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.

On investors' inquiry primary dealers will quote, either on phone or personally, bid and offer prices for all government securities included in the system, and conclude a deal at that price for any nominal value above HUF 2 million on their own account. Dealers are required to quote prices by adhering a maximum yield spread of 1°percentage point for fixed rate government securities and a maximum price spread of 1 percentage point for floating rate government securities.

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 3rd 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 5th working day preceding the coupon and principal payment date. Principal and coupon payments are made on the basis of positions registered 3rd 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.

Discount treasury bills

The yields and prices of discount treasury bills can be calculated by using the following formulas:

[KÉP]

Index-linked bond

Secondary market deals for index-linked bonds is based also on the clean price. The dirty price consists of three components: the clean price of the bond, the inflation compensation, and the accrued interest.

1. The clean price of the index-linked bond is calculated in the same way as for other bonds, on the basis of the real coupon rate and the real return expected by investors on the bond.

2. The inflation compensation is computed by multiplying the pro-rata amounts of monthly consumer price indices referring to the months, which elapsed between the issue date and the current date. The pro-rata amount of monthly price index should be calculated on the basis of the last monthly consumer price index published by the Central Statistical Office until the first day of the current month. This data is the index referring to the second month preceding the current month (reference period). The calculation of the pro-rata amount of the monthly consumer price index is based on the number of days in the reference period, and for whole periods on the number of days in the current month, and for odd periods on the number of days elapsed from the first day of the current month until the current date.

The month-end data used in calculations should be rounded to two decimals, and the result should be expressed in percentage form rounded to two decimals.

[KÉP]

IK= inflation compensation (capital uplift)
CPI = monthly consumer price index
i = index of the current month (month of issue i=0)
h= no. of days in the current month (days elapsed from the first day of the month)
n= no. of days in the reference month

3. The accrued interest applies to both the original principal and the inflation compensation based on the real coupon rate and the days elapsed between the previous coupon payment date and the current date.
[KÉP]

FK= interest accrued
r= real coupon rate

In the calculations of index-linked bond the general rule should govern, according to which 365 day calendar year has to be used (365/365). Interest does not accrue on 29 February, therefore neither inflation compensation nor accrued interest is calculated for that day.

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Harmonization of day-count convention and calculation method for Hungarian Discount Treasury Bills and floating rate Government Bonds according to practice in the European Union (Effective from 1st January, 2003.) Click here to loading down!

Harmonization of day-count convention and calculation method for Hungarian Government fixed coupon bonds (Actual/Actual) Click here to loading down!