The goal of issuing Latvian government securities is to ensure financing of the government budget deficit and re-financing of the government debt, as well as liquidity of the government finances.
The goal of issuing Latvian government securities is to ensure financing of the government budget deficit and re-financing of the government debt, as well as liquidity of the government finances. Currently, the government securities are the main source of the government domestic funding.
The first issue of the government securities took place at the end of 1993. Next years, due to increased necessity for the government financing, as well as development of the securities market, the investors were offered longer-term securities. At present moment there are short-term T-bills outstanding with initial repayment term of six and twelve month, medium term T-bonds with initial term of repayment of two, three and five years, as well as long-term bonds with initial term of repayment of ten years
The issuer is the Ministry of Finance of the Republic of Latvia. According to “Regulations on Issuing Government Securities” approved by Cabinet of Ministers 31st May 2005 the Treasury of the Republic of Latvia performs all transactions with government securities.
Classification of Securities
The government securities fall into three groups according to their initial term of repayment.
Short-term T-bills - securities with initial repayment term less or equal to one year;
Medium-term T-bonds - securities with initial repayment term longer than one year but not exceeding five years;
Long-term T-bonds - securities with initial repayment term longer than five years. The government short-term T-bills are sold at a discount and repaid at their nominal value on the date of repayment. The government medium-term and long-term T-bonds are sold with fixed income - periodical interest payments, which usually are paid semi-annually or annually and they are repaid at their nominal value on the day of repayment.
Latvian government securities are sold in the auctions of primary placement of securities. Announcements on upcoming auctions and tender results are published at government newspaper “Latvijas Vēstnesis”. At present, there are two types of auctions:
Competitive multi-price auctions organised by the Treasury at NASDAQ OMX Riga Stock Exchange electronic trading system Genium INET. The auctions are usually held on Wednesdays. The settlement for securities is usually made two business days later, if the Treasury has not set other date. At the bids participants indicate amount and yield rate of securities.
The Treasury may approve the limit on maximum amount to be allotted for a one bidder.
The securities bid step in the competitive multi-price auction is 0,01%.
The minimal amount of bids in this auction is LVL 100.
Non-competitive fixed rate amount auctions organised by the Treasury at NASDAQ OMX Riga Stock Exchange electronic trading system Genium INET. The auctions are usually organised a day before settlement date. The bids, where the participants indicates the amount of securities to be purchased, are covered proportionately to submitted nominal amounts at the weighted average yield rate set in the competitive multi-price auction.
In applications, the participant may indicate only the amount of securities nominal values that does not exceed the securities amount offered by the Treasury in respective auction. Minimal bid amount in this auction is LVL 100.
Fixed income rate is set as the average weighted yield rate of securities bids approved at the competitive multi-price auction that is down-rounded to 1/8 of interest rate. The Treasury has the rights to set a fixed income rate for a new issue in advance.
In order to ensure operative transactions under financial management government might be placed via tap selling method – by direct deals at NASDAQ OMX Stock Exchange electronic trading system Genium INET. Information on upcoming new issue and/ or reopening is published on Genium INET.
All government domestic securities are registered at the Latvian Central Depository. Since 10th August 1999, Latvian government securities, which are sold at the initial placement via auctions are registered and included in the official list of NASDAQ OMX Riga Stock Exchange.
Participants of the initial placing securities in the competitive multi-price and non-competing fixed rate amount auctions as well as tap selling are NASDAQ OMX Riga Stock Exchange members.
As an individual investor in the primary placement of the government securities, in compliance with respective agreements with the Treasury on purchase of government securities Financial and Capital Market Commission is allowed to invest Deposit Guarantee Fund and Fund for the Protection in government securities at the average weighted annual yield rate set in the multi-price auction.
Legal and physical persons may purchase the government securities at primary placement via financial intermediaries – banks and brokerage companies on NASDAQ OMX Riga Stock Exchange or at OTC market by direct trading.
NASDAQ OMX Riga Stock Exchange for the transactions with Latvian government securities determines fee in the primary placement, both in competitive multi-price and non-competitive fixed rate amount auctions (0,01% from the purchased amount).
NASDAQ OMX Riga Stock Exchange has set the commission for trading of debt securities as 0,01% of the transaction amount for each counter party (maximum fee – LVL 30).
Moreover, financial intermediaries (banks and brokerage companies) may set the additional commissions for services provided.
The settlement for the government securities in the primary placement in organised by Bank of Latvia and Latvian Central Depository.
Transactions with the government securities are made in compliance with principle of Delivery Versus Payment.
According to standard of ISMA – International Securities Market Association, the annual base for the calculation of the price, accrued interest, fixed interest and interest of medium-dated and long-dated bonds is 30E/360*. This means that each calendar month shall be regarded as 1/12 of 360 days in a year or 30 days, and the period of time from a particular date of a month until the same date of the next month shall be regarded as 30 days.
* – For all new issues of medium and long-term T-bonds after 1st July 2005 Act/Act day counting method is applied.
Time of Trading
The auctions of Latvian government securities according to the yearly schedule for government securities primary placement are usually held on Wednesdays at 13.00 – for competitive multi-price auctions and at the same time on Thursdays for non-competitive fixed rate amount auctions. Tap selling is organised on irregular basis and announcement is published no later than a business day before the planned offering. The settlements are usually made on Fridays, providing the funds for the Treasury’s account at the Bank of Latvia by 10.00 a.m.
Trading for the Latvian government securities at NASDAQ OMX Riga Stock Exchange takes place every business day from 10.00 - 16.00.
Comparing to other forms of investments in the securities market of Latvia, the government securities are considered as investments of rather high liquidity because of larger outstanding amounts. The Bank of Latvia ensures the banks with possibility to re-finance the government securities with lombard-loans, moreover, REPO auctions are organised, as well as the Bank of Latvia buys securities for implementation of the monetary policy.
Information on Latvian sovereign credit ratings might be found at section “Rating”.