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Synthetic Bond (SB)
Synthetic Bond (SB) is defined as a structured product consisting of several instruments for bullet redemption. In other words, it’s a basket of securities (T-Bills and/or T-Bonds). Securities are selected from the standard points of the yield curve. The amount borrowed by the State is split between the securities that make up the basket in proportions defined for each security. Thus, the amount sought by the State on each security is function of a coefficient expressed as a percentage of the total amount of the loan.
Characteristics of SB
- Each security of the basket is detachable and has its own characteristics (refer to T-Bills and T-Bonds product sheets).
- All SB securities require bullet redemption.
Who can benefit?
- Any natural or legal person residing in the Union
- Foreign non-residents through Primary Dealers or banks resident in the Union.
Issuance technique
- Synthetic Bonds are issued by auction at multiple price/rates (requested price/rate) depending on the nature of the securities in the basket.
Subscription terms
- The bid amount is multiple of ten-thousand (10,000) CFA FRANCS for T-Bonds or one million (1,000,000) CFA FRANCS for T-Bills making up the basket.
- Direct investors (Primary Dealers that can directly place bids) bid on their own account or that of their customers on the whole basket of securities. Their bids will be placed according to the distribution key defined by the terms and conditions of the operation. These terms and conditions are specified in the notice of invitation to tender or the issuance-Briefing Note.
- Indirect investors (individuals or companies unable to buy Securities directly) can go through Primary Dealers to buy securities on one or more instruments making up the basket.
Taxation
Tax applied to T-Bills and/or T-Bonds of the SB is that in force in the issuing State. In general, the T-Bills and T-Bonds that make up the SB are tax-exempt for buyers residents of the issuing State.
Benefits
- Synthetic Bonds offers investment opportunities in the short, medium and/or long term for all profiles of investors contrary to the classic single securities.
- Synthetic Bonds are instruments to diversify the investor’s portfolio.
- Investment in Synthetic Bonds contributes to the financing of State projects
Availability
- Each of the securities comprising the SB is available for purchase on the primary market and the secondary market through Primary Dealers and brokerage firms within WAMU.
Liquidity
- Each SB security is detachable and can be negotiated over-the-counter on the secondary market and / or be admitted (for eligible securities) as collateral for refinancing from the Central Bank.
Illustration
Consider, for example, Synthetic Bond tender for an amount of 30 billion and maturities of 364 days, 3 years and 5 years. The basket consists of three (03) instruments: 364 day T-Bills, 3 year T-Bonds and 5 year T-Bonds. The issuance is made in the form of targeted award, only Primary Dealers are allowed to place bids.
Targeted synthetic bond auction
| Amount to be raised (in million de FCFA) | 30 000,00 |
| Auction date | 01/02/2017 |
| Value Date | 02/02/2017 |
| Composition of the synthetic bonds |
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| Maturities | 31/01/2018 | 02/02/2020 | 02/02/2022 | ||||||
| Single Nominal Value (in CFA FRANCS) | 1 000 000 | 10 000 | 10 000 | ||||||
| Interest rate | – | 6,00% | 6,25% | ||||||
| Allocation facto | 40% | 30% | 30% |
Primary Dealers place offers respecting the weighting (distribution key) set in the notice of invitation to tender. The offers are placed as below:
Examples of offers received from Primary Dealers at the auction
| Primary Dealer_A | 40% on the 364 day T-Bill | 30% on the 3 year T-Bond | 30% of the 5 year T-Bond | ||||
| Amount to be invested (in millions) | Amount | Requested rate (%) | Amount | Requested price (%) | Amount | Requested price (%) | |
| Own account | 1 000,0 | 400,0 | 3,0000 | 300,0 | 99,0000 | 300,0 | 98,5000 |
| 5 000,0 | 2 000,0 | 3,1500 | 1 500,0 | 98,0000 | 1 500,0 | 98,0000 | |
| Customer account | 3 000,0 | 1 200,0 | 3,1500 | 900,0 | 100,0000 | 900,0 | 100,0000 |
| 2 000,0 | 800,0 | 3,4000 | 600,0 | 99,5000 | 600,0 | 99,5000 | |
| Primary Dealer_B | 40% on the 364 day T-Bill | 30% on the 3 year T-Bond | 30% of the 5 year T-Bond | ||||
| Amount to be invested (in million) | Amount | Requested rate (%) | Amount | Requested price (%) | Montant | PRequested price (%) | |
| Own account | 10 000,0 | 4000 | 3,1500 | 3 000,0 | 99,5000 | 3 000,0 | 99,5000 |
| Primary Dealer_C | 40% on the 364 day T-Bill | 30% on the 3 year T-Bond | 30% of the 5 year T-Bond | ||||
| Amount to be invested (in million) | Amount | Requested rate (%) | Amount | Requested price (%) | Amount | Requested price (%) | |
| Customer account | 6 000,0 | 2400 | 3,2500 | 1 800,0 | 100,5000 | 1 800,0 | 100,5000 |
| 8 000,0 | 3200 | 3,4000 | 2 400,0 | 99,7500 | 2 400,0 | 99,7500 | |
Results of the examination of 364 day T-Bill tenders
| Amount (in millions of CFA) | 10 000 |
| Marginal rate | 3,40% |
| Average Weighted Rated | 3,77% |
| Interest paid by Treasury (in million CFA) Net received by the Treasury (in millions of CFA | 190,53 9 809,47 |
| Price | 98,09% |
| Performance | 3,84% |
| Stock of the 364 day T-bills (in millions of CFA) | 30 000 |
Once the auction is closed on the three instruments, the examination of the bids is done in a standard way. On each instrument, offers are classified according to the rates/prices. Arbitration concerning the cost relatively to the maturity will be made by the issuing Treasury to establish the winning amounts on the three instruments.
For example, following examination, Treasury may decide to accept 31 billion overall on the three instruments as follows:
- 10 billion on 364 day T-Bills
- 10.5 billion on 3 year T-Bonds
- 10.5 billion on 5 year T-Bonds
| Results of the examination of 364 day T-Bill tenders | Investors | Requested rate (%) | Amount proposed (in million CFA | Accumulation | |
|---|---|---|---|---|---|
| Amount (in millions of CFA) | 10000 | Primary Dealer_A | 3 | 400 | 400 |
| Marginal rate | 3.25% | Primary Dealer_A | 3.15 | 2000 | 2400 |
| Average Weighted Rated | 3.17% | Primary Dealer_A | 3.15 | 1200 | 3600 |
| Primary Dealer_B | 3.15 | 4000 | 7600 | ||
| Primary Dealer_C | 3.25 | 2400 | 10000 | ||
| Primary Dealer_A | 3.4 | 800 | 10800 | ||
| Primary Dealer_C | 3.4 | 3200 | 1400 | ||
| Results of the examination of 3 year T-Bond tenders | Investors | Requested price (%) | Requested proposed (in millions CFA) | Accumulation | |
|---|---|---|---|---|---|
| Amount (in millions of CFA) | 10500 | Primary Dealer_C | 100,5 | 1800,00 | 1800,00 |
| Marginal rate | 98.0000% | Primary Dealer_A | 100 | 900,00 | 2700,00 |
| Average Weighted Rated | 99.5429% | Primary Dealer_C | 99,75 | 2400,00 | 5100,00 |
| Primary Dealer_A | 99,5 | 600,00 | 5700,00 | ||
| Primary Dealer_B | 99,5 | 3000,00 | 8700,00 | ||
| Primary Dealer_A | 99 | 300,00 | 9000,00 | ||
| Primary Dealer_A | 3.4 | 3500,00 | 10500,00 | ||
| Results of the examination of 5 year T-Bond tenders | Investors | Requested price (%) | Amount proposed (in million CFA) | Accumulation | |
|---|---|---|---|---|---|
| Amount (in millions of CFA) | 10500 | SPrimary Dealer_C | 100,5 | 1800,00 | 1800,00 |
| Marginal rate | 98.0000% | Primary Dealer_A | 100 | 900,00 | 2700,00 |
| Average Weighted Rated | 99.5286% | Primary Dealer_C | 99,75 | 2400,00 | 5100,00 |
| Primary Dealer _A | 99,5 | 600,00 | 5700,00 | ||
| Primary Dealer_B | 99,5 | 3000,00 | 8700,00 | ||
| Primary Dealer_A | 99 | 300,00 | 9000,00 | ||
| Primary Dealer _A | 3.4 | 3500,00 | 10500,00 | ||
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