The liquid secondary market

One of the most important objectives of establishing the primary dealer system was to ensure the functioning of a liquid and transparent secondary market for investors by the primary dealers' active market participation and their obligation to quote two-way prices. Accordingly, the dealers' basic obligation is to quote continuous two-way (bid and offer) prices for government securities included in the system .

Government securities are traded on the stock exchange and on the over-the-counter market.

Stock Exchange trade

The trade of government securities listed on the Exchange takes place in the debt securities section of the Exchange through an automated trading system. Transactions are based on clean prices. Within the trading hours (9.00 a.m. - 4.30 p.m.) the obligatory trading time is from 9.00 a.m. to 10.30 a.m., and from 1.30 p.m. to 3.00 p.m. respectively.

For the most liquid benchmark bonds all primary dealers have to quote prices for at least HUF 200 million lots at par. Regarding other government securities listed on the Exchange the issuer selects at least 3 dealers (market makers) through competitive tendering or by drawing lots. These dealers quote bid and offer prices on a continuous basis for the amount stated in their tenders: for fixed rate government bonds and discount T-bills the maximum bid and offer spread is 0.5 percentage point in yield terms, but at least for HUF 100 million nominal amount.   For floating rate government bonds maximum bid and offer spread 1 percentage point in price terms, but at least for HUF 50 million nominal amount.

The price quotations, which apply also to odd lots , can be hit by all participants of the debt securities section having licence for stock exchange trade. Price quotations are based on firm prices, at which primary dealers have to conclude transactions with their counterparties. Price quotation refers to a spot buy or sell transaction, settled by KELER for a T+2 cycle pursuant to its rules of operation governing exchange-traded government securities settlement.

Over-the-counter (OTC) trading

Primary dealers quote off-exchange prices to each other on electronical trading systems (Reuters, Bloomberg), but the price quotation and dealing on phone is quite common..

 The ÁKK doesn't set procedures and rules for the off-exchange price quotation. Primary dealers while calculating two-way prices for each government securities series decide freely on the percentage point of the bid and offer spread in yield terms. Due to the liquid secondary market the usual spread at off-exchange price quotation is less than 0.5 percentage point.

 

Off-exchange government securities transactions is settled through KELER Plc. usully for T+2 settlement cycle, but participants can agree on a different settlement date.

The secondary market liquidity of government securities is further enhanced by inter-dealer brokers' activity. Their job is to concentrate bids and offers on the secondary market for government securities and other publicly issued instruments, and provide market participants with reliable information on the movement of yields and prices. Dealers anonymity is guaranteed entering into deal with inter-dealer brokers, their identity will be only uncovered for the counterside. Market participants not involved can be informed only on the deal.

Secondary market transactions are settled in accordance with the KELER Security Account Management Regulations. OTC government securities transactions can be settled through KELER Plc. from the issue date until the 2nd working day preceding the redemption date ("ex-coupon" day).

In the case of both OTC and stock exchange trading, the ex-coupon date for T+2 delivery is the 4th working day preceding the coupon and principal payment date. Principal and coupon payments are made on the basis of positions registered 2nd working day preceding the payment date.

Government securities market yield and price calculations

In Stock Exchange trading, the transactions are based on clean prices, and it is also clean prices that are quoted on the OTC market. Nevertheless, trades made on phone are usually based on yields, but it is always advisable to agree with the partner on the price as well.

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