Legal Framework
The level of how much own securities can be held is regulated in § 2 (5) of the Budget Law for credit authorizations. This dictates that currently, credit can be raised for financing purchases “within the framework of market support operations in the secondary market”. The volume of credit should not exceed 5% of the nominal volume of the Federal bonds, five-year Federal notes, Federal Treasury notes and Treasury discount paper in circulation annually.
Starting Point
At each auction the German Federal Government can retain a portion of securities for secondary market operations which is then sold successively in the market afterwards. The volume of securities retained for market operations varies widely from auction to auction. Since 2005, the amount retained has averaged about 20% of the issuance volume (which also included money market paper and inflation-linked German Government securities).
Implementation
For its secondary market operations the Federal Government uses electronic trading platforms and the German stock exchanges. The agency’s stock of bonds can be sold or purchased in the spot market within the framework of the German Federal Government’s liquidity planning. The focus is on interbank trading and on supporting the activities of the market makers. This service provided by the issuer also enables members of the Auction Group to conduct transactions directly with the issuer as counterparty if necessary. The spot transactions are supplemented by repurchase agreements (“repos”) and securities lending. The German Finance Agency executes its transactions with a minimum impact on the market and in line with market prices.
Effects
Through its own secondary market activities, the Finance Agency supports the smooth trading in German Government securities. Its participation in the secondary market also gives the Finance Agency insights into the current market situation for German bonds. Special market and price situations can be monitored and assessed more efficiently thanks to the Finance Agency’s direct presence in the market. The combination of spot transactions and repo trading provides a particularly high level of information which can be channelled into the structuring of the issuance calendar and the auction decisions. In addition, selling off the portion retained at the auctions in the secondary market enables the Bund to spread the timing of its financing activities better, which helps to reduce the Federal Government’s funding costs. The deployment of the Finance Agency’s own holdings of Government securities, in cooperation with numerous international banks, contributes indirectly to fair market pricing and successful primary market placements.
