Market Making In Icelandic Government Bonds Increased Transparency In The Bond Market June-December 2000

In order to increase transparency and enhance market making in the secondary market the Minister of Finance has assigned the National Debt Management Agency (NDMA) the task of offering Market Making Agreements to market participants. Under this agreement Market Makers will be paid a fixed commission based on the transaction volume they initiate on the Icelandic Stock Exchange. In addition the NDMA will appoint the Market Makers as Authorised Dealers in Icelandic Government Bonds. Under the agreement the Market Makers will be committed to submit bid and offer prices in certain series of Government Bonds on the Icelandic Stock Exchange and meet a certain bid and offer spread criteria. The Market Making agreement includes the following series: RS03-0210/K, RS05-0410/K, RS15-1001/K and RB03-1010/KO. These series will be the true benchmarks on the Icelandic Bond market as they will have the depth and liquidity which is necessary to ensure that the market is efficient and by that become the benchmarks for other bond issuers.

Buybacks until December are estimated at 8bn kronas net. The total buyback for the year is estimated at 14bn. Buybacks will mainly take place in reverse auctions and buybacks. Purchases in the secondary market will be an exception and will only be directed at smaller amounts. Series to be bought back are: RS01-0210/K, RS02-0401/K, RS04-0410/K, RS10-0115/KI and smaller non-benchmark series.

The NDMA will increase the release of information in the next months. Firstly, there is Market Information, which will contain information for investors in Icelandic Governments Bonds. Then there is the Yearly Review, which will include the main issues in debt management for the coming year. These efforts are a part of making the Icelandic Bond market more visible to foreign investors.

The Icelandic CSD will commence its operation in June and Icelandic Government Bonds included in the Market Making agreement will be among the first series to receive registration.

There will be increased issuance into the conventional Treasury Bond series of RB03-1010/KO and the next auction will take place in July. An exchange offer will also be made to exchange the series: RS01-0210/K, RS02-0401/K, RS04-0410/K and RS10-0115/KI for RB03-1010/KO. Amount offered is 3bn this year and auctions will take place on a monthly basis. In August there will be an exchange offer for the series RB00-1010/KO in exchange for a three month Treasury Bill. In the future there will be a practice of offering Treasury Bills for maturing conventional Treasury bonds when there is less than one year until final maturity.

The NDMA will soon commence discussions with market participants on a Primary Dealer System for Icelandic Treasury Bills. The objective will be to establish a P/D system in the next months.