Hungarian government securities are sold at discriminatory price auctions, i.e. each bidder pays the price he bidded for at the auctions. Hungarian Government Bond and Discount Treasury Bill auctions are announced by ÁKK Rt. 5 days before the auction in. Pursuant to the effective regulations, only investment companies who have signed agency contracts to trade government securities (primary dealers) may place bids at the auctions of government securities. Investors need to give orders to primary dealers to purchase government securities at the auctions on their behalf.

Each bid may be submitted for government securities of a minimum nominal value of HUF 1 million. If the total amount of bids reaches or exceeds the offering amount at the auction, each bidder's bids are taken into account up to 50 % of the offering amount. Bidders are considered single bidder if a bidder owns directly or indirectly more than 10 % of another bidder, or if two or more bidders are more than 50 % owned (directly or indirectly) by the same entity (other than the Government).

Each bidder may also submit non-competitive bids without stating price or yield rate. The minimum amount of non competitive bids is HUF 1 million at par and the maximum amount equals to HUF 100 million at par if the announced auction amount is HUF 10 billion and less and to HUF 200 million at par if the announced auction amount is more than HUF 10 billion. Non competitive bids are bids to purchase securities at the average yield rate or price of awards to competitive bidders. Auction bids must be delivered via the auction function of the automated trading system (MMTS) operated by BSE before 11 a.m. The auction results are announced at 12h on ÁKK's website and through the information system of Reuters.

Auctions of Discount Treasury Bills

Discount Treasury Bills are issued through auctions held on a weekly basis: 3-month Discount Treasury Bills are sold on Tuesdays every week; 6-month bills on the Wednesdays and 12-month bills on the Thursdays of every odd numbered week of the calendar year. The payment date for Discount Treasury Bills is always the Wednesday of the week following the auction.

Bids submitted to auctions must state the yield expected by the bidder. The 'yield band' of the Discount Treasury Bill auctions was terminated on 25 September, 1998, therefore auction participants may state any yield rate in their bids without any limitation. The auction details, namely the date of auction, the offering amount of the Treasury bills, the payment dates and the maturity date of the securities, are published by ÁKK Rt. on the Thursday of the week before the auction.

In order to provide information for investors, the Issuer published the 'Prospectus on the Public Offering of Discount Treasury Bills through Auctions', laying down the general terms and conditions of issue and trade. The specific auction regulations for Discount Treasury Bills are set down in the 'Rules of Discount Treasury Bill Auctions', published as a supplement to the Prospectus. The Rules prescribes the terms and conditions of sale and defines the rules of the auction procedure. These documents are available at primary dealers and at ÁKK Rt..

Auctions of government bonds

Since 1996, the Hungarian Government Bond have been offered to the public through auctions and auction-linked subscriptions. The auction-linked subscriptions were terminated in September 1998. The auctions are held on the Thursdays of every even numbered week of the calendar year. Each time, two types of bonds are offered, namely the 3 year and the 5 year fixed rate bond at one auction, and the 3 year fixed rate bond goes with the ten or with the fifteen year fixed rate security at the other.

In their auction bids, bidders must state clean price.

The date of the auctions, the details of the government bonds offered for sale and the offering amount are published in a Public Offering.
The 'Prospectus on the Public Offering of Government Bonds in the Domestic Market' provides information to investors on the terms and conditions of issue and trade, and the rules and regulations applying to non-residents. The terms and conditions of sale and the rules of auction procedure concerning primary dealers are set down in the 'Rules of Government Bond Auctions'. These documents are available at primary dealers and ÁKK Rt.

Issuing Calendar

The elaboration and regular dissemination of an issuing calendar, which is based on consistent, pre-set, and pre-announced principles, has been an important means of improving the transparency of the primary market. The calendar contains the auction dates, subscription periods and payment dates of the various government securities.

According to the issuing calendar, 3 month Discount Treasury Bills are auctioned on Tuesdays every week, while 6 month bills are offered for sale on the Wednesdays of the odd numbered weeks of the calendar year, and 12 month bill auctions take place on the Thursdays of every odd numbered week. The payment dates of all Discount Treasury Bills fall on the Wednesday of the week following the auction week. The maturity dates of Discount Treasury Bills also fall on Wednesday.

The auctions of government bonds take place on the Thursdays of every even numbered week of the calendar year. Each time, two series of government bonds are offered for sale simultaneously. At the present, the three and the five year fixed rate government bond are offered for sale at one auction, while the three year fixed rate bond and the ten or the fifteen year fixed rate security are offered at the following auction. The payment date of government bonds usually falls on the Thursday of the week following the auction. If a big redemption is expected close to the payment date, that date will be set to be the same as the redemption date. The exact payment dates of government bonds are included in the public offering.

In order to increase the issue size of Discount Treasury Bill series the re-opening method is used. This means that the 6 and 12 month Discount Treasury Bills are sold 4-4 subsequent auctions. Therefore the new 6 and 12 month Discount Treasury Bill series are issued in every 8 weeks, while in the weeks between the two issues new 3 month T-bill series are sold.

The system for the Hungarian Government Bond is very similar to the mechanism described above, i.e. a government bond series is sold at several subsequent auctions. For the three year bonds 2 series p.a., while for longer securities 1-1 series p.a. is placed in the market.

Repurchase of government securities before maturity (reverse auctions)

In order to increase the secondary market liquidity of government securities, ÁKK Rt. is planning to issue fewer but larger series. Consequently, larger amounts of government securities may mature at the same time. Big redemptions might imply renewal risk and increase volatility of the market price due to substantial excess liquidity flowing into the economy.

One way of smoothing maturity profile can be the repurchase of government securities before redemption date (e.g. through reverse auctions). This means that securities are repurchased in smaller tranches several times some months before the maturity of these securities. Thus securities originally representing larger amounts will be redeemed in smaller tranches, causing less distortions in the market and reducing the risks for both the investors and the issuer.

Reverse auctions have been used for Hungarian Government Bonds in Hungary since January 19, 1998. Primary dealers are authorised to participate in reverse auctions that are held one to four months before redemption date. Similarly to usual auctions, during the reverse auction process primary dealers submit offers stating the yield rate expected by them. The offers are then ranked by yield rate and they are accepted starting with the highest yield rate. If the total amount of acceptable offers is higher than the bidding amount determined for the reverse auction, the competing offers are satisfied on the basis of the principle of 'dealing out cards'. ÁKK Rt. reserves the right to refuse all offers submitted for the reverse auction. The reverse auction of the Hungarian Government Bond is held on the day preceding a bond auction.

ÁKK Rt. notifies primary dealers of the details of the government securities to be repurchased, the reverse auction and payment dates via fax and the HUISSUE Reuters page on the 5th day before the auction date. On the auction date, offers may be submitted between 10 a.m. and 11 a.m. Offers sent by ReuterMail must be delivered before 10.45 a.m. The results are announced at the office of ÁKK Rt. and on the HUISSUE Reuters page at 1 p.m.