• a result of a longstanding pursuit of market-based policies
• a concerted program of financial sector deregulation and reform

(1) Market risk arises as soon as one has committed to a market position through either debt or derivatives transactions

(2) Managing market risk is all about making explicit, informed decisions about this risk, before committing to a market position

(3) Unlike the situation for many sophisticated financial market participants (banks and financial intermediaries), for sovereigns market risk is not optional, it can't be hedged only managed

Introduction

• Australia's financial markets today, emphasising the current government bond market
• snapshot of pre-deregulation market environment
• operational and infrastructure reforms that have underpinned development of today's government bond market

(1) Market risk arises as soon as one has committed to a market position through either debt or derivatives transactions

(2) Managing market risk is all about making explicit, informed decisions about this risk, before committing to a market position

(3) Unlike the situation for many sophisticated financial market participants (banks and financial intermediaries), for sovereigns market risk is not optional, it can't be hedged only managed

Australian Government Bond Market

• corporate outstandings now comparable
  
• secondary market turnover in government sector far greater

Australian Government Bond Market

• deep and liquid derivatives market for fixed interest products
  
• consolidation of Australian government bonds into benchmark lines

Government Bond Market - Looking Back Twenty Years

• fixed exchange rate / exchange controls
  
• regulated interest rates and lending in the banking sector

Government Bond Market - Looking Back Twenty Years

• fixed price 'tap' system for issuance
  
• unclear separation between monetary policy and debt management
  
• domestic investor base

Government Bond Market - Looking Back Twenty Years

• 'captive market' arrangements
  
• 'buy and hold' market - little secondary market activity
  
• no derivatives markets

Development of Government Bond Market

• removal of exchange controls and floating of Australian dollar
• removal of regulated interest rates and other controls; introduction of foreign bank competition
• separation of Debt Management and Monetary Policy

Development of Government Bond Market

• issuer behaviour
• primary issuance mechanism
• captive market arrangements
• issuer support of bond secondary market and derivatives markets

Development of Government Bond Market

• clear separation of debt management and monetary policy responsibilities
• clearing and settlement systems
• regulatory framework

Operational Reforms - Issuer Behaviour

• perceptions of market integrity
• maintain a high reputation for financial management competency
• transparent and predictable debt management activities
• maintain regular and open communication with markets
  • but not totally mechanical in approach

Operational Reforms - Issuance Mechanism

• auction approach
• 'dealer panel' arrangement
  

Operational Reforms - Issuance Mechanism

• nature of investor base
• stage of market development

• dealer panels & underwriting syndicates
• cost an important consideration

Operational Reforms - Captive Investors

• prudential aspect
  
• guaranteed a growing demand for government bonds

Operational Reforms - Captive Investors

• removes an important fiscal discipline
  
• distorts flow of investment funds
  
• inhibits secondary market development

Operational Reforms - Secondary Market Development

• ultimately beyond the control of the government debt manager

Operational Reforms - Secondary Market Development

Infrastructure Reforms - Separation from Monetary Policy

• Transactions based on a commercial arms length basis

Infrastructure Reforms - Clearing & Settlement Systems

• electronic transfer and settlement system for government securities (RITS)
  
• Real Time Gross Settlement (RTGS)

Infrastructure Reforms - Clearing & Settlement Systems

• clear, unambiguous regulations
• a sound legal basis
• sound risk management procedures
• well established contingency arrangements
• explicit identification of government regulator

Infrastructure Reforms - Regulatory Framework

• prescribes a level playing field
• clearly defines property rights
• has transparent information flow
• a capable and appropriately empowered prudential authority

Conclusion

Conclusion

Conclusion

Conclusion

• flexible enough to adapt to a dynamic market environment

Conclusion

• Strength of Australian markets reflects their local financing role in the Australia economy and investors desire to be part of this economy

Domestic Bonds Outstanding

Bond Market Turnover (daily average)

Turnover in Physical & Futures Markets (daily average)

JP Morgan Liquidity Ratio (as at 31 December 1999)

Daily Average Turnover Versus Bonds Outstanding

Benchmark Bond Issues (as at 24 March 2000)

Bond Auctions: Range of Accepted Bids