Secondary Market of Public Debt in Spain

 

 

In the secondary public debt market in Spain, the State debt in euros that is subject to trading in said market is negotiated, and consists of Treasury Bills , State Bonds and State Obligations.

 

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

 

Debt instruments negotiated

Debt instruments negotiated

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 are issued for 3 or 5 years, they are called bonds, while terms longer 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 ​​allow to be cut and negotiated 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.

 

Foreign currency debt:

Foreign currency debt:

Your weight is reduced. It consists of loans and fixed income securities denominated in yen and dollars.

 

Members of the public debt market

They can be members of the secondary market of public debt:

 

Companies and securities agencies.

Spanish credit institutions.

The 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 market members are equal, there are different categories:

 

Account holders in their own name:

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

 

Management entities:

 

Key part of the market, they are in charge of connecting the market between members with non-members. 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 in both the primary and secondary markets. With its creation, it is intended to favor 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:

 

Bilateral contracting,  directly or through brokers, by the account holders, acting in their own name or on behalf of third parties.

In the contracting system of the Madrid Stock Exchange.

Through the retail segment  or third-party negotiation with the entities holding the account.

 

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 transmitted until the date of execution of the contract. The buyer is not committed to keeping them until that date, since the seller does not assume the commitment to buy them back before expiration.

 

In simple cash transactions , between the date of hiring and the execution date, they are at most five business days. However, in simple term operations , it is more than five business days, the parties may agree that the operation is settled by differences, including any date of the term.

 

Double:

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

 

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

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

 

Risk premium

Risk premium

The profitability of the public debt is explained by the risk premium of the issuer and is measured in two ways:

 

By difference with the issuance of better 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 return of 6.81%, and the 10-year German bond rented at 1.33%. The difference between one and another of 548 basis points is what is called the risk premium .

For the price of non-payment 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 is that if some of these assumptions ( default, non-payment or restructuring ) occur , the one that acquires the protection receives a protection. These protection contracts are derivative contracts , and are called CDS ( Credit Default Swaps ).

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