Archived - Developing Well Functioning Canada Bond and Bill Markets

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Context

The Department of Finance values the work of Professors Halpern and Rumsey in the preparation of this report and is moving to address the issues raised within their report.

We are pleased to note that Professors Halpern and Rumsey expressed the opinion that initiatives undertaken by the Government of Canada have been successful in improving liquidity in the bond and bill markets.

The authors did not make any specific recommendations for new initiatives beyond those already being considered by the Government. The issues presented here are summaries, approved by the authors, of issues raised in the document above. The first three issues addressed below were raised during interviews with market participants but do not represent actual recommendations by the authors. Specific management responses to issues raised are:

1. The Government should consider more frequent auctions of smaller size of 30-year bonds; this change would improve liquidity.

Department Response

The Department of Finance places importance on liquidity and has recently consulted market participants on this issue and concluded that maintaining fewer (regular) larger issues is preferable. While more frequent smaller auctions might improve access, it was determined that the required decrease in auction size would have a negative impact on liquidity.

2. The amount of retail debt should be decreased or eliminated and replaced with wholesale bonds to increase liquidity of the latter.

Department Response

The retail debt program contributes to the Government's stated objective of using a variety of instruments to maintain a diversified investor base by making Government of Canada securities available to Canadians at the retail level.

3. The Government should support the introduction of automated trading systems (ATS) that are accessible by the institutional investor market.

Department Response

The Department of Finance and the Bank of Canada have an ongoing dialogue with the Canadian Securities Administrators and market participants supporting the development of electronic trading systems and the appropriate framework for their regulation. The launch of institutionally targeted systems is expected in the near future.

To date, the Government has actively supported the enhancement of market transparency through the development of CanPx, a screen-based, real-time information system that provides market participants with best bid and offer prices and trading volumes in a range of benchmark fixed-income securities.

Other Issues Raised:

4. The collection of some data on both benchmark and non-benchmark bonds, (e.g. bid-ask spreads; how quickly trades clear; impact of trades on market price; and transaction size) would allow for better evaluation of Government initiatives.

Department Response

The Bank of Canada is taking steps, as means become available, to improve data quality. As the data related to trading in the over-the-counter market is proprietary to the dealers, and dependent on the quality of their systems, there are limits to the availability of some types of information. Current efforts are focussing on improving bid-ask spread and transaction size data. The adoption of an Automated Trading System (ATS) is expected to facilitate the collection of improved data on clearing times and price impact.

5. The Government of Canada should attempt to shorten the turnaround time on reverse auctions.

Department Response

A move to shorter turnaround times on auctions and reverse auctions was announced as part of the Government's 2002-03 Debt Strategy.