New bond auction system seeks dealer competitiveness

Reuters: Sri Lanka’s new Treasury bond auction system is designed to increase competitiveness among primary dealers by being more transparent, Deputy Central Bank Governor Nandalal Weerasinghe said on Wednesday.

The Government introduced a new bond auction system last week comprising competitive, non-competitive and mandatory auctions. They also brought in some regulatory actions against primary dealers not performing up to standard.

The new system was introduced after the prior competitive auction method, introduced in February 2015, came under heavy criticism as a result if a bond scam, currently under investigation.

“This is a much more transparent and rule-based system,” Weerasinghe told Reuters in an interview.

“This will encourage more competitive bidding. There is an inherent incentive for everybody to become more competitive rather than having off-market bids.”

He said under the new system, markets will be given the auction data and amount to be raised well in advance and the Government will stick to the amount it announces.

The Government will first go for competitive bidding and the weighted average yield will be decided by the debt office depending on the existing market rate, Weerasinghe said.

If it cannot raise the total amount it expects, the debt office will then go for non-competitive bidding, asking the primary dealers to bid for the remaining amount at the same yield decided in the competitive phase.

In the event the Government still fails to raise the total amount, it will go for the third step – a mandatory auction that will place all the remaining amount equally among all the 15 primary dealers, Weerasinghe said.

“If primary dealers continuously bid off-market rates and continuously not getting anything for three months, then there are certain actions regulator can take,” he added. The Finance Ministry said in a statement on Wednesday said the first bond auction under the new system went smoothly.

The weighted average yield dropped by 99 basis points in a 59-month bond and 78 bps in a 118-month bond compared with previous auctions.

Short-term bond yields also fell between 41-55 bps at a weekly auction on Wednesday, following the fall in long term debt instruments.