the current practise of holding sporadic auctions depending on the liquidity needs of the state.