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The role of the Central Bank of Malta as Market-Maker
in the Malta Government Securities Secondary Market
The Central Bank of Malta has
been acting as market-maker for Malta Government securities
since the inception of the Bank in 1968. This function is undertaken
by the Bank because, to date, there are no private market-makers
or primary dealers in Malta who are prepared to take on this
role due to the small size of the market. By performing this
function, the Bank has been contributing significantly to the
development of the domestic money and capital markets and has
enhanced the liquidity of Malta Government securities.
The Central Bank’s market-making
role is limited solely to secondary market dealing with absolutely
no involvement in the primary market. Indeed, the Bank is statutorily
precluded from participating in the primary market for all
types of public sector debt instruments. The Bank’s market-making
function is performed through the Money and Capital Markets
Office which publishes daily prices and yields for Malta Government
securities, namely Malta
Government Stocks and Malta
Treasury Bills. This section also contains Reports on the
Money Market and the Legal
Opinions on Enforceability of Master Agreements.
Malta Government Stock
Until 1991, the Central Bank’s
market-making role was conducted on an over-the-counter basis.
In January 1992 when the Malta Stock Exchange commenced operations,
the Bank appointed its stockbroker to deal on the Exchange
in Government Stocks in terms of section 3(1) of the Malta
Stock Exchange Statute. The Central Bank of Malta Stockbroker
carries out his duties by virtue of article 155 (3) of the
Financial Markets Act (Cap 345).
The Bank's Broker publishes
daily prices and yields for each outstanding bond issued by
the Malta Government. The maturity of these bonds (on date
of issue) ranges from 5 years to 20 years. Until July 2003,
the Bank's Broker published both bid and offer prices. As from
August 2003, the Bank's Broker started to publish only bid
prices, discontinuing to publish offer prices given that the
Bank by that stage did not have an adequate trading balance
to enable it to operate effectively as market-maker on the
selling side. The main factors contributing to this situation
are that investors in Malta Government securities have traditionally
tended to prefer to hold these securities to maturity and,
in the event that any securities are offered for sale by the
public, the Bank’s policy is to allow sufficient time
for the market to take up such securities before intervening.
In the event that the Bank acquires significant amounts of
any given Stocks in the secondary market, the Bank's Broker
would be prepared to quote indicative offer prices for such
Stocks only.
In the morning, the Bank's Broker
publishes indicative
bid prices at which the Bank is prepared
to trade for reasonable amounts. In the afternoon, after the
close of business on the Malta Stock Exchange plc, the Bank's
Broker publishes the closing
bid prices at which the Bank actually
traded on that day or the price at which it was prepared to
buy reasonable amounts. These indicative prices are applicable
to amounts up to EUR 250,000 in Stocks with an issue amount
of EUR 70 million or over and up to EUR 100,000 for Stocks
with an issue amount below EUR 70 million. For amounts exceeding
these levels, the Bank's Broker reserves the right to review
the bid price in the light of prevailing market conditions.
The prices quoted daily by the Bank's Broker are reviewed regularly
in response to changes in the prices dealt in by other private
brokers and also take into account the underlying trends in
market sentiment. The Central Bank of Malta Stockbroker reserves
the right to review prices during the course of the trading
session in the light of changing market conditions. This pricing
policy is determined at arms’ length
from the Bank’s monetary policy role.
Besides the indicative bid price
for each outstanding Malta Government Stock, the Bank's Broker
also publishes the corresponding Current Yield (equivalent
to the coupon interest rate divided by the bid price) and the
Yield-to-Maturity. Up to 2003, yields were computed on the
Actual/365 days convention. Since then, yields started to be
computed on an Actual/Actual basis. In view that the coupon
rate on Malta Government Stock is paid on a six-monthly basis,
the Yield-to-Maturity is not strictly comparable to that of
other bonds whose coupon rate is paid annually. Accordingly,
the Bank's Broker also publishes the corresponding ISMA Redemption
Yield which represents an annualisation of the Yield-to-Maturity
so that the yield on Malta Government bonds becomes comparable
to that of bonds which pay interest on an annual basis.
The daily prices and yields
are published on the Bank’s website, Reuters, Bloomberg
and the local newspapers.
Malta Treasury Bills
The Central Bank of Malta, through
its Money and Capital Markets Office, also acts as market-maker
for Malta Treasury Bills in the local secondary market. Daily
Bid and offer prices and yields are published for all outstanding
Treasury Bills on a same
day value (T+0) basis, in respect
of deals traded On-Exchange with settlement conducted through
MaltaClear of the Malta Stock Exchange plc, and on a one
day value (T+1) basis, for deals effected off-exchange operated
by the Malta Stock Exchange plc. Such deals are reported on
the Off-Exchange Trade Validation and Reporting System, operated
by the Exchange within its trading infrastructure. The maturity
of these bills (on date of issue) includes one month, three
months, six months, nine months and one year. The Bank's Broker’s
offer price in the secondary market is normally based on the
latest weighted average yield in the primary market. The Bank's
Broker reserves the right to review its bid price for amounts
which are considered to be in excess of normal levels. This
pricing policy is determined at arms’ length from the
Bank’s monetary policy role. The Bank's Broker does not
deal in Treasury Bills with less than 5 working days to maturity.
The daily prices and yields
are published on the Bank’s website, Reuters, Bloomberg
and the local newspapers.
Prior to 1 April 2007, the Malta
Treasury Bills were still in certificate form and were traded
over-the-counter. As from 1 April 2007 the Malta Treasury Bills
were dematerialised and were admitted to listing and trading
on the Malta Stock Exchange plc. Prior to dematerialisation
date, Treasury Bill yields were computed on Actual/365 day
basis. As from 1 April 2007 such yields started to be computed
on an Actual/360 day basis.
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