Strategies and benefits of developing a market for government securities
| Date | 01 January 2006 |
| Published date | 01 January 2006 |
| Pages | 47-56 |
| DOI | https://doi.org/10.1108/13581980610644752 |
| Author | Juan Fernando Lucio |
| Subject Matter | Accounting & finance |
Strategies and benefits of
developing a market for
government securities
Juan Fernando Lucio
Securities and Exchange Commission of Colombia, Bogota, Colombia
Abstract
Purpose – The purpose of this essay is to formulate practical steps in establishing a market for
government securities. When such a market does not exist two issues are of critical importance:
establish the credibility of the issuer, and create the trading avenues.
Design/methodology/approach – On the issue of creating the trading avenues, there is a
discussion about market design and its parameters. The essay addresses issues like access to trading
platforms, depositories and settlement standards as great determinants of market design.
Findings – The case of Colombia demonstrates that a market for government securities can be
created out of sound decisions that stimulate participation by various financial institutions. The study
also discusses the real benefits of having developed such a market, in terms of the cost/risk and the
institutional building components. However, despite the progress, the Colombian case also shows that
issuer credibility and design are not enough in the long term. Maturing markets require also coherence
of many other different components. To achieve this, the paper proposes that the overall level of
training of market participants is a decisive element for markets to face ever growing challenges of
competition from other markets and investor demands.
Originality/value – This essay is especially intended for public officials in emerging economies who
are developing local markets for government securities, since it is full of practical recommendations to
implement at specific events in primary and secondary markets.
Keywords Government,Securities, Trading companies, Financialinstruments, Colombia
Paper type General review
1. Introduction
It is often the case, in small emerging economies without a market for government
securities that the market is fragmented and illiquid. The government finances very
little of its debt domestically and most of it is financed either by multilateral
institutions or at international capital markets. The currency exposure of such a debt is
significant and access to funds is not always guaranteed. The Central Bank usually
issues its own monetary instruments in ways that are often completely discretional and
lack coordination with the government.
Meanwhile trading in general is very weak both in money and bond markets.
Adverse selection among intermediaries lead to concentration in the provision of
liquidity in money markets, and most private bond issuance have no secondary
trading. Investors can only buy and hold their securities. There are usually no market
valuation rules. Market infrastructure, in terms of trading platforms and depositories,
though existing remains underutilized.
It is easy to see that every participant is likely to win out of one market, capable of
delivering better information, higher volumes and safety standards: government
securities is such a market. The incentive for the government is:
The current issue and full text archive of this journal is available at
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Market for
government
securities
47
Journal of Financial Regulation and
Compliance
Vol. 14 No. 1, 2006
pp. 47-56
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/13581980610644752
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