Overview of Advisory Services Program June 2012

Overview of Advisory Services Program June 2012 1

Table of Contents I. Gemloc Advisory Services: An Overview... 3 Components of the Gemloc Advisory Services Program... 3 Countries and Scope of Gemloc Advisory Services... 4 II. Country Specific Operations... 5 Overview... 5 Highlights of Country Achievements... 5 Brazil... 5 Costa Rica... 6 Egypt... 6 Kenya... 7 Morocco... 8 Nigeria... 8 Uruguay... 9 Global Innovative Products.9 Issuer-Driven Exchange Traded Fund.. 9 Treasury Mobile Direct.. 9 III. Peer Group Cross-Country Dialogues... 11 Peer Group 1... 12 Peer Group 2... 12 Peer Group Dialogue Background Materials... 13 IV. Applied Research... 15 Gemloc Papers and Articles... 15 Background Notes... 16 Books... 16 Technical Training Events... 18 Conferences... 18 2

I. Gemloc Advisory Services: An Overview Gemloc Advisory Services (AdS) supports and leverages country-led reforms in the area of local currency bond market development through its three interactive pillars of country-specific technical assistance programs, cross-country dialogue, and applied research and training. The process is guided by client demand, domestic market size, and degree of investability of markets. Based on these factors, 34 emerging market economies (EMEs) have been identified as being eligible for Gemloc AdS. Components of the Gemloc Advisory Services Program Country-specific programs address the reform needs of countries through an array of products. Operations range from diagnostics to reform implementation and from comprehensive to focused assistance. Cross-country dialogues offer client countries a fast and cost-effective way to share challenges and discuss policy actions. So far, these dialogues have engaged 20 EMEs over 7 meetings to discuss critical bond market development issues. Applied research and training component of Gemloc Advisory Services plays the crucial role of identifying and tackling knowledge gaps and of disseminating good practices. To do this, the team builds partnerships with academics and practitioners to create products such as books, handbooks/toolkits, research papers, and technical training workshops. Through these three components, the Gemloc Advisory Services program leverages country-led market reforms. 3

Countries and Scope of Gemloc Advisory Services Gemloc Eligible Countries East Asia and Pacific Europe and Central Asia Latin America and Caribbean Middle East and North Africa South Asia Sub-Saharan Africa China, Indonesia, Malaysia, Philippines, Thailand, Vietnam Croatia, Hungary, Kazakhstan, Poland, Romania, Russia, Turkey, Ukraine Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Peru, Uruguay, Venezuela Egypt, Jordan, Lebanon, Morocco, Tunisia India, Pakistan, Sri Lanka Kenya, Nigeria, South Africa Scope of Gemloc Advisory Services Macro and Micro interactions and trade-offs - Capital controls, international excess liquidity and convertibility - Financial markets taxation structure Primary Markets - Debt management strategy and issuance policy - Placement mechanisms and organization Money Markets - Repo markets - Operational liquidity management Secondary and Derivatives Markets - Exchange and OTC markets - Interactions between markets and development sequence - Valuation schemes Participants and Investor Base - Foreign and local investor base - Strategies for diversification - Prudential regulations Custody, Clearance, and Settlement - Local and International Central Securities Depositories (CSD) - Risk management upgrades Regulations for Debt Markets - Systemic risk and investor protection - Enforcement capabilities 4

II. Country Specific Operations Overview Country operations typically cover three types of work in the following sequence: Diagnostic and assessment of country needs. Design of an Action Plan in consensus with Government officials and other relevant stakeholders. Hands on support on the design and implementation of agreed reforms. Highlights of Key Country Achievements The Gemloc Advisory Services program is involved in Government debt market reforms in Brazil, Costa Rica, Egypt, Kenya, Morocco, Nigeria, South Africa, 1 and Uruguay. Operations expanded steadily since the launch of the program in 2008, reaching new countries and topics. Innovative programs such as the Issuer-Driven Exchange Traded Fund and the Treasury Mobile Direct have been developed and are being piloted for future replication. Key achievements by country include the following (in alphabetical order): BRAZIL Roadmap on selected debt market development issues for the National Treasury Participated in joint working groups to define key areas of cooperation in local market development to: - Upgrade the role of primary dealers as liquidity providers - Assess advantages of linking the domestic C&S system to the International Central Depositories (ICSDs) 1 The program in South Africa is in its initial stages and program details will be forthcoming. 5

COSTA RICA More robust yield curve building procedures and enhanced transparency in the primary markets: Supported the design of an issuance strategy for the second semester of 2010 as a model to sustain yield curve building across all maturities Designed and developed a simulation tool on issuance policy to support future Government debt issuance decisions within a five-year horizon. Designed liability management techniques (securities buy backs and switches) to reduce rollover risk and enhance the liquidity of outstanding Government debt and provided training. Enhanced competition in the primary market auction: Designed an appraisal model of Auction Participants performance at the auction. Designed and implemented and ad-hoc auction database to monitor performance and competition of Auction Participants. Simulation tool to support issuance decisions towards yield curve building. Unification of Government debt markets Supporting the design of a strategy to have the Ministry of Finance as an issuing agent for the Central Bank structural sterilization needs. EGYPT Benchmark building for 3, 5, 7 and 10-year bonds: Designed issuance strategy in gradual process, in 2009 and 2010, focusing on key benchmarks. Designed and developed a simulation tool to support issuance decisions towards yield curve building with a three-year horizon 6

Enhanced competition of Primary Dealer scheme at primary market auctions Designed and implemented an appraisal model of Primary Dealers performance at the auction. Implementation of institutional and operational tools to increase secondary market liquidity Developed a new scheme on Primary Dealer s secondary market rules and quoting obligations to increase secondary market liquidity in T-Bonds Designed a Securities Lending Facility provided by Ministry of Finance to support secondary market trading on T-Bonds. Designed the institutional and operational requirements of secondary market electronic trading arrangement for Primary Dealers to be implemented with a designated trading systems vendor. Supported design of Repo market framework on Government securities, and consensus building process with market participants. Supported enhanced price transparency trough design of price dissemination arrangements Developed a strategy and detailed design of Clearing and Settlement functionalities to upgrade existing facilities for T-Bills and T-Bonds. KENYA Consensus roadmap with the Ministry of Finance and the Central Bank on debt market development focusing on: Issuance policy and benchmark building tools Improved efficiency and transparency of auction process Wholesale secondary market organization Vision and consensus building on institutional scheme for the Central Securities Depositories (CSDs) Upgrades of most pressing operational bottlenecks in the clearing and settlement process 7

MOROCCO Launched a technical assistance program in 2011 with planned work on: Building benchmarks Designing the Secondary Market Architecture (including trading platform and quoting obligations) Improving rules in the primary dealer system to foster primary and secondary market development Introducing a securities lending facility for primary dealers NIGERIA Consensus action plan among public and private sector stakeholders Developed a diagnostic and needs assessment across all building blocks of debt markets. Designed a comprehensive action plan and initiated implementation on four priority areas: - Securities buy-backs and switches for benchmark building - Securities Lending and Repos - Price dissemination schemes - Clearing and settlement roadmap to support agreed reforms Implementation of institutional and operational tools Provided formal training to Debt Management Office officials in securities buy backs and switches techniques. Designed a detailed roadmap on a price dissemination scheme for Primary Dealers Designed a Securities Lending Facility to support market makers trading obligations 8

URUGUAY Consensus action plan with Government officials Developed a diagnostic and needs assessment across all building blocks of debt markets. Designed an Action Plan on two priority areas: - Rebalancing issuance policy from foreign currency to local currency. - Enhanced auction calendar and debt instrument choice aiming at increasing liquidity. Implementation of operational tools Designed simulation tool to support issuance decisions towards yield curve building. 9

Global Innovative Products 2 Innovative global products complement existing advisory services activities and further catalyze local market development. These products are being piloted in specific countries with intent to replicate on a broader scale. ISSUER-DRIVEN EXCHANGE TRADED FUND Innovative Bond ETF structure designed by the World Bank that supports a country s development goals in the public and corporate local currency bond markets. The Issuer- Driven ETF enhances efficiency, liquidity and reduces operating costs of physical ETFs improving their business viability and avoiding risks of synthetic ETFs Ongoing pilot Issuer-Driven ETF project in Brazil. Assessed business case for Colombia Disseminated the concept across leading ETF industry experts and among 16 Gemloc countries via peer group meetings. TREASURY MOBILE DIRECT Support pilot project in Kenya to place Government securities with retail investors through mobile phones Supported stakeholders in the viability assessment for the project along with the high level design of the product, custody arrangements, and distribution channels. Gemloc is acting as advisor in the implementation phase since April 2011. HARMONIZATION OF CENTRAL BANK AND TREASURY ISSUANCE POLICY Support pilot project in Costa Rica to harmonize the issuance policies of the Central Bank and Ministry of Finance, with the objective of enhancing the depth and liquidity of the secondary market. 2 The team is also working on a Diaspora Bond Fund initiative, details on which will be forthcoming. 10

III. Peer Group Cross-Country Dialogues The Gemloc Peer Group Dialogue (PGD) provides countries around the globe a fast and costeffective way to share challenges faced in development of government bond markets and discuss policy actions needed to address them. The initiative, which involves roundtable discussions via conferencing and a web-based meeting/presentation tool, has facilitated sixteen virtual meetings to date among two groups of emerging market economies (EMEs) Peer Group 1 comprising the top ten EMEs by bond market size and a Peer Group 2 open to all Gemloc-eligible countries (see map). The PGD initiative was launched in response to demand from Gemloc-eligible countries for an innovative and cost-effective means to share experiences with their peers on a variety of debt market topics. It has engaged 23 EMEs to date. 11

Gemloc Peer Group Meetings Retail Government Debt Programs: Main Models, Issues, and Experiences Peer Group 1 Meeting (May 2, 2012) Participants: Brazil, Colombia, Hungary, India, Kenya, Malaysia, Mexico, South Africa, and Turkey Peer Group 2 Meeting (May 8, 2012) Participants: Costa Rica, Kenya, Lebanon, Mexico, Nigeria, Pakistan, Sri Lanka, Uruguay, and Vietnam Global Financial Crisis and Domestic Debt Markets: Lessons from the Past, Measures for the Future Peer Group 1 Meeting (January 10, 2012) Participants: Brazil, Hungary, India, Mexico, Poland, South Africa, Turkey Peer Group 2 Meeting (January 17, 2012) Participants: Costa Rica, Kenya, Lebanon, Morocco, Nigeria, Sri Lanka, Uruguay ETFs and Domestic Debt Market Development: Is there a link? Peer Group 1 Meeting (October 5, 2011) Participants: Brazil, Colombia, Hungary, India, Mexico, Poland, South Africa, and Turkey Peer Group 2 Meeting (October 25, 2011) Participants: Costa Rica, Egypt, Kazakhstan, Morocco, Nigeria, Pakistan, Thailand, and Uruguay Key Practices in Securities Lending Peer Group 1 Meeting (April 26, 2011) Participants: Brazil, Colombia, Hungary, Malaysia, Mexico, and Turkey Peer Group 2 Meeting (May 3, 2011) Participants: Costa Rica, Kenya, Morocco, Nigeria, Romania, Sri Lanka, Uruguay, and Vietnam Buy Backs and Switches: Key Functions and Practices in Liability Management Peer Group 1 Meeting (February 7, 2011) Participants: Brazil, Colombia, Hungary, Malaysia, Poland, South Africa, and Turkey Peer Group 2 Meeting (February 28, 2011) Participants: Costa Rica, Kenya, Morocco, Pakistan, Peru, Romania, Sri Lanka, Uruguay 12

Syndication as an Alternative Mechanism for Placing Domestic Debt Peer Group 1 Meeting (September 23, 2010) Participants: Brazil, Colombia, Hungary, Mexico, Poland, South Africa, and Turkey Peer Group 2 Meeting (September 29, 2010) Participants included: Costa Rica, Egypt, Morocco, Pakistan, Romania, and Uruguay. How to Build an Effective Primary Dealer System Peer Group 2 Meeting (January 25, 2010) Participants: Argentina, Costa Rica, Egypt, Morocco, Nigeria, Peru, Romania, Sri Lanka, and Uruguay Electronic Trading Platforms: How to Avoid Fragmenting Market Information Peer Group 1 Meeting (November 18, 2009) Participants: Brazil, Colombia, Hungary, India, Malaysia, Mexico, Poland, South Africa, and Turkey Primary Dealers Experience and Practices in the Financial Crisis Peer Group 1 Meeting (July 20, 2009) Participants: Brazil, India, Malaysia, Mexico, Poland, South Africa, and Turkey Impact of the Financial Crisis on Domestic Debt Markets Peer Group 1 Meeting (March 31, 2009) Participants: Brazil, Colombia, Hungary, India, Malaysia, Mexico, Poland, South Africa, and Turkey Peer Group Dialogue Background Materials 3 Presentations Global Financial Crisis, Key Risks and Implications (January 10 and 17,, 2012) ETFs and Domestic Debt Market Development: Is there a link? (October 5 and 25, 2011) Securities Lending Facility (April 26 and May 3, 2011) Bond Buy Backs and Switches (February 28, 2011) Bond Buy Backs and Switches: Evolution of Practices in Mature Markets (February 7, 2011) 3 All knowledge management products referenced in this note can be downloaded from the Gemloc Advisory Services website at www.gemloc.org. 13

When and How to Use Syndications to Issue Domestic Public Debt (September 23 and 29, 2010) Primary Dealer Systems: Preconditions and Trends (January 10, 2010) Electronic Trading Platforms: The EU Experience (November 18, 2009) Primary Dealers Experience and Practices in the Financial Crisis (July 20, 2009) Surveys with Peer Group Member Countries Key Features of DMO-Provided Securities Lending Facilities for Primary Dealers (May 2011) Key Features of Electronic Trading Platforms (May 2011) Buy Backs and Switches Practices in Domestic Debt Markets (February 2011) Non-Competitive Subscription Practices in Primary Dealer Systems (December 2009) 14

IV. Applied Research Introduction The applied research component of Gemloc Advisory Services plays a crucial role in identifying and tackling knowledge gaps, and disseminating appropriate practices, by building partnerships with academics and practitioners to create products such as books, handbooks/toolkits, research papers, and technical training workshops. To date, the following products have been prepared by leading academics, researchers and staff. Most of these publications can be accessed through the Gemloc Advisory Services website at www.gemloc.org. Gemloc Papers and Articles Canuto, Otaviano, Catiana Garcia-Kilroy, and Anderson Caputo Silva. 2011. Foreword in The Euromoney Emerging Markets Handbook 2011/12. Canuto, Otaviano, Catiana Garcia-Kilroy, and Anderson Caputo Silva. 2010. Foreword in The Euromoney Emerging Markets Handbook 2010/11. Anderson, Phillip R.D., Anderson Caputo Silva, and Velandia-Rubiano Antonio. 2010. Public Debt Management in Emerging Market Economies: Has This Time Been Different? World Bank Policy Research Working Paper 5399. Garcia-Kilroy, Catiana and Anderson Caputo Silva. 2010. Reforming Government Debt Markets in MENA. World Bank s MENA Finance Flagship Report. Silva, Anderson Caputo and Catiana Garcia-Kilroy. 2009. Unlocking Debt Market Development in Times of Crisis. Chapter in The Euromoney Emerging Markets Handbook 2009/10. Gemloc Advisory Services team. 2009. Key Priorities for Debt Market Development. Gemloc Advisory Services Survey. Silva, Anderson Caputo and Catiana Garcia-Kilroy. 2008. The Development of Deeper and More Liquid Local Currency Bond Markets. Chapter in The Euromoney Emerging Markets Handbook 2008/09. 15

Burger, John D., Francis E. Warnock, and Veronica Cacdac Warnock. 2008. A Virtuous Cycle in Local Currency Bond Markets? Gemloc Conference 2008, Washington, DC. Raddatz, Claudio and Sergio L. Schmukler. 2008. Pension Funds and Capital Market Development: How Much Bang for the Buck? Gemloc Conference 2008, Washington, DC. Bordo, Michael D., Christopher M. Meissner. 2008. Foreign Currency Debt, Financial Crises and Economic Growth: A Long-run Exploration. Gemloc Conference 2008, Washington, DC. Eichengreen, Barry. 2008. Field of Dreams: Measures for Overcoming the Obstacles to Bond Market Development. Gemloc Advisory Services Guest Commentary. Eichengreen, Barry. 2008. Rationale and Obstacles to the Development of Bond Markets in Emerging Economies. Gemloc Advisory Services Guest Commentary. Background Notes 4 Primary Dealer Systems Provides guidance on how to design a primary dealer system so as to best meet the development needs of the market as well as the legitimate expectations of the parties involved. Repo Markets Reviews the various types of repo instruments, and analyzes the different issues involved in its functionality in terms of the legal structure, market structure, accounting treatment, taxation and regulation. Liability Management Reviews the various functions of liability management and illustrates usage of the main liability management instruments, especially buy backs and exchanges, with some country examples. Securities Lending Provides a detailed analysis of different types of securities lending facilities (SLFs), with a focus on SLFs provided by debt management offices to primary dealers, including their main features and functionalities, accounting considerations, and the process of putting them in place. 4 Two background notes on Syndication and Electronic Trading Platforms are forthcoming. 16

Books Silva, Anderson Caputo, Lena Oliveira de Carvalho, and Otavio Ladeira de Medeiros (eds). 2010. Public Debt: The Brazilian Experience. World Bank. (Translated from the Portuguese version, Dívida Pública: A experiência brasileira by Hilda Maria Lemos Pantoja Coelho; English adaptation by Barbara Koeppel, Brasilia: National Treasury Secretariat). 5 Sophastienphong, Kiatchai, Yibin Mu, and Carlotta Saporito. South Asian Bond Markets: Developing Long-Term Finance for Growth, World Bank, 2008. World Bank, 2007. Managing Public Debt: From Diagnostics to Reform Implementation and Developing the Domestic Government Debt Market: From Diagnostics to Reform Implementation. These books draw insights from a joint pilot program set up by the World Bank and the International Monetary Fund to design relevant reform and capacity-building programs in twelve countries. The experiences of these geographically and economically diverse countries - Bulgaria, Colombia, Costa Rica, Croatia, Indonesia, Kenya, Lebanon, Nicaragua, Pakistan, Sri Lanka, Tunisia, and Zambia - illustrate the challenges and elements necessary to make progress in the area of public debt management and market development. 5 The English version can be downloaded from the website of the Brazilian National Treasury at: http://www.tesouro.fazenda.gov.br/english/public_debt/book_divida.asp The Portuguese version is also available for download. 17

Technical training events 6 Implementing Government Debt Management Strategies: The Gemloc Advisory Services team conducts this semi-annual, five-day technical workshop in collaboration with the World Bank Treasury. The aim of the workshop is to build capacity among staff of ministries of finance and central banks in the execution of new borrowing, including designing a cost-effective funding program, which contributes to developing the domestic debt market. This workshop has brought together over 250 participants from 33 countries. Gemloc Advisory Services Workshop: The Gemloc Advisory Services team conducts a day-long technical workshop following the Gemloc Conference for emerging markets debt managers and central bankers. The Workshop provides a platform for presentation of papers and discussion of various applied research topics. Conferences Gemloc Roundtable Conference 2008, Washington, DC, USA: This first Gemloc conference attracted representatives from Ministries of Finance, Central Banks, and securities regulators from over 20 EMEs, as well as capital markets specialists from the World Bank and other multilateral agencies, academic institutions, and investment consulting firms. It served as a platform for participants to share their experiences in developing local currency bond markets and laid the foundation for further collaboration, for example, through Gemloc Advisory Services. Gemloc Investor-Country Conference 2010, Cairo, Egypt: The second Gemloc conference brought together debt managers and central bankers from 15 EMEs along with several international investment managers and financial sector institutions from Egypt. The event addressed key technical issues in local bond market development, targeted at Gemloc country officials. It provided a unique opportunity for global investors and senior country officials to meet and exchange information about local bond markets in selected emerging market countries and learn how the Gemloc program might help strengthen those markets. It also included individual country-investor meetings for in-depth discussions on topics of mutual interest. 6 The Gemloc Advisory Services team delivers other demand-driven, client-tailored training courses on topics related to the implementation of debt strategies and debt market development. 18

Gemloc Investor-Country Conference 2011, Rabat, Morocco: The third Gemloc conference attracted debt managers, central bankers and securities regulators from 17 EMEs along with private sector investors and capital market specialists from the World Bank. It facilitated exchange of information about local bond markets in selected EMEs, dialogue on key issues facing emerging bond markets today, and technical discussions in local bond market development. Participants also learned how the Gemloc program might help strengthen emerging markets going forward. 19

For further information: Anderson Caputo Silva Lead Securities Market Specialist Capital Markets and Corporate Governance Service Line Capital Markets Practice Financial and Private Sector Development The World Bank Telephone: +1-202-458-1140 Email: asilva3@worldbank.org Alison Harwood Manager Capital Markets and Corporate Governance Service Line Capital Markets Practice Financial and Private Sector Development The World Bank Telephone: +1-202-473-0486 Email: aharwood@ifc.org www.gemloc.org 20

www.gemloc.org 21