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Secondary Market Bond Trading

Government Bonds, Electronic System for Secondary Market Trading.

Trading System Operation

The Trinidad and Tobago Stock Exchange (TTSE) introduced an electronic system for secondary market bond trading from November 2007. This system allows Exchange Members to enter their orders, and those of their clients, directly from their desks to the TTSE. These buy or sell orders are automatically matched and trades completed at the TTSE.

The trading system at the TTSE is linked to an electronic depository at the Central Bank. Once a trade is completed at the TTSE, an instruction is sent to the depository which records the changes in ownership on settlement date at the same time with the transfer of funds from the buying Exchange Member to the selling Exchange Member. To accommodate the latter, all Exchange Members must maintain trading accounts at the Central Bank.

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How to Buy or Sell a Bond on the Secondary Market

Holders of certificates for Government bonds must first deposit their certificates with the depository at the Central Bank in order to sell their bonds on the electronic platform. This means that these bonds must be de-materialized, that is, paper certificates would be replaced by the electronic database at the Central Bank and the bond certificate cancelled. Investors will receive regular statements from the depository on their holdings.

In order to trade a Government bond on the TTSE, the bond must be recorded at the electronic depository at the Central Bank. Bondholders wishing to sell their bonds must therefore ensure that these are registered in electronic form at the Central Bank. The arrangements for trading are as follows:

The investor goes to an Exchange Member and completes the client account documents and gives written instructions to the institution by way of a standard form.

Step 1 Investor's Guide to TTSE, Account Setup and Instructions

The Exchange Member then enters the order (the instruction to either buy or sell bonds) from its office into the electronic trading system at the TTSE. For a buy order, the Exchange Member will verify the source and amount of the client’s funds required for the transaction. For a sell order, the client’s holdings in that bond will be verified.

A trade takes place when independent buy and sell orders are matched on the TTSE. This means that a trade will occur when two independent parties have each entered corresponding buy and sell orders for the same bond.

Orders are first matched on the basis of price, i.e. where there is a buy and a sell order for the bond at the same price, the orders will be matched and a trade confirmed. If there are competing orders that can be matched at one particular price, the order which was entered earliest will be matched first, followed by other orders in time priority. If these competing orders were entered at the same time, the smaller order volume will be allocated first.
The quantity of a bond that will be the subject of a trade is frozen when a sell order is entered into the trading system of the Stock Exchange. When a bondholding is frozen it cannot be otherwise sold or oved from where it is located, until the order is either matched or cancelled.

On settlement date, the transaction is settled, that is, the payment is made, and the depository is updated simultaneously with the change in ownership. The Exchange Member completes the transaction with his customer.

Secondary Market Operating Rules

The minimum face value of a Government bond that can be traded on the Secondary Market will be determined by each bond’s Trust Deed (this value will range from $1,000.00 to $5,000.00).
Trading will initially take place on Tuesdays, Wednesdays, and Fridays (except public holidays) from 9:30 a.m. to 12:00 p.m.
Investors cannot transfer Government bonds on the Trinidad and Tobago Stock Exchange (TTSE) without payment, for instance as a gift.
Trades cannot be settled in securities, i.e. the exchange of another form of security as payment for a GORTT bond.

Trade Date VS Settlement Date

The trade date is the date on which a trade occurs, i.e. when a buy order and a sell order are automatically matched at the TTSE.

The Settlement date is the day when the actual payment of funds due from the trade and the transfer of ownership of the bond are done. For the time being, the settlement date will be two (2) working days after the trade date. This is referred to as settlement on ‘T+2’. On the settlement day a cash payment must be made by the buying Exchange Member to the selling Exchange Member for the accounts of their clients.

Price Quotations

Government bonds are quoted at a price per $100.00 face value. For instance, if an investor sells $5,000.00 face value of a GORTT bond at a price of 98.775, the cost of purchasing these bonds will be:

(98.775/100) x $5,000.00 = $4,938.75 [1]

This price does not include accrued interest on the bond and is called the clean price.

Government bonds pay interest periodically (usually on a semi-annual basis). For secondary market trades that occur during the period prior to or between interest payments, a buyer of a bond must pay the seller both the clean price as well as the accrued interest. The interest earned between the last coupon or interest payment date and the settlement date of a trade is called accrued interest. This is paid because the buyer will receive the full coupon due for the period from the last interest payment date to the next.

($5,000.00 x 8.00%) x 31/365 = $33.97 [2]

For instance, if $5,000.00 of the above Government bond, with a coupon rate of 8.00% and interest dates of June 30 and December 31, is traded on July 31, the accrued interest will be determined for the period July 1st to 31st, or thirty-one days. The accrued interest due is calculated as:

The accrued interest will be calculated by the Stock Exchange. The full payment or settlement value is referred to as the dirty price and is computed as follows:

[1] $4,938.75 + [2] $33.97 = $4,972.72

This settlement value will be included in contract notes issued by the selling and the buying Exchange Members to their clients. The contract notes will also confirm the trade date and the settlement date, and any other fees charged by the Stock Exchange or the Exchange Member for their services, and any taxes payable on the transaction.

Published Information

The last trade price, the highest unfilled bid (or buy order) price and lowest outstanding offer (or sell order) price for each bond will be published on the following day. The details of all the bonds listed for trading on the Stock Exchange can be obtained from Exchange members and the Central Bank.