Government securities eligible dealers (GSEDs) actively participating in the auction of government securities admitted that the two-tiered scheme would force market makers to perform their function as actual makers of market for government securities.
At present, GSEDs are selected based on their compliance with the usual requirements of the Bangko Sentral ng Pilipinas (BSP), but the BTr decided it would classify the dealers into two.
The bureau approved the scheme that would allow only active players to continue trading and bidding for Treasury bills, notes and other government securities.
According to bankers, GSEDs had the specific function of creating markets for government securities which meant that as eligible dealers, the should make a bid for government securities even if they do not need them.
"The idea is for banks to buy these securities and then trade them in the secondary market," said one banker. "If they do not do that then there is no market being created at all."
According to National Treasurer Mina Figueroa, the BTr plans to release the guidelines before the end of the month and actual ranking of GSEDs would be conducted in November.
The BTr started reviewing the performance of GSEDs with the end-view of revising its classification of primary and secondary dealers.
At present, Figueroa said GSEDs were accredited based on their capital adequacy ratio, corporate registration and compliance with all the relevant requirements of the BSP.
All GSEDs, however, are allowed to bid for government securities regardless of their actual performance in the market.
"Starting November, we will require certain performance criteria for GSEDs which want to be primary dealers," Figueroa said. Existing GSEDs that fail to meet the BTr’s criteria, she said, would be downgraded as second tier GSEDs.
"They will be still allowed to submit "non-competitive‚ bids, but not participate in the price setting operations of the auction," Figueroa explained.
According to Figueroa, banks whose licenses are downgraded would be allowed to participate in the auctions but they would be restricted to accepting the average interest rates accepted by the auction committee.
"They won’t be market makers," she said. "This time, we will include their performance in the auctions as part of the qualification for classification as a primary dealer."
Figueroa said GSEDs have been showing erratic performance in the GS auctions and the BTr wants to rationalize the list of some 40 GSEDs that have been participating in the auctions.
According to Figueroa, even the secondary market for government securities was no longer a relevant benchmark.
"Every time we say we will align our rates with the market, they play around with Mart 1 and they jack it up," Figueroa said. "So we don’t want to believe that anymore since there are no done deals there anyway."
Figueroa said the BTr was looking at market participation of the GSEDs over the last 12 to 24 months. "Some of them haven’t awarded anything for as long as a year," Figueroa said.