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Government Debt exchange auctions are a discretionary formula used by the Treasury to withdraw from the market certain references, replacing them with others.
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The main aims the Treasury pursues through its exchange programmes are:
- 1. to rationalise the structure of government debt maturities by eliminating illiquid references with little residual life.
- 2. to alter the maturities curve of outstanding debt, lengthening or shortening it
- 3. to ensure that enough strippable bonds are outstanding in order to ensure that Bono and Obligación stripping and reconstitution operations are backed by sufficient liquidity.
- 4. to build up the liquidity and depth of the Public Debt market, in order to attract investor savings within the single capital market defined by European Economic and Monetary Union, and ensure the Spanish Treasury can successfully compete with other sovereign issuers.
- Procedures
Exchange procedures have been progressively improved. In the past, the Treasury set the price for both the bond references to be exchanged and the new references to be issued. Investors willing to transact at these prices would indicate in their bids the nominal amount of the outstanding bonds they wished to exchange. But the auction itself was held a few days after price-setting, with the danger that market conditions could have changed in the interim, impairing the exchange's attraction. Few bids, in consequence, were ever received and the Treasury decided to change the price-setting process.
Now, the Treasury sets the price of the new bond -usually the secondary market price- and investors state in their bids both the nominal value and the price at which they wish to exchange.
Government Debt exchanges are resolved by competitive auction, in which the Treasury reserves itself the right to decide the cut-off price.
On the day of the auction, the Bank of Spain gives the price of the new bonds exchangeable for the old, and agents enter their bids accordingly. Any individual or legal entity, resident or non-resident, is eligible to participate. Bids, however, can only be presented by Book-Entry Public Debt Market Members -Account Holders and Management Institutions. Each member can submit up to five competitive bids for each of the issues exchangeable, alongside an en bloc non-competitive bid. Competitive bids must be for a minimum nominal amount of 1 million euros, while non competitive bids may not exceed a nominal of 1 million euros individually. These amounts may be modified in the future as defined in the Resolution calling the exchange.
Resolution procedures are similar to those used in standard debt issues. Competitive bids are ordered from the highest to the lowest price. The General Director of the Treasury, at the proposal of a committee made up of Bank of Spain and General Directorate of the Treasury and Financial Policy representatives sets the maximum price to be accepted in each exchange transaction. Securities allocation is then carried out.
The results of the auction are announced immediately after via Reuters and Dow Jones Telerate, and subsequently published in the Boletín Oficial del Estado (Official Gazzette).
It should be noted that, on the exchange date, each bidder must put the securities specified at the disposal of the General Directorate of the Treasury and Financial Policy and make, where appropriate, the corresponding cash deposit. The new securities issued will likewise be placed at subscribers' disposal on this same date.
The procedures used for exchanges may be modified in future, though they are generally regarded as having worked extremely well.
