The Government Securities Market General Organization
Government securities are issued by the Ministry of Finance via auctions organized by the Bulgarian
National Bank. Only primary dealers can participate directly to the auctions. Other investors may
participate in the auctions through a primary dealer, who submits bids on their behalf and for their
account. Primary dealers are obliged to participate actively in the auctions and to maintain liquid
secondary market for government debt. Primary dealers are financial institutions, which are active
on the government debt market.
The market of Bulgarian government securities is an over-the-counter market. Settlement of
government securities transactions is executed 4 times a day on a gross basis (designated time gross
settlement), based on transfer instructions received from direct participants. Direct participants send
transfer instructions on behalf of indirect participants, who settle transactions across their books.
Under the current monetary regime, the BNB is not allowed to extend credit in any form to the
government or a government agency. Therefore, the central bank cannot use the market of
government securities for implementing monetary policy objectives based on outright sales or
purchases of government securities or repo operations. However, the BNB is an administrator of the
CBSRTGS, which acts as both a central securities depository and a securities settlement system of
Bulgarian government securities. The organization of the secondary market of government
securities in Bulgaria is meant to facilitate liquidity management in the Bulgarian banking system.
The stock of domestic debt outstanding has been gradually increasing since the end of 2001. This is
positive for the debt market because demand for T-paper has been substantial while supply has been
inadequately low, which has squeezed yields to very low levels, making Bulgarian debt,
denominated in local currency, unattractive for investors. It is expected that T-paper with longer
maturity will be introduced should domestic market conditions remain favorable.
All Bulgarian government securities are dematerialized and held in a book-entry form in a central
securities depository at the Bulgarian National Bank. At the end of 2001 foreign holdings of
Bulgarian government securities account for about 5% of total domestic debt outstanding, which is
due to the lower yield on Bulgarian debt compared to that of other sovereigns with similar credit
rating. Foreign institutions on the Bulgarian debt market are represented by 2 branches of foreign
banks, which act as primary dealers. However, many of the local banks, which are active in
government debt operations, are owned by foreign institutions.
Bulgarian domestic debt is held solely by the Government Securities Depository of the BNB.
The value of government securities outstanding has been steadily decreasing for the period 1997 –
2000 (from 2,822 mln. BGN to 1,772 mln. BGN). This has created some difficulties on the
government debt market, as the inadequate supply did not meet substantial demand for T-paper.
However, local government debt issuance has been increased in the last six months. New bond
issues have been introduced during this period - with 7-year and 10-year maturity – which were well
received by the market.
Because the BNB does not perform open market operations, the need for collateral in the Bulgarian
economy arises mainly from the requirement for public funds in banks to be collateralised by
government securities. As of 2001 yearend about 25% of outstanding government securities have
been blocked to serve as collateral for public funds.
Another reason for demand of government securities is to serve as collateral on the interbank repo
market. However, due to the increasing stability of the Bulgarian banking system, the need for
collateral for the purposes of the interbank money market has decreased as some of the share of repo
agreements has been substituted by uncollateralised interbank deposits.
The Computerized Book-Entry System for Registration of and Trade in Government Securities
(CBSRTGS) is the country’s central securities depository and settlement system for government
securities. It settles transactions in real time with central bank money.
The market of government securities is basically an over-the-counter market. The largest financial
institutions act as market makers through a system of primary dealers. Trade in government
securities can be done on all trading platforms licensed by the respective supervisory authorities
(including the BSE), but registration and settlement of transactions should be done in accordance
with the regulations of Regulation No.5 of the MoF and the BNB. However, due to insufficient
supply of government securities, trade in government debt on the floor of the BSE is rather
Because the CBSRTGS is both a depository and a settlement system, owned by the BNB, it settles
transactions via the participants’ accounts with the BNB. Thus the payments on interbank money
market transactions and the government securities market are made using the interbank payment
system of the BNB and the accounts of commercial banks with the BNB.
The CBSRTGS has not entered in international alliance agreements so far although it plans to do so
in the near future.
It can be concluded that the government debt market infrastructure in Bulgaria serves well to the
Government securities transactions are processed by the CBSRTGS using transfer instructions
received by the e-mail service of Reuters, called ReutersMail. There are standardised proformas for
all types of government securities transactions. The irrevocable transfer instructions received are
matched manually by the staff, operating the CBSRTGS. This is virtually the only manual operation
performed in the process of settlement of government securities. After transactions are matched,
they are entered for settlement at the relevant settlement session in the system. If the seller has
enough government securities, the transfer of funds from the buyer to the seller is executed in real
time via a direct electronic link with the accounting system of the Bank.
ISIN codes are used to identify individual issues of government securities. Currently there is a
project for identifying the feasibility of using the SWIFT standards or a VPN for the communication
purposes of the government securities market. Practically, apart from the matching process, the
whole process of settlement of government securities transactions is a straight-through processing
Government securities transactions are settled at designated times on a gross basis. Normally it
takes up to 30 minutes to enter the transactions for settlement, to check whether the seller possesses
enough government securities, to generate the necessary accounting records, to process the
generated accounting records using automatic link with the accounting system of the Bank, called
SOFI, to confirm the transfer of securities from the seller to the buyer and to notify participants
about the transactions settled at the current settlement session through ReutersMail.
Securities clearing and settlement
Government securities transactions are settled when transfer instructions, sent by direct participants,
are received from both sides to a trade. There are 4 settlement sessions, at which the matched
transactions are settled - at 9:00 a.m., 11:00 a.m., 1:00 p.m. and 3:00 p.m. – on an intraday
principle. Typically, a batch of matched transactions is processed for up to 30 minutes. Transactions
of indirect participants are confirmed by the relevant direct participants.
There is not a clearinghouse for government securities transactions in Bulgaria. Also, there is not a
trading system for government securities, the CBSRTGS is the only infrastructure serving the
market of government debt in the capacity of central securities depository, security settlement
system and a source of information for the market of government debt. Because the CBSRTGS is
part of the BNB and it settles transactions in central bank money, the DvP is the norm for settlement
of government securities transactions, which include simultaneous transfer of funds and securities.
DFP is employed when only a transfer of securities is requested by participants.
The CBSRTGS settles transactions using the interbank payment system. Therefore, a disturbance in
the interbank payment system will block the CBSRTGS settlement procedures. On the other hand, if
the CBSRTGS fails to execute settlement procedures, the interbank payment system may be
blocked. However, because the BNB operates both the interbank payment system and the
CBSRTGS, all problems are addressed and resolved in the fastest possible way. There are no special
arrangements for settling monetary policy transactions because the BNB does not perform open
market operations due to the Currency Board Arrangement (CBA).
The accounting and safekeeping procedures of the CBSRTGS ensure segregation of clients’
securities from those of direct participants.
The Role of the Central Bank
Art. 2 (1) of the Law on the BNB stipulates "the main task of the BNB shall be to contribute to the
maintenance of the stability of the national currency through implementation of the monetary and
credit policy as provided for by this Law, and to assist in the establishment and functioning of
efficient payment mechanisms". And later on Art. 40 (1) indicates that "For the purposes of
facilitating noncash payments, the BNB may organize and operate payment systems and clearing
offices, as well as issue regulations providing for the establishment and operation of such systems
According to the Law on the BNB (Art.43) the Bulgarian National Bank is the official
depository of the state. Under terms agreed upon with the Minister of Finance, the Bank acts as a
fiscal agent for public and for publicly guaranteed debt. These duties are interpreted in practice in
the following way. The Bank (Fiscal Services Dept.) performs functions covering both the primary
and secondary market of book-entry government securities, organization and maintenance a
computerized system for registration of and trade in these debt instruments. To this end, it conducts
auctions for sale of GS and their initial registration, registers transactions in government securities
in the secondary market, effects maturing principal and interest payments on government securities.
The participants in the system are primary dealers of government securities – commercial banks and
financial and brokerage houses (investment intermediaries). The BNB maintains accounts reporting
the government securities holdings of primary dealers and their clients. In case of transactions in
government securities between participants in the system, the BNB effects the transfers in the
registers it maintains, and the payments through the payment system functioning in the BNB in real
time during the accounting day and in compliance with the DVP principle. The Bank (Fiscal
Services Dept.) also runs an automated system for direct sales of saving government bonds targeted
at individuals only (residents and nonresidents). The legal framework for these Bank activities is
given by: the Degree of the Council of Ministers No. 167/1999 on the Issuance, Servicing and
Redemption of Domestic Government Debt and on Budget Deficit Financing; the Regulation No.5
of the Ministry of Finance and the BNB on the Terms and Procedure for Issuance, Acquisition and
Redemption of Book-entry Government Securities; the Terms for Effecting Transactions at the
Primary and Secondary Market.
Based on the Agency Agreement with the Ministry of Finance, the BNB (Fiscal Services Dept.)
establishes and maintains an automated system for registration, servicing and management of all
external public debt obligations. The central bank also initiates payments on credits regarding which
it acts in the capacity of a fiscal agent of the government.
The central bank accepts oversight responsibility for the payment system servicing GS market.
Oversight extends also to government securities clearing and settlement systems. All procedures and
operations performed in connection with GS transactions are subject to daily oversight activities.
These activities are carried out in a close coordination with the Ministry of Finance. There is a
regulatory and contractual basis for this responsibility given by the Regulation 5 of the Ministry of
Finance and the BNB on the Terms and Procedure for Issuance Acquisition and Redemption of
Book-entry Government Securities; Criteria for Evaluation and Selection of Government Securities
Primary Dealers; Agency Agreement between the MoF and BNB on public and publicly guaranteed
The CBSRTGS complies with "The Recommendations for Securities and Settlement Systems" of
the CPSS-IOSCO Joint Task Force on SSS, including on the regulation and oversight activities. The
objectives are to ensure the smooth functioning of the system and to minimize the potential risk for
the participants. These objectives are publicly disclosed. We have filled in the Association of Global
Custodians Questionnaire and Thomas Murray – Standard&Poor's Questionnaire and the CBSRTGS
performance was given a positive assessment.
Review of the Government Securities Market in 2001 and early 2002
In 2001 a wide spectrum of short-term and medium-term government securities were offered
through auctions in the primary market as follows:
Auction for 3-month discount T-bill issues were conducted twice instead of four times
per month (every first and third Monday of each month, or on the next working day, if a
Monday turned out to be a holiday) with an increased face value of each issue from BGN
5 million to BGN 10 million;
Auctions for 12-month discount T-bills continued to be held quarterly (the second
Monday of the second month of each quarter) with a face value of each issue of BGN 20
Reopened issues of 2-year fixed coupon T-notes were one for each quarter of BGN 50
million. The auctions were carried out on Monday preceding the second Wednesday of
the first and third month of each quarter.
3-year fixed coupon T-notes were not offered for sale;
Reopened issues of 5-year fixed coupon T-bonds were offered one for each quarter, for
BGN 60 million each, the auctions taking place on the Monday preceding the fourth
Wednesday of each month.
With a view of extending the maturity of debt, the MoF offered in October 2001 a new 7-
year reopened issue of fixed coupon T-bond for BGN 30 million.
In the months immediately following the introduction of the 2001 calendar of government
securities issues the bid-to-cover ratio (the ratio between submitted and approved bids) for 3-month
government securities did not change substantially. It was usually around 2:1 in the first half of the
year and typically (except for March) was higher in the month’s first auction than in the month’s
second auction. In the second half of the year the ratio gravitated toward 1.5:1, retaining the pattern
of rising at the start of the month and declining in the middle of the month. The average annual
yield at issuance (also basic interest rate) started around the level of 4.5% and after sliding to the
4%-level in the first quarter, returned close to the 4.5% level in the second quarter and gradually
ascended toward the 4.75% level in the second half of the year.
For the 12-month instruments, a gradual decrease in the bid-to-cover ratio from 3.1:1 at the
February auction to 1.5:1 at the November auction influenced a gradual rise in the yield at issuance
from 4.88% to 5.11%. Still, the level in November 2001 was well below the 5.40% of November
For 2-year government securities, in the first half of the year the bid-to-cover ratio moved
from 2.5:1 to 2:1 and stayed there throughout the second half of the year, slightly downward-bent.
The overall tendency of decrease in the average annual yield at issuance was not reversed, but only
gradually pared by this decline. After 6.29% at the auction in December 2000, the yield at issuance
started at 6.04% in January 2001, to end at 5.63% in December 2001 (having reached lows of 5.49%
in April and 5.55% in July). The tendency in yields permitted the issuer to lower the coupon to 6.5%
annual interest rate for January’s issue (from 7% for the previous issue), then to 6% for July’s issue.
Developments were similar for 5-year government securities, a relative newcomer, whose
bid-to-cover ratio spiked to 4.8:1 in January 2001 from 2.1:1 in December 2000. During the first
half of 2001 the centre of gravitation moved from 4.5:1 to 2.5:1 and stayed there in the second half
of the year. After 9.03% in December 2000, the average annual yield at issuance dropped to 8.59%
in January. The yield went down to as low as 6.81% in July, then stayed inside a 6.9-7% corridor for
the rest of the year. A sudden decrease in the bid-to-cover ratio to 1.4:1 in late December only
marginally raised the yield from the bottom to the middle of the corridor and it ended the year at
6.95%. Coupons were lowered to 8% annual interest rate (from 9%) in April and 7% in July.
Out of total of BGN 53.67 million of bids for the new instrument, a 7-year bond (carrying a
7.5% annual interest), bids amounting to BGN 18.93 million were approved at the initial auction in
October. The amount of bids received was 1.7 times larger than the total nominal value of the issue
and 2.7 times larger than the amount of bids approved. The average annual yield at issuance was
8.37%. Still larger bids, totalling BGN 54.615 million, were received for the remainder of the issue
in November. The bid-to-cover ratio was 4.9:1 (bids of BGN 11.07 million approved) and the yield
was 7.84%. This way the auctions for 7-year bonds in late 2001 (October-November) produced
average annual yields at issuance similar to those at the auctions for 5-year bonds in early 2001
The monthly amount (in nominal terms) of target issues (retail sales only for individuals)
sold to physical persons marked a typical seasonal rise in the first quarter, from BGN 1.2 million in
January to BGN 2.1 million in March. Afterwards it oscillated between BGN 0.9 million and BGN
In November in foreign capital markets the Republic of Bulgaria successfully sold its first
Eurobond issue of EUR 250 million, maturing on 1st March 2007, and with 7.25% annual coupon.
The issue price was 98.955 percent, producing a yield of 376 basic points (3.76 percentage points)
over Germany’s Bond maturing in January 2007. A few days earlier, on 30th October, Fitch affirmed
Bulgaria’s long-term foreign currency rating at ‘B+’ with outlook ‘positive’ (Fitch attributed this
rating to the new Eurobond issue on 12th November) and on 7th November Standard&Poor’s raised
Bulgaria’s long-term foreign currency issue credit rating to ‘BB-‘ with outlook ‘stable’. (Later on,
from 17th December, this appeared as an S&P’s rating for the Eurobond on Reuters’ information
screen for the issue.) Moody’s Investors Service followed suit on 19th December by raising
Bulgaria’s country ceiling for foreign currency bonds together with the rating of the government’s
foreign currency bonds to ‘B1’ with outlook ‘stable’ and Fitch upgraded its rating to ‘BB-‘ with
outlook ‘stable’ in early 2002 (14th January).
1 January 2002 – 30 April 2002
In 2002, just like in the previous year, the issue policy of the Ministry of Finance is aimed to
further develop the government securities market and to increase its liquidity by offering a greater
variety of instruments. In order to streamline the debt structure and its service, the 2002 calendar of
government securities includes more medium-term and long-term reopened issues with a fixed
coupon enabling the reduction in number of short-term issues sold at a discount. According to this
calendar from the beginning of this year:
the auctions for 3-month discount issues take place once per month, instead of twice, and
unlike last year the amount of each issue increased from BGN 10 million to BGN 12
the auctions for 12-month discount issues are still held once per quarter, offering the
amount of BGN 20 million;
the auctions for 2-year government securities are terminate and the auctions for 3-year
reopened government securities issues with a fixed coupon are resumed. The amount of
each issue is BGN 50 million. These auctions take place once per quarter;
the auctions for 5-year reopened issues with a fixed coupon take place twice per quarter,
the amount of each issue being BGN 90 million, against BGN 60 million last year;
the auctions for 7-year reopened issues with a fixed coupon take place twice per quarter,
with the total amount of each issue being BGN 70 million.
Given the investors’ increased interest in longer-term instruments and with a view to
extending the yield curve, since the beginning of this year the MoF has offered 2 extra issues, apart
from those planned in the calendar, of a reopened type and with a fixed coupon, maturing in 7 ¼
years and in 10 years respectively.
Results of the auctions held till the end of April
Short-term discount issues of government securities
The bid-to-cover ratio for the 3-month issues throughout the period was more than 2:1 and
tends to rise. The average annual yield on these issues, which forms the basic interest rate,
gradually fell down from 4.78% to 3.92%.
The offered 12-month issue sold at an average annual yield of 4.97% and bid-to-cover ratio
of 2.02:1. For comparison, the yield on the last 12-month issue sold in 2001 was 5.11% and the bid-
to-cover ratio was 1.52:1.
Medium-term reopened issues of government securities with fixed coupon
Government securities market participants showed considerable interest to the 3-year
reopened government securities issue, and the coverage ratio at its opening was 2.91:1, and the
average annual yield achieved - 5.90%. (The MoF calendar envisages two more reopenings of this
issue in the following months).
The auctions for sale of the 5-year reopened government securities issue also feature high
bid-to-cover ratio - 2.60:1 on the average, against 1.44:1 for the latest issue of 5-year government
securities placed in the preceding year. The average annual yield on the payment day is respectively
6.63% for the 2002 issue, and 7.94% for the 2001 issue.
Long-term reopened issues of government securities with fixed coupon
Auctions for 3 long-term reopened government securities issues with maturities 7 years, 7 ¼
years and 10 years, were conducted in this period (only the first of them is closed). There was
enormous investors' interest to each of these issues, and the highest bid-to-cover ratio - 4.81:1 - was
reached at the opening of the 10-year issue of government securities. No particular relation between
the sequence number of a reopening and the coverage ratio of an issue is discerned, while the
average annual yield at the payment date of the issue decreases with each subsequent reopening.
In 2001, the secondary market of public debt instruments developed in the conditions of a
continuing process of restriction by the Ministry of Finance of the short-term issues, and orientation
to reopened issues of longer maturities. Consequently, the market was active, with a certain
prevalence of demand over supply. Market intensity was also related to the fact that the government
securities, in addition to being a profitable investment, were becoming more and more an instrument
used by commercial banks to meet their current needs of additional liquidity.
In the year, the secondary market registered 8599 transactions with a nominal value of BGN 8097.7
million. The biggest share in these is held by the transactions in medium-term (1 - 5-year)
government securities - BGN 5446.8 million, or 67.3%, followed by transactions in long-term
government securities (maturity over 5 years) - BGN 1830.9 million, or 22.6% and short-term
government securities (maturity up to 1 year) - BGN 820.0 million, or 10.1%.
The trade volumes were unevenly distributed throughout the year, trade being more intensive in the
days of acquisition of government securities of new issues and in the periods of adjustment of the
minimum reserve requirements of commercial banks held with the BNB. Prevailing in the year were
transactions collateralized by securities - 61.4%, followed by the transactions on account of
government securities primary dealers' clients - 27.4% and outright trades in the inter-bank market -
11.2%. The yield on repos followed the movements of the base interest rate. The same trend was
also maintained in early 2002.
The structure of government securities holders throughout the year remained relatively stable with
insignificant fluctuation in individual months. In the case of government securities issued for budget
deficit financing purposes, the biggest market segment is held by private banks - 49.4%, followed
by state-owned banks - 29.7%, and local non-bank financial institutions, companies and households
- 20.9%. In the case of government securities issued for structural reform purposes, the biggest share
is held by private banks - 41.4%, followed by local NBFIs, companies and households - 31.2%,
state-owned banks - 14.9%, and foreign investors - 12.5%.
The portfolio in government securities of NBIFs, companies and households in 2001 and early 2002
remains relatively stable. In structural terms, government securities issued for budget deficit
financing feature a 22.5% growth in the period January 2001 - March 2002, while the government
securities issued for the structural reform have decreases by 18.6% in the same period.
In 2001, the amount of government securities in foreign investors' portfolios significantly decreased
on the whole from BGN 196.7 million at the beginning of the year to BGN 97.1 million at year-end,
that is by 50.6%. In the first half of the year, these investments remained at a relatively high level,
with a stable downward trend after September, which was preserved also in the beginning of 2002.
One of the reasons accounting for the reduced foreign investments in domestic debt instruments are
the Euro-denominated securities issued by the Bulgarian government in the international financial
Debt Restructuring Operations
The Restructuring of the Foreign Exchange Component of Domestic Debt
In June 2001, the third subscription for the replacement of USD-denominated 25-year
government bonds maturing 1-st January 2019 by Euro-denominated 20-year government bonds of
the same status and maturity date was conducted. Twelve primary dealers participated in the
subscription, 10 of which bid on behalf and for the account of their clients. MoF approved all bids
made by the primary dealers for participation in the subscription, and on 1 July 2001, the BNB
wrote off from the registers it maintains USD 31,9 million of face value of the USD-denominated
issue, and registered EUR 37.5 million of the Euro-denominated issue.
In February 2002, another subscription was conducted for the replacement of USD-
denominated long-term government bonds by Euro-denominated long-term government bonds, with
a value date 1 March 2002. Similarly to the previous subscription, 12 primary dealers of
government securities participated in the subscription (9 of which bid on behalf and for the account
of their clients), but the total amount of bids was by USD 10.1 million bigger. Following the MoF
approval of all bids, the BNB wrote off from its register government securities of USD 42.0
aggregate nominal value, and registered government securities of EUR 48.2 million aggregate
Brady Exchange Operations
In April the following exchange operation of Brady bonds with floating exchange rate and
maturities by 2024 was conducted:
- Replacement of Brady bonds by new Euro-denominated Global bonds;
- Replacement of Brady bonds by new USD-denominated Global bonds;
- Replacement of Brady bonds against cash;
- Acceptance of new bids for the issue of Euro-denominated Global bonds against
Results of the Exchange
Reduction of the Brady bond debt by USD 1 326.3 million;
Issue of EUR 835.5 million Euro-denominated 11-year Global bonds with a 7.50%
annual interest coupon and interest payments maturing on January 15, sold at a price of
Issue of USD-denominated 13-year Global bonds with a 8.25% annual interest coupon
and interest payments maturing on January 15 and July 15, sold at a price of 93.681%;
Immediate savings - net reduction of debt to external creditors by USD 80 million, and
elimination of additional interest costs in case of GDP growth;
Overall savings from debt servicing payments - of USD 414 million in the next 5 years,
and USD 652 million in the next 9 years;
Long-term savings - the reduced refinancing risk will result in lower risk premiums in
the future, reduction of debt servicing costs and longer-term refinancing of bought back
debt, improved credit rating of the country and subsequent reduction of debt servicing
Additional Benefits of the Deal:
Strategic management of debt profile - releasing of the blocked collateral of USD 197
million; increased debt duration - +2.6 years/3.1 years; extending the yield curve for
Euro-denominated refinancing; expanding investor base.
Improved international image of Bulgaria - decreased dependence on official creditors
and a confirmation for the government's expert debt management.
Facilitating direct foreign investments and privatisation - decrease in the risk premium
calculated in the evaluation of privatisation deals by foreign investors, and increased
privatisation proceeds as a result of the reduced risk premium for Bulgaria.