Secondary public debt market in Spain

economic-dictionary

In the secondary market for public debt in Spain, the State debt is negotiated in euros, which is the object of negotiation in said market, and is made up of Treasury Bills, State Bonds and State Obligations.

Its issuance takes place through the competitive auction procedure in the primary market, with the Bank of Spain acting as the Treasury's financial agent, so that it can move to a second trading segment or secondary market.

Debt instruments traded

Therefore, the debt instruments traded in this market are:

  • Treasure letters

They are short-term securities (maximum term of 18 months), with a minimum nominal value of 1,000 euros, issued at a discount (this means below par, which is 100).

  • Bonds and Obligations of the State

They are securities that are issued for a term of 2 years or more. When the initial terms issued are 3 or 5 years, they are called bonds, while terms greater than 5 years are called State obligations. They are issued for a minimum value of 1,000 euros, but with a periodic interest called a coupon.

  • Strips

These values ​​can be divided and traded in other values. Thus, from a 5-year bond, 6 strips can be obtained, one for the principal and 5 more for each coupon received. The segregation technique is reversible.

  • Debt in foreign currency

Its weight is reduced. It is made up of loans and fixed income securities denominated in yen and dollars.

Members of the public debt market

The following can be members of the secondary public debt market:

  • Securities companies and agencies.
  • Spanish credit institutions.
  • ESIs and credit institutions authorized in another EU Member State and also those that are not from the EU, as long as they meet certain requirements established by law.

Not all members of the market are the same, there are different categories:

  • Account holders in their own name

Financial institutions authorized by the Treasury, following a report from the Bank of Spain, to acquire and maintain public debt recorded in accounts opened in their own name at IBERCLEAR.

  • Managing entities

A key part of the market, they are in charge of connecting the market between members with non-members of the same. They are authorized to carry out the securities accounts in IBERCLEAR of those who are not members of the market. There are entities with full capacity and restricted capacity.

  • Market makers

They have a series of special rights and obligations both in the primary market and in the secondary market. With its creation, it is intended to promote liquidity and the proper functioning of the public debt market.

Negotiation

The public debt market is a decentralized market. You can be hired in any of the following areas:

  1. Bilateral contracting, directly or through brokers, by account holders, acting on their own behalf or on behalf of third parties.
  2. In the contracting system of the Madrid Stock Exchange.
  3. Through the retail segment or negotiation of third parties with the account holders.
  4. In the following electronic contracting platforms:
    • SENAF.
    • EUROMTS.
    • MTS Spain.
    • BrokerTec.

In addition, anyone can subscribe public debt in the direct accounts of the Bank of Spain. However, if you want to operate in the secondary market (sale before maturity), you must have the assistance of a managing entity. In this section, the following operations are authorized:

  • Simple

Buyer and seller agree that the securities are transferred until the date of execution of the contract. The buyer does not have the commitment to keep them until that date, since the seller does not assume the commitment to buy them back before maturity.

In simple cash operations, there are a maximum of five business days between the contracting date and the execution date. However, in simple forward operations, it is more than five business days, the parties may agree that the operation be settled by differences, including any date of the term.

  • Double

The owner of the securities sells them until the amortization date, agreeing to repurchase securities with identical characteristics for the same nominal value, on a specified date and at an agreed price. The difference between a repo and a simultaneous one is the availability of the securities. (see the differences between repos and simultaneous).

Central of Annotations in account of the debt of the State and Iberclear

In 1998, the clearing and settlement trading segment of the market was separated. In 2003, with the reform of the financial markets that led to the creation of the holding company Bolsas y Mercados Españoles (BME), IBERCLEAR was created. Therefore, in terms of clearing and settlement of operations, the members of the market register the operations in IBERCLEAR's securities accounts, keeping their own operations and operations on behalf of clients in a separate register.

Risk premium

The return on public debt is explained by the issuer's risk premium and is measured in two ways:

  1. By difference with the issuance of the best credit quality in the currency. In the case of Spain, by difference with the German public debt. On August 31, 2012, the Spanish 10-year debt had a yield of 6.81%, and the 10-year German bond was yielding at 1.33%. The difference between one and the other of 548 basis points is what is called the risk premium.
  2. For the price of default insurance. This way of measuring consists of observing how much it costs to acquire in the market a protection between the non-payment or restructuring of the Spanish public debt, which consists in that if some of these assumptions occur (default, non-payment or restructuring), the one who acquires the protection receives protection. These hedging contracts are derivative contracts, and are called CDS (Credit Default Swaps).

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