SGS - A Guide to SGS Primary Dealer Operations


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A GUIDE TO SGS PRIMARY DEALER OPERATIONS

CONTENTS


1.	Introduction
2.	Admission Criteria
3.	Responsibilities, Obligations & Privileges
4.	Assessment and Ranking of SGS Primary Dealers
5.	Participation in MAS' Money Market Operations
6.	Participation in the MAS Repo Facility
7.	Submission of SGS Data
8.	Participation in SGS Auctions & Purchase Operations

APPENDICES


1.	Primary Dealers Peer Evaluation (April 2002) (PDF, 10.9KB)
2.	Template on MAS' Broadcast of Its Money Market Operations (PDF, 5.20KB)
3.	Terms & Conditions of the MAS Repo Facility (PDF, 26.8KB)

(58.3KB)

Introduction

1.1

This guide provides a reference on the roles and responsibilities of Primary Dealers (PDs) in the Singapore Government Securities (SGS) market. It spells out the obligations and privileges of SGS PDs, and the guidelines for their participation in SGS auctions and the Monetary Authority of Singapore's (MAS) money market operations.

1.2

MAS reserves the right to revise the terms and conditions listed in this guide. PDs will be informed in advance of any changes.

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Admission Criteria

2.1

SGS PDs are banks in Singapore that have been appointed by MAS to play a role as specialist intermediaries in the SGS and S$ money markets. In addition to the licensing and regulatory requirements applicable to all banks in Singapore, MAS' minimum admission criteria for SGS PDs include:

i)	a minimum credit rating of B/C by Fitch IBCA or Keefe, Bruyette & Woods (KBW);

ii)	a minimum trading limit of S$300 million in the SGS market; and

iii)	staffing requirements of at least 2 dealers, one with at least 5 years of experience in fixed income trading and the other with at least 3 years.

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Responsibilities, Obligations & Privileges

3.1

SGS PDs play an important role in the growth and development of the SGS market by undertaking a set of market-making obligations, and in return enjoy certain privileges. The obligations of a PD are to:

i)	provide liquidity in the SGS market by quoting effective two-way prices for SGS sale and repurchase agreements (repo) and outright SGS transactions under all market conditions;

ii)	participate actively in the SGS issuance programme and underwrite SGS issuance;

iii)	provide market feedback and daily closing prices for all SGS issues to MAS;

iv)	participate in the Association of Banks in Singapore's (ABS) fixing of Singapore interbank offer rates (SIBOR); and

v)	actively contribute to the development of the SGS market and related interest rate markets, such as interest rate swaps (IRS) and bond futures.

3.2

In recognition of their specialist intermediary role, PDs enjoy the following privileges:

i)	exclusive dealing with MAS in money market and foreign exchange operations;

ii)	exclusive access to the MAS Repo Facility to borrow SGS issues to facilitate its market-making;

iii)	exclusive right to submit applications for SGS auctions and reverse auctions;

iv)	higher non-competitive tender limit and overall allocation limit at SGS auctions;

v)	tax exemption on trading income derived from SGS; and

vi)	close consultation and dialogue with MAS on SGS auctions and market-related issues.

3.3

SGS PDs are expected to observe the Rules and Market Practices of the SGS Market and the SGS Repo Code of Best Practice. In addition, they are required to sign the PSA-ISMA Global Master Repurchase Agreement with MAS for dealing in repo transactions.

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Assessment and Ranking of SGS Primary Dealer

4.1

SGS PDs receive feedback on their performance through MAS' semi-annual PD ranking exercise. PDs are ranked in terms of both quantitative and qualitative criteria. The quantitative assessment of PDs is based on their average daily SGS outright and repo trading volumes, excluding transactions with MAS. The qualitative assessment of PDs, conducted through a peer evaluation, is based on the PDs' market conduct and professionalism in both SGS outright and repo markets, including their ability to quote competitive prices and execute trades efficiently (see Appendix 1 (PDF, 10.9KB)). The results of the PD Peer Evaluation listing the top three PDs in the SGS outright and repo markets separately are published on the SGS website.

4.2

The PD rankings determine the amount of MAS' money market operations business awarded to them. The better-ranked PDs will be entitled to a larger percentage of MAS' money market operations. Notwithstanding the ranking, however, the actual award of business will be primarily determined by price competitiveness and liquidity conditions in the money market.

4.3

In connection with the PD ranking exercise, MAS actively engages the PDs in individual dialogue sessions aimed at exchanging views and feedback on the SGS market and any other market issues.

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Participation in MAS' Money Market Operations

5.1

Given that Singapore's monetary policy is centred on management of the trade-weighted exchange rate of the S$, MAS' money market operations are thus endogenous and directed at ensuring that there is sufficient liquidity in the banking system to meet banks' demand for reserve and settlement balances. The conduct of daily money market operations involves:

i)	estimating the liquidity in the banking system;

ii)	carrying out appropriate transactions in the SGS and money markets with PDs; and

iii)	monitoring the money market conditions throughout the day.

5.2

MAS typically conducts money market operations using the following money market instruments:

i)	SGS sale and repurchase agreements (repo) and reverse repo transactions

ii)	foreign exchange swaps/reverse swaps

iii)	direct borrowing/lending

If necessary, money market operations may also be conducted through the outright purchase/sale of SGS.

Transacting in the money market

5.3

The Monetary Management Division (MMD) conducts its main money market operations every morning at 9.45 am, after assessing and estimating the day's key money market factors. MMD monitors the monetary conditions of the banking system throughout the day and, if necessary, carries out further money market operations in the afternoon.

5.4

The amount of liquidity to inject or withdraw from the banking system will depend on the net liquidity impact of:

i)	MMD's foreign exchange operations, if any, and its maturing money market operations;

ii)	changes in banks' liabilities base and, hence, their Minimum Cash Balance (MCB) requirements;

iii)	net changes in currency demand;

iv)	net SGS issuance;

v)	CPF Board's fund transfers; and

vi)	Government's fund transfers by Accountant-General's Department.

5.5

For its main money market operations in the morning, MMD will broadcast to all PDs the amount it intends to inject into or withdraw from the banking system. At the same time, MMD will also invite PDs to provide price quotes for its desired money market instrument of a specified tenor according to the template shown in Appendix 2 (PDF, 5.20KB). PDs are expected to provide their price quotes promptly, which must be for minimum transaction amount of S$50 million. Unless they specify the maximum amount that they can transact, PDs are held committed to the full amount of MAS' money market operations for each of their price quotes. Trades will be awarded based on the following criteria:

i)	price competitiveness;

ii)	the PD's performance ranking (see Section 4); and

iii)	other liquidity concerns.

All trades for the purpose of MAS' money market operations are valued on the same day, unless otherwise stated. On completion of its money market operations in the morning, MMD will broadcast to all PDs the actual amount of money market operations transacted and the average rates dealt according to the type and tenor of transactions. The template is shown in Appendix 2 (PDF, 5.20KB).

5.6

In view of the implications of MAS' money market transactions on liquidity and monetary conditions in the banking system, PDs are required to settle their money market transactions with MAS promptly and before the relevant MAS Electronic Payments System (MEPS) cut-off times. Failure in settlement of transaction with MAS is disruptive to its money market operations as it affects the liquidity and monetary conditions of the banking system. When there is a failed trade with MAS, the trade will be treated as cancelled and a penalty fee will be imposed. In addition, PDs who fail in their trades may be suspended from participating in MAS' money market operations for a period.

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Participation in the MAS Repo Facility

6.1

PDs have exclusive access to the MAS Repo Facility to borrow SGS to facilitate their market-making activities in the SGS market. This facility makes available for repo, SGS benchmark bonds over most tenors as well as off-the-run issues when available. Under the facility, MAS lends specific SGS via a reverse repo transaction, and simultaneously transacts a back-to-back general repo for an identical nominal amount. The borrowing cost of specific SGS is determined via a multiple price, closed auction tender. The facility is provided on an overnight basis only to help PDs cover any short position in SGS arising from their market-making activity on any day. It is necessarily a limited one in terms of the tenure of transactions, i.e. overnight, and the amount of SGS made available to any PD, as PDs are expected to ultimately cover any of their short positions in SGS in the market.

6.2

MAS conducts daily repo auctions at 4.30 pm. PDs will be informed of the outcome of their applications before 6.30 pm. The Terms & Conditions governing participation in this facility are included in Appendix 3 (PDF, 26.8KB). PD's participation in this facility is optional.

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Submission of SGS Data

7.1

PDs are required to submit the following data to MAS on a daily basis:

i)	SGS closing prices for all outstanding securities;

ii)	SGS outright and repo trading volumes; and

iii)	closing rates for SGS repos.

7.2

The average daily SGS closing prices are on the SGS website for investor reference and the daily mark-to-market of the 5-year SGS Bond Futures contract.

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Participation in SGS Auctions & Purchase Operations

SGS Auctions

8.1

PDs enjoy exclusive right to submit applications for SGS auctions and reverse auctions. All other financial institutions, companies and individuals wishing to participate in SGS auctions must submit their applications through any one of the PDs, which tender at auctions via the SGS Electronic Applications service (SGS eApps) on the SGS website¹.

8.2

PDs are given higher overall allocation limits of 30% at SGS auctions, as well as higher limits for non-competitive bids per PD of up to 1% of the SGS issue on offer. For non-PDs, the overall allocation limit is lower at 15% of the issue size per applicant, while the limits for non-competitive bids are S$1 million per applicant for Treasury bills and S$2 million per applicant for bonds. These limits are subject to revision by the MAS.

8.3

PDs must participate in all SGS auctions. As part of their obligation, PDs are required to subscribe to their share of the issue on offer, which is computed as 1/x of the issuance amount, with x being the number of PDs. Failure to do so is undesirable for SGS market development and unfair to other PDs who fulfil their obligation. To discourage this from happening, MAS will take the necessary measures on any PD who fails to subscribe or subscribes less than its required share at any SGS auction. An administrative charge will be imposed on the non-compliant PD, and it will also be allotted its proportionate share of the issue at the 5^th percentile² of the yields submitted by all successful competitive bidders.

8.4

More details on participating in SGS auctions are listed in the SGS Rules and Market Practices.

SGS Purchase Operations

8.5

From time to time, MAS may conduct SGS purchase operations aimed at re-channelling liquidity from off-the-run issues into the more liquid benchmark issues. SGS purchase operations are conducted via reverse auctions. Only PDs can submit offers in these reverse auctions. Announcements inviting offers for reverse auctions will be made on the SGS website and advertised in the major newspapers about 1-2 weeks before the reverse auction date.

¹ PDs can also refer to the website for more Information on SGS eApps and a User Guide.

² 5% of the amount of successful competitive bids are tendered at or below this yield.

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Last modified on 7/7/2006

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