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 its foundation in 1968. To date, there have been no other private market-makers or primary dealers in Malta who have been prepared to take on this role owing to the market’s small size. Thus, 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 Bank’s market-making role is solely limited to secondary market dealing with absolutely no involvement in the primary market. Indeed, the Bank is statutorily precluded from participating in the primary market in all types of public sector debt instruments. The Bank’s market-making function is performed through the Government Securities Office, which publishes daily prices and yields for Malta Government securities, namely Malta Government Stocks and Malta Government Treasury bills. This section also contains reports on the Money Market and the Legal Opinions on Enforceability of Master Agreements.
Malta Government Stocks
Until 1991, the Central Bank of Malta’s market-making role was conducted on an over-the-counter (OTC) 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 (MSE) Statute. Consequently, the Central Bank of Malta, through the Government Securities Office, carries out its duties subject to Section 3 (sub-clauses 3.00.06 – 3.00.08) of the MSE Bye-laws.
On 9 July 2012 the MSE launched the new trading platform Xetra (Exchange Electronic Trading) to replace the Malta Automated Trading System (MATS) on which all listed securities on the Exchange were traded. Xetra is a leading trading platform in Europe operated by Deutsche Börse Group. Up to 5 October the settlement cycle for all listed securities on the Malta Stock Exchange (MSE) on the Regular Market were executed on a (T+3 basis). Following the migration to the T+2 settlement cycle launched on 6 October 2014 trades in all listed securities on the MSE are executable on a T+2 settlement cycle. The Government Securities Office publishes daily bid, offer prices and yields for each outstanding bond issued by the Malta Government for a T+2 settlement basis, following the move taken by the MSE together with most European markets. The maturity of these bonds (on date of issue) ranges from 5 to 20 years. Investors in Malta Government securities traditionally have tended to prefer to hold these securities to maturity. If securities are offered for sale by the public, the Bank’s policy is to allow sufficient time for the market to take them up before intervening. If the Bank does not have significant amounts of any given stock in the secondary market, the Bank would not quote indicative offer prices for such stocks.
In the morning, the Government Securities Office publishes indicative bid, offer prices at which the Bank is prepared to buy or sell reasonable amounts. After the close of business on the MSE, the Government Securities Office publishes the closing bid, offer prices at which the Bank actually traded on that day or the price at which it was prepared to buy or sell reasonable amounts. The Bank is not bound to quote the published indicative prices during the trading session as these are subject to regular review in response to change in prices dealt in by other private brokers. The Bank also takes into account the underlying trends in market sentiment, namely it reserves the right to review prices during the course of the trading session in the light of changing market conditions. Besides the indicative bid, offer prices for each outstanding Malta Government Stock (MGS), the Government Securities Office also publishes the corresponding Yields-to-Maturity. Up to 2003, yields were computed according to the Actual/365 day convention. Since then, yields started to be computed on an Actual/Actual basis. As the coupon rate on MGS is paid on a six-monthly basis, the Yield-to-Maturity is not strictly comparable with that of other bonds whose coupon rate is paid annually. Accordingly, the Government Securities Office also publishes the corresponding ISMA (International Securities Market Association) Redemption Yield. Isma redemption yields are quoted with an annual compounding period, irrespective of how many coupon periods per annum the stock has. Thus, an investor could compare yields on MGSs which have a semi-annual coupon with those of other debt securities with an annual coupon.
The daily bid, offer 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 the Government Securities Office, also acts as market-maker for Malta Government Treasury bills in the domestic secondary market. Up to 5 October 2014 daily bid, offer prices and yields were 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 TBClear of the MSE, and on a one day value (T+1) basis for deals effected on Free of Payment (FOP) basis through the OTC trading window on Xetra trading system.
Following the move from a T+0 to a T+2 settlement basis as from 6 October 2014, the Bank started to publish the daily bid and offer prices and yields on a T+2 settlement basis to be quoted during the Treasury Bill Dealing Session on the Regular Market. Since the Bank is ready to trade in treasury bills on the Off-Exchange Market on a FOP basis, (settlement outside TBClear), it shall quote treasury bill prices and yields on a T+1 settlement basis on request (however trading limits exist).
The maturity of these bills (on date of issue) includes one month, three months, six months, nine months and one year. The Bank reserves the right to review its bid price for amounts which are considered to be in excess of normal levels. The Bank does not deal in Treasury bills with less than five working days to maturity.
The daily prices and yields are published on the Bank’s website, Reuters and Bloomberg.
Prior to 1 April 2007, the Malta Government Treasury bills were still in certificate form and were traded OTC. From 1 April 2007 the Malta Government Treasury bills were dematerialised and were admitted to listing and trading on the MSE. Prior to the dematerialisation date, Treasury bill yields were computed on Actual/365 day basis. From 1 April 2007 such yields started to be computed on an Actual/360 day basis.