The Sixth Annual OECD/World Bank Global Bond Market Forum May OECD Headquarters Paris, France

Transcription

1 OECD The World Bank The Sixth Annual OECD/World Bank Global Bond Market Forum May 2004 OECD Headquarters Paris, France Room Document N 12 Experience of a Centralized Valuation: Colombia Juan Camilo Gutiérrez Central Bank of Colombia

2 Experience of a Centralized Valuation: : Colombia Juan Camilo Gutiérrez Central Bank of Colombia Jgutieca@banrep.gov.co

3 Outline Colombian Bond Market Motivation, Objectives and Methodology Market Reality and Fears Adjustments Summary of Experience

4 Banco de la República Colombian Bond Market Structure Fiscal Agent Ministry of Finance DCV SEN SuperValores Broker-Dealers Bolsa de Valores de Colombia Credit Rating Agencies DECEVAL Collective Investment Schemes SuperBancaria Credit Institutions Pension Funds Insurance Companies

5 TES Dominate Local Issuance Of some 15.5 trillion pesos issued between 2003 and ytd % Central Government (TES B) 10% Local Banks 6% Non-financial private sector 5% Mortgage securitizations 7% Others

6 and Trading thru Bolsa Shares CDs (credit institutions) Others Public sector bonds Securitizations Private sector bonds 100% 90% 80% 70% TES (central government) 60% * 50%

7 Outline Colombian Bond Market Motivation, Objectives and Methodology Market Reality and Fears Adjustments Summary of Experience

8 Motivation Keeping regulation up to speed was hard Significant leeway in methodology Increased moral hazard Allowed the smoothing of results Made supervision and control harder Regulatory arbitrage collective investment vehicles August 2002 TES Crisis deficient risk management poor investor information

9 Lofty Objectives Closer to international standards Held-to to-maturity, Available-for for-sale, Trading Fair-Value from prices and quotes One regulation and methodology Private sector participation Price Vendor (Bolsa( de Valores de Colombia) Committee to adjust methodology and prices Incentive for price discovery One price for each security

10 Methodology: Group Securities Class (Type of Issuer or Security; 28) Denomination (COP, UVR, USD...; 13) Reference Rate (Spot Curve, IPC, DTF ; 37) Days to Maturity (19) Credit Rating (12)

11 Methodology Cascade Price = Cashflow Reference Rate + Spread Use price if more than 3 reliable trades Use quote if instrument is traded abroad Use spread from Other securities in same group that did trade A previous day s prices A cautious estimate based on groups nearby

12 Timeline TES B Crisis SV, SB, BR and BVC Valuation Committee Joint Decree and Method Most Changes to Methodology External Bonds TES B Rest of Bonds Allowed to amortize gains and losses III IV I II III IV I II

13 Outline Colombian Bond Market Motivation, Objectives and Methodology Market Reality and Fears Adjustments Summary of Experience

14 Volatility in Collective Investments Reality How returns are shown overstates volatility Negative returns are rare Risk aversion after TES crisis Stability benefits opportunistic investors Fears What part existed but was hidden? What part is created by methodology? Will this cause massive withdrawals?

15 Price Manipulation Reality All transactions are not booked properly Some trades are retail,, others institutional My trades are at market, now theirs Fears How can a few trades change all portfolios? What is an adequate minimum trade size? How do you identify a trade as an outlier? Are local quotes / registered trades reliable?

16 Outline Colombian Bond Market Motivation, Objectives and Methodology Market Reality and Fears Adjustments Summary of Experience

17 Adjustments to Methodology Initial loss or gain could be amortized Even in collective investment schemes Particularly with Forced Investments Groups where made smaller Minimum trade size was increased The estimation of spreads between groups (last step) was severely curtailed Firms allowed to use own trades

18 Outline Colombian Bond Market Motivation, Objectives and Methodology Market Reality and Fears Adjustments Summary of Experience

19 Strengths (1) Closer to international standards Held-to to-maturity, Available-for for-sale, Trading Fair-Value from prices and quotes One regulation and methodology Private sector participation Price Vendor Committee to help adjust methodology and review prices

20 Strengths (2) A centralized approach allowed us to Keep process under control Maintain consistency of valuation Deal quickly with operational details Securities identification, terms and conditions Transmission of information Software providers Address deeper market deficiencies Stale credit ratings Improve trading systems

21 Weaknesses (1) One price for each security Moral hazard Smoothing of results Difficult supervision and control Incentive for price discovery Easier to argue for use of own trades; special cases (smaller( groups); and increase of minimum trade size

22 Weaknesses (2) A centralized approach made it harder to Keep important alive while facing urgent Contain the amortization of gains and losses Address collective investment s needs Farm-out the valuation of complex securities

23 More information (under metodologías y normas )