## 1sycea2020002

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### Preface — Mission and participants
- TA mission on scoping the prospects for developing a secondary market for government securities in Seychelles visited Victoria during October 29–November 9, 2018.
- Mission team: Mr. László Búzás (short-term expert), Mr. Sybi Hida (AFS), Ms. Marjorie Pampusa (attachment) and Ms. Carina Selander (AFS).
- Mr. Hida only participated in the mission between November 7–9, 2018.
- Stakeholders met: Central Bank of Seychelles (CBS) divisions/units, Ministry of Finance Trade Investment and Economic Planning (MoFTIEP), Financial Services Authority (FSA), Seychelles Pension Fund, the Investment Board, the banking association, one insurance company (SACOS), a few securities brokers/dealers, the securities exchange (Trop‑X), and commercial banks.
- AFS donors listed: European Union, Switzerland, Germany, China, Mauritius, the United Kingdom, Netherlands, European Investment Bank and Australia.

### Executive summary — scope and context
- Objective: scope prospects of developing a secondary market for government securities in Seychelles; CBS acted as the primary counterpart.
- Mission outreach: MoFTIEP, commercial banks, pension fund, insurance companies, securities exchange, securities dealers, etc.
- Coordination recommended with the World Bank (WB) (assisting on legal and payment system areas) and the IMF country (SYC) team (providing policy advice under the current PCI program).

### Key findings — constraints to market development
- Developing a viable government securities market will take considerable time and coordinated efforts.
- Supporting markets are weak or inactive:
  - Money, FX and equity markets are "barely active."
  - Interbank market activity is hampered by an uncooperative market environment and basic infrastructure.
- Investor base is thin; infrastructure is underdeveloped; legal framework requires upgrading.
- Structural excess liquidity in the banking system hampers domestic money market development.
- Government practice of issuing T-bills for Fiscal Purposes (FP) driven by weekly cash-flow needs is not supportive of market development.
- Transition in monetary policy framework: CBS has started transition from reserve money targeting to an interest rate targeting framework; implementation of policy rate expected by end of 2018.

### Recommendations — primary market, monetary policy, and instruments
- Primary market reforms to spur secondary market development:
  - Limit access to the primary market to a selected group of market participants undertaking market making.
  - Reduce auction frequency.
  - Issue more long-term securities to smooth the maturity profile of domestic debt.
  - Replace current T-bill practice for FP (purely cash-flow driven) with a more strategic approach.
- Monetary policy related measures:
  - Strengthen the interest rate channel and develop a benchmark yield curve as interest rate targeting progresses.
  - Introduce CBS bills as a complementary instrument to absorb liquidity when Government issuance of T-bills for monetary purposes decreases; clarify distinction between monetary policy and fiscal objectives regarding T-bill issuance.
  - Manage liquidity so interbank rates are tightly linked to the policy rate to be implemented by end of 2018.
  - Possibly introduce Reverse CBS repos and/or CBS bills; develop a repo window and horizontal repos later.
- Market infrastructure and operational measures:
  - Investigate listing government securities on the securities exchange given the lack of a proper CSD; address technical procedures, registration, CSD, clearing, settlement.
  - Implement automated payment system to spur interbank activity and improve interest rate assessment.
  - Develop temporary collateralized framework for interbank market, to be later replaced by GMRA-based horizontal repos.
  - Develop market code of conduct (jointly with SBA) and review counterpart agreements to strengthen obligations.
  - Open a buy-back facility (window) for households and address technical obstacles (immobilized Global Note, registration, redemption pricing).
  - Limit auctions to banks only and oblige banks to facilitate customer orders.

### Roadmap highlights and sequencing (selected items)
- 2019 — Legal, debt management, money/FX market, infrastructure, expected IMF TA needs:
  - Legal: Review and revise Financial Institutions Act and Securities Act (with WB); Bankruptcy and Insolvency Act; Draft/customize a GMRA for Seychelles.
  - Debt management: Review strategy (annual borrowing plan), issue some longer-term Bonds, implement issuance calendar (reduce auction frequency), improve government cash-flow management, increase transparency, develop long-term investor base strategy, open buy-back facility, investigate listing on securities exchange.
  - Money and FX market: Implement new MP framework; possibly introduce Reverse CBS repos and/or CBS bills; limit auctions to banks; develop temporary collateralized framework; develop market code of conduct; continue FPAS developments.
  - Infrastructure (WB): Move forward with Automated payment system project and CBS “Financial Sector Development Implementation Plan”; decide on CSD responsibility; strengthen supervisory/regulatory authority.
  - Expected IMF TA needs: off-site review and draft of GMRA and B&L Act; on-site debt management missions; continuous off-site advice for buy-back and listing preparations; combined Money and FX market development mission; continued FPAS TA; market-focused workshop and capacity building.
- 2020 — Legal approvals, listing, repo framework, investor base, expected IMF TA needs:
  - Legal: Approval of Acts in AG, Cabinet, and Assembly; review and revise FX legislation/regulation to introduce hedging instruments (swaps and forwards).
  - Debt management & market operations: List Government securities on stock-exchange; implement technical/infrastructural features for listing (settlement, clearing, registration, CSD function (AfriClear role?), etc.); investigate criteria for market makers; promote securities and expand investor base; implement GMRA, CBS repo window and Horizontal Repos.
  - Expected IMF TA needs: off-site review of legal amendments; TA for implementation of infrastructural features; review/evaluation of new MP framework; continued FPAS developments; SBA-assisted training/capacity building.
- 2021 — OTC trade and FX derivatives:
  - Implement OTC trade of government securities by end year.
  - Implement Swaps and Forwards on the FX market by end year.
  - Expected IMF TA needs: CBS TA on Swaps and Forwards for market and CBS use; continue Automated payment system project (procurement and implementation of soft- and hardware for trading, settlement, clearing, info/quoting platforms).
- 2022 — Full infrastructure and market development:
  - Legal update completed.
  - Full scale CSD function implemented along with clearing house and RTGS.
  - Secondary market started and to develop over time; new instruments (Forwards, Options, etc.), active FX and Money markets, all technical infrastructure and capacity in place.
  - Examine feasibility of connecting the local CSD to international CSDs.

### Background and Financial Sector Development Implementation Plan (FSDIP)
- FSDIP created by a team of international experts in 2014 with main objective: "to create the necessary preconditions for a sustainable market to develop."
- Expected creation of basic infrastructure (legal environment, CSD, credit systems, etc.) by 2015–17; most developments now expected to be operational by 2020–21.
- Seychelles Banking Association (SBA) recommended roles:
  - establish a market developed and agreed code of conduct for the money and FX markets to promote interbank trading;
  - contribute towards capacity-building among the banks, including in the area of treasury management to stimulate the interbank market.
- Seychelles Securities Exchange: recommended for trading government securities to activate the secondary market and provide opportunity for early cash-in; potential to invigorate equity market if privatized shares are listed.

### Financial education and inclusion
- National Financial Education Plan developed to strengthen and modernize the financial sector.
- Seychelles has the highest level of financial inclusion in the Southern African Development Community (SADC) but still faces challenges.
- Financial education plan aims to improve financial capability of the population to support development of a secondary market.

### Monetary policy modernization
- Modernization includes introduction of a policy rate to provide stronger guidance on interest rate formation and support money market functioning and secondary market development.
- CBS monetary policy framework transitioning from reserve money targeting to interest rate targeting.
  - Under Seychelles’ program with the IMF, the CBS has, as of Q4, 2018 shifted from the money target and moved into a framework with a Monetary Policy Consultation Cause (MPCC) with an inflation forecast at its core.
  - Inflation forecast defined as a moving average of annual inflation with a +/- 2 percentage point fluctuation band.
- Policy rate: CBS has not yet determined the definition but leans towards implementing it as a ceiling for the standard 7-day Deposit Auction Arrangement (DAA).
  - Announcing a maximum bid rate for key liquidity-absorbing operations should help anchor bids.

### Liquidity management and the money market
- Minimum Reserve Requirement (MRR) system allows reserve averaging; maintenance period set to 4 weeks starting mid-month, on a Wednesday ending on a Tuesday to avoid end-month and end-week liquidity shocks.
- CBS interventions to absorb excess liquidity primarily through Deposit DAA.
  - By start of 2019, CBS will reduce the “standard” 7-day DAA from three to two times a week on Wednesdays and Fridays.
  - The “non-standard” DAA has been abolished.
  - Intention to move to a one-week DAA auction.
- Standing facilities:
  - open without limits;
  - rates attached form a 600 basis point wide interest rate corridor;
  - both facilities accessible through the online portal.
- CBS intends to introduce reverse repos using T-bills on its balance sheet as underlying collateral.
  - CBS holds about 1,2 billion of T-bills in SCR.
  - Reverse repos could mop up a large chunk of excess liquidity and be tradable instruments to stimulate collateralized interbank market trade.
- Use of T-bills by CBS to absorb liquidity may send mixed signals about monetary policy intentions; contributes to differences in interest rates for same-maturity T-bills between Tuesday and Friday auctions.
- CBS omnipresence (multiple liquidity-absorbing operations per week) reduces banks' incentive to develop interbank market.
- Market uncooperativeness: instances of both Standing Credit and Deposit Facilities (SCF/SDF) being accessed when banks fail to agree on overnight rate despite 600 basis point corridor; few credit lines between banks and often one-way.
- Lack of dealing capacity at banks: generally no dedicated Treasury desks; Interbank Working Group created comprising CBS and bank representatives to address constraints.

### Debt management — size, composition, and governance
- Total government and government guaranteed debt as of end-September 2018: SCR 13,052.44 million, representing about 60 percent of GDP.
- Historical: public debt hit 150 percent of GDP in 2008; decreasing path since 2010 after restructuring.
- Debt Management Strategy (DMS) for 2019–21 forecasts reaching 50 percent Debt/GDP by 2020.
- Composition as of end-September 2018:
  - Direct domestic debt: SCR 7,599.36 million (or 53 percent);
  - Domestic guaranteed debt: 5 percent;
  - External debt: 42 percent of the debt stock.
- Domestic debt instrument composition (including guarantees):
  - securities: 82.8 percent;
  - loans: 15.3 percent;
  - other liabilities: 1.9 percent.
- Debt Management Division of MoFTIEP:
  - primary responsibility for government and government guaranteed debt and monitoring nonguaranteed public enterprise debt;
  - staff: 3 members; recommended to increase resources.
- Public Debt Management Act of 2008 (amended 2009 and 2012) regulates public debt management.
- Annual Borrowing Plan (ABP) included in DMS and submitted to Parliament with Annual Budget.
  - 2019 DMS contains detailed plan for external debt but vague on domestic issuance schedule.
  - Recommendation: provide a more detailed borrowing plan with auction days, aggregated amounts for different T-bill maturities, and planned issuance of longer-term securities; supplement ABP with quarterly issuance plans.
- MoFTIEP aims to lengthen maturity profile to reduce roll-over risk; ATM of domestic debt is short (see Primary Market).

### Primary market — issuance practices and features
- MoFTIEP issues discount T-bills with tenors of 91, 182 and 365 days at regular auctions conducted by CBS weekly on Tuesdays and Fridays.
  - Tuesday auctions conducted for monetary policy purposes (to mop up excess liquidity).
  - Friday auctions follow fiscal policy/cash management objectives of MoFTIEP.
- No regular issuance of longer-term domestic securities; occasional issues of 3, 5 and 7-year bonds in 2014 and 2017.
- Bonds represent about 10 percent of domestic government securities outstanding.
  - Average Term to Maturity (ATM) of domestic debt: 2.3 years (vs. 6.1 years of external debt).
  - Share of domestic debt maturing in 1 year: 72 percent — exposing government to significant roll-over risk.
- New bonds planned for 2019 to lengthen maturity profile; likely require higher coupon.
- Market distinguishes T-bills by auction purpose despite identical characteristics:
  - Tuesday (MP) investor base tilted toward financial institutions; average rates and tendered amount tend to be lower.
  - Friday (FP) auctions see higher tendered amounts and higher accepted yields.
- Government account balance at CBS is not remunerated; recommendation for MoFTIEP to accept more bids when tendered amounts are high to create cash buffers and reduce exposure to changes in market demand.
- Auction participation open to all investor types; process is not electronic—bids via Tender Box at CBS or secured e-mail.

### Investor base — holdings and behavior
- Commercial banks:
  - hold 54 percent of outstanding T-bills and 50 percent of T-bonds;
  - out of 9 banks in Seychelles, only 5 have government securities positions;
  - all securities are marked Held-to-Maturity (HTM) and not available for sale or trading.
- CBS holds 23 percent of outstanding T-bills in its portfolio under a Memorandum of Understanding with MoFTIEP dating back to 2010.
  - Purposes: (a) temporary/permanent adjustments in liquidity by collateralized transactions or selling T-bills for sterilization; (b) earn income to ensure independence and enhance CBS standing—latter purpose has become more predominant as liquidity situation erodes CBS balance sheet.
- Non-bank financial institutions hold 8 percent of outstanding T-bills and 22 percent of T-bonds.
- Others (mainly retail investors and some non-financial corporates) account for 15 percent of outstanding T-bills and 28 percent of T-bonds.
- Investment funds incorporated in Seychelles currently not active in domestic market due to lack of investable assets.
- Foreign investors: currently not present in domestic market in official statistics (anecdotal evidence suggests possible indirect participation via resident intermediaries but no statistical confirmation).

### Legislation and regulation — key features and constraints
- Financial Institutions Act (2004) enables banks to buy/sell debt securities for own account or customers, engage in safekeeping and administration, and provide portfolio management/advisory services.
  - Transactions with or guaranteed by government are exempt from large credit limits.
- Securities Act (2007) limits dealing in securities to licensed dealers; financial institutions licensed under the Financial Institutions Act are exempt from licensing requirements for dealing by way of offering for underwriting, subscription or inviting to purchase securities on the first sale thereof.
- Government securities are explicitly excluded from the definition of securities under the Securities Act.
  - Consequence: unclear if they can be introduced (listed) on the Seychelles Securities Exchange.
  - If listed, the Act would make trading outside the Exchange impossible: "no dealing in a security listed in Seychelles shall take place in Seychelles except on the Seychelles Securities Exchange on which it is listed..."
- Short selling:
  - Short selling is not prohibited by the Act, but naked short selling is prohibited.
  - Covered short selling permitted based on statutory definition of ownership; violation is an offence subject to fines and/or imprisonment.
- Taxation and non-resident access:
  - Since removal of capital controls in 2008 non-residents may have unlimited access to securities issued in Seychelles.
  - Withholding tax on interest income on T-Bills: 5 percent for non-residents that are non-financial institutions; zero rate if they are financial institutions.
  - Residents: zero rate on interest earnings on T-bills.
  - No capital gains tax in Seychelles.
- Accounting standards:
  - Financial institutions currently apply IAS39 rules, changing to IFRS9 in 2019.
  - Government securities purchased by banks are marked as HTM and kept in the banking (investment) portfolio.
  - Banks do not hold a trading book and there are no securities Available for Sale (AFS), impeding secondary market sale and trading.
- Public Debt Management Act (PDM) 2008:
  - Minister of Finance has exclusive right to raise domestic debt.
  - Issuance rules include: auctioning "to the best possible extent" through market-based procedures; may be traded/ transferred consistent with regulations; shall be held in book entry system maintained by the Central Bank or auction agent.
  - Minister may raise debt for exclusive use of monetary policy of the Central Bank; regulated by MoU concluded in 2012.

### Market infrastructure and operational constraints
- Missing infrastructure required for functioning markets:
  - Nation-wide payment system (RTGS).
  - Interface between securities settlement and RTGS.
  - Central Securities Depository (CSD) and dematerialization of securities.
  - Electronic auction platform for Debt Management Office or Central Bank.
  - Trading platforms and connectivity to Stock Exchange/Securities Exchange.
- Consequences of missing infrastructure:
  - Lack of RTGS is a major impediment to interbank trading and intraday position certainty.
  - Absence of a CSD: settlement of primary and secondary market transactions occurs in CBS registry; securities immobilized (represented by a global note) not dematerialized, complicating secondary trading and early redemption.
  - Repo market impediments: no GMRA; immobilization of securities series; need to review Bankruptcy and Insolvency Act (2013) and dematerialize securities to facilitate repos.
  - Clearing, custody, and custodian services lacking domestically; International Business Companies open accounts in Mauritius due to lack of local custodian capacity.
- Current partial infrastructure:
  - Seychelles Securities Exchange and limited-operation clearing/depository institutions (AfriClear and AfriDep) exist; other systems absent.
  - OTC transactions often cannot be completed and settled efficiently (example: overnight repo concluded by phone cannot be settled in timely manner).

### Policy recommendations — "The Way Forward" (selected)
- Monetary policy operations and money market:
  - Reduce number of short-term liquidity management operations (already initiated).
  - CBS retain flexibility to adjust final allotment amount based on latest liquidity information; announce intended allotment amount as indicative.
  - Support secured interbank credit lines and a web of secured credit lines to support collateralized interbank market until horizontal repos introduced.
  - Replace some Government T-bills used for MP by central bank bills with tenors up to two months; note legal/financial implications regarding CBS capital requirement ("CBS bills are considered monetary liabilities, and the CBS’ capital is appropriately required by law to be maintained above 10 percent of monetary liabilities.").
- Primary market, debt management, investor base:
  - Temporary buy-back window for households needing early redemption until secondary market is established.
  - List securities on the securities exchange to improve accessibility for foreign investment and trading in absence of OTC infrastructure.
  - Replace some T-bills with longer term bonds to smooth domestic debt profile, reduce roll-over risk, and support secondary market development.
  - Publish an auction calendar with annual, quarterly, and monthly estimates of government financing requirements; improve cash-flow forecasts.
  - Consider fees for CBS services and remunerating the government account to incentivize optimal behavior.
  - Promote collective investment schemes domestically and abroad; incentivize savings in voluntary private pension funds (e.g., tax benefits); offer easier access for non-residents combined with necessary technical infrastructure.
- Legal and infrastructural reforms, CSD and market-making:
  - Options for CSD: in-house CSD at CBS versus Trop‑X; pros and cons listed (capacity, connectivity, regulatory assignment to FSA).
  - Listing preconditions: Amend Securities Act regarding definition of government securities and trading OTC; dematerialize and separate from the global note.
  - Repo facilitation: CBS drafting a general agreement to facilitate repos/reverse repos as interim solution; likely requires changes in Bankruptcy and Insolvency Act.
  - Counterparty agreements with usage obligations and fees across degrees of usage of automated payment system; could include obligations to support market development and public financial education.
  - Market maker system pros/cons outlined; interim measure: restrict primary auction access to a distinguished circle of financial institutions with retail and non-bank participants submitting orders through banks.
- Expected TA needs: debt and cash management, buy-back window implementation, listing of securities, primary and secondary market operations, building a market maker/primary dealer system, investor base development, legal assistance for repos, payment system implementation support.

### Case studies and comparative findings
- Mauritius case study (selected findings):
  - Weekly Treasury Bill auctions introduced in 1992; Government Notes and Bonds issuance per issuance calendar defined at fiscal year start.
  - Significant increase in medium to long-term securities from 2004; primary dealer system implemented in 2002.
  - Technical infrastructure improvements: dematerialization, electronic clearing/settlement, online auctioning and secondary market trading platform (2017).
  - Public debt management improvements: creation of a Public Debt Management Unit.
- Box 2 — Hungary (selected findings and policy implications):
  - Gradual market development from 1990s, introduction of primary dealer system, benchmark bonds, dematerialization, electronic trading and auctioning, published borrowing plans and transparency measures.
  - Policy options and risks discussed for auction frequency, MP vs FP issuance, access restrictions, ATM lengthening, auction calendar, legal changes (Securities Act, Bankruptcy and Insolvency Act), repo arrangements, trading infrastructure, and incentives for collective investment schemes.

### Risks, implementation issues, and market behavior observations
- Higher cost risks:
  - Higher cost for either CBS or government and possible government debt increase if certain instruments replace T-bills.
  - Government minimal financing need could lead extra liquidity into CBS instruments, hampering government securities market development.
- Market sentiment and structural issues:
  - "No trust- no trade; No credit lines; Weak BA."
  - No interbank FX market and asymmetric FX liquidity distribution leading to no price discovery or reference rate.
  - Very frequent OMOs and non-tradeable main instrument reduce banks' incentive to trade among themselves.
  - Lack of dealing capacity at banks (no Treasury desks, no Reuters/Bloomberg) and settlement/timeliness issues.
- Appendix V — Analysis of bank liquidity management:
  - Re-introduction of an interest rate corridor in July 2017 implied a positive rate on the deposit facility.
  - Despite incentives, banks underbid for DAAs; presence of CBS on market reduces banks' planning incentives.
  - Instances where average tender rate from a bank was lower than average accepted rate for same bank; accepted amounts lower than tendered by rejection of competitive bids.
- Market instruments and rate observations listed: 91-day TB, 182-day TB, 365-day TB, 7-day DAA; timeline reference points Jan-15 through Oct-18.

*IMF Monetary and Capital Markets Department (MCM) and AFRITAC South (AFS) TA mission, October 29–November 9, 2018.*

### Preface ................................................................................................................

### Preface

### Mission and participants
- TA mission on scoping the prospects for developing a secondary market for government securities in Seychelles visited Victoria during October 29–November 9, 2018.
- Mission team: Mr. László Búzás (short-term expert), Mr. Sybi Hida (AFS), Ms. Marjorie Pampusa (attachment) and Ms. Carina Selander (AFS).
- Mr. Hida only participated in the mission between November 7–9, 2018.
- Stakeholders met: Central Bank of Seychelles (CBS) divisions/units, Ministry of Finance Trade Investment and Economic Planning (MoFTIEP), Financial Services Authority (FSA), Seychelles Pension Fund, the Investment Board, the banking association, one insurance company (SACOS), a few securities brokers/dealers, the securities exchange (Trop‑X), and commercial banks.
- AFS donors listed: European Union, Switzerland, Germany, China, Mauritius, the United Kingdom, Netherlands, European Investment Bank and Australia.

### Executive summary — scope and context
- Objective: scope prospects of developing a secondary market for government securities in Seychelles; CBS acted as the primary counterpart.
- The mission reached out broadly: MoFTIEP, commercial banks, pension fund, insurance companies, securities exchange, securities dealers, etc.
- Coordination recommended with the World Bank (WB) (assisting on legal and payment system areas) and the IMF country (SYC) team (providing policy advice under the current PCI program).

### Key findings — constraints to market development
- Developing a viable government securities market will take considerable time and coordinated efforts.
- Supporting markets are weak or inactive:
  - Money, FX and equity markets are "barely active."
  - Interbank market activity is hampered by an uncooperative market environment and basic infrastructure.
- Investor base is thin; infrastructure is underdeveloped; legal framework requires upgrading.
- Structural excess liquidity in the banking system hampers domestic money market development.
- Government practice of issuing T-bills for Fiscal Purposes (FP) driven by weekly cash-flow needs is not supportive of market development.
- Transition in monetary policy framework: CBS has started transition from reserve money targeting to an interest rate targeting framework; implementation of policy rate expected by end of 2018.

### Recommendations — primary market, monetary policy, and instruments
- Authorities should prioritize reforming the primary market to spur secondary market development:
  - Limit access to the primary market to a selected group of market participants undertaking market making.
  - Reduce auction frequency.
  - Issue more long-term securities to smooth the maturity profile of domestic debt.
  - Replace current T-bill practice for FP (purely cash-flow driven) with a more strategic approach.
- Monetary policy related measures:
  - As transition to interest rate targeting progresses, strengthen the interest rate channel and develop a benchmark yield curve.
  - Introduce CBS bills as a complementary instrument to absorb liquidity when Government issuance of T-bills for monetary purposes decreases; clarify distinction between monetary policy and fiscal objectives regarding T-bill issuance.
  - Manage liquidity so interbank rates are tightly linked to the policy rate to be implemented by end of 2018.
  - Possibly introduce Reverse CBS repos and/or CBS bills; develop a repo window and horizontal repos later.
- Market infrastructure and operational measures:
  - Investigate listing government securities on the securities exchange given the lack of a proper CSD; address technical procedures, registration, CSD, clearing, settlement.
  - Implement automated payment system to spur interbank activity and improve interest rate assessment.
  - Develop temporary collateralized framework for interbank market, to be later replaced by GMRA-based horizontal repos.
  - Develop market code of conduct (jointly with SBA) and review counterpart agreements to strengthen obligations.
  - Open a buy-back facility (window) for households and address technical obstacles (immobilized Global Note, registration, redemption pricing).
  - Limit auctions to banks only and oblige banks to facilitate customer orders.

### Roadmap highlights and sequencing (selected items from Table 1)
- 2019
  - Legal: Review and revise Financial Institutions Act and Securities Act (with WB); Bankruptcy and Insolvency Act; Draft/customize a GMRA for Seychelles.
  - Debt management: Review strategy (annual borrowing plan), issue some longer-term Bonds, implement issuance calendar (reduce auction frequency), improve government cash-flow management, increase transparency, develop long-term investor base strategy, open buy-back facility, investigate listing on securities exchange.
  - Money and FX market: Implement new MP framework; possibly introduce Reverse CBS repos and/or CBS bills; limit auctions to banks; develop temporary collateralized framework; develop market code of conduct; continue FPAS developments.
  - Infrastructure (WB): Move forward with Automated payment system project and CBS “Financial Sector Development Implementation Plan”; decide on CSD responsibility; strengthen supervisory/regulatory authority.
  - Expected IMF TA needs: off-site review and draft of GMRA and B&L Act; on-site debt management missions; continuous off-site advice for buy-back and listing preparations; combined Money and FX market development mission; continued FPAS TA; market-focused workshop and capacity building (optionally jointly with WB).
- 2020
  - Legal: Approval of Acts in AG, Cabinet, and Assembly; review and revise FX legislation/regulation to introduce hedging instruments (swaps and forwards).
  - Debt management & market operations: List Government securities on stock-exchange; implement technical/infrastructural features for listing (settlement, clearing, registration, CSD function (AfriClear role?), etc.); investigate criteria for market makers; promote securities and expand investor base; implement GMRA, CBS repo window and Horizontal Repos.
  - Expected IMF TA needs: off-site review of legal amendments; TA for implementation of infrastructural features; review/evaluation of new MP framework; continued FPAS developments; SBA-assisted training/capacity building.
- 2021
  - Implement OTC trade of government securities by end year.
  - Implement Swaps and Forwards on the FX market by end year.
  - Expected IMF TA needs: CBS TA on Swaps and Forwards for market and CBS use; continue Automated payment system project (procurement and implementation of soft- and hardware for trading, settlement, clearing, info/quoting platforms).
- 2022
  - Legal update completed.
  - Full scale CSD function implemented along with clearing house and RTGS.
  - Secondary market started and to develop over time; new instruments (Forwards, Options, etc.), active FX and Money markets, all technical infrastructure and capacity in place.
  - Examine feasibility of connecting the local CSD to international CSDs.

### TA coordination and next steps
- The mission identified areas likely to need further TA and presented a recommended roadmap (Table 1).
- Emphasis on coordinating TA with other donors (e.g., WB) to avoid redundancies and conflicting recommendations.
- Follow-up TA to provide in-depth analysis and technical support will be subject to AFRITAC South prioritization and budget constraints.

*IMF Monetary and Capital Markets Department (MCM) and AFRITAC South (AFS) TA mission, October 29–November 9, 2018.*

### 7.      At the request of the Government to create the necessary preconditions for

### 1sycea2020002 - 7.      At the request of the Government to create the necessary preconditions for

### Background and Financial Sector Development Implementation Plan (FSDIP)
- FSDIP created by a team of international experts in 2014 with main objective: "to create the necessary preconditions for a sustainable market to develop."
- Expected creation of basic infrastructure (legal environment, CSD, credit systems, etc.) by 2015–17; most developments now expected to be operational by 2020–21.
- Seychelles Banking Association (SBA) role recommended:
  - establish a market developed and agreed code of conduct for the money and FX markets to agree on acceptable behavior between the banks and thus promote interbank trading;
  - contribute towards capacity-building among the banks, including in the area of treasury management to stimulate the interbank market.
- Seychelles Securities Exchange: recommended for trading government securities to activate the secondary market and provide opportunity for early cash-in; potential to invigorate equity market if privatized shares are listed.

### Financial Education and Inclusion
- National Financial Education Plan developed to strengthen and modernize the financial sector.
- Seychelles has the highest level of financial inclusion in the Southern African Development Community (SADC) but still faces challenges.
- Financial education plan aims to improve financial capability of the population to support development of a secondary market.

### Monetary Policy Modernization
- Modernization includes introduction of a policy rate to provide stronger guidance on interest rate formation and support money market functioning and secondary market development.
- CBS monetary policy framework transitioning from reserve money targeting to interest rate targeting.
  - Under Seychelles’ program with the IMF, the CBS has, as of Q4, 2018 shifted from the money target and moved into a framework with a Monetary Policy Consultation Cause (MPCC) with an inflation forecast at its core.
  - Inflation forecast defined as a moving average of annual inflation with a +/- 2 percentage point fluctuation band.
- Policy rate: CBS has not yet determined the definition but leans towards implementing it as a ceiling for the standard 7-day Deposit Auction Arrangement (DAA).
  - Announcing a maximum bid rate for key liquidity-absorbing operations should help anchor bids.

### Liquidity Management and the Money Market
- Minimum Reserve Requirement (MRR) system allows reserve averaging; maintenance period set to 4 weeks starting mid-month, on a Wednesday ending on a Tuesday to avoid end-month and end-week liquidity shocks.
- CBS interventions to absorb excess liquidity primarily through Deposit DAA.
  - By start of 2019, CBS will reduce the “standard” 7-day DAA from three to two times a week on Wednesdays and Fridays.
  - The “non-standard” DAA has been abolished.
  - Intention to move to a one-week DAA auction.
- Standing facilities:
  - open without limits;
  - rates attached form a 600 basis point wide interest rate corridor;
  - both facilities accessible through the online portal.
- CBS intends to introduce reverse repos using T-bills on its balance sheet as underlying collateral.
  - CBS holds about 1,2 billion of T-bills in SCR.
  - Reverse repos could mop up a large chunk of excess liquidity and be tradable instruments to stimulate collateralized interbank market trade.
- Use of T-bills by CBS to absorb liquidity may send mixed signals about monetary policy intentions; contributes to differences in interest rates for same-maturity T-bills between Tuesday and Friday auctions.
- CBS omnipresence (multiple liquidity-absorbing operations per week) reduces banks' incentive to develop interbank market.
- Market uncooperativeness:
  - instances of both Standing Credit and Deposit Facilities (SCF/SDF) being accessed when banks fail to agree on overnight rate despite 600 basis point corridor;
  - few credit lines between banks and often one-way.
- Lack of dealing capacity at banks: generally no dedicated Treasury desks; Interbank Working Group created comprising CBS and bank representatives to address constraints.

### Debt Management
- Total government and government guaranteed debt as of end-September 2018: SCR 13,052.44 million, representing about 60 percent of GDP.
- Historical: public debt hit 150 percent of GDP in 2008; decreasing path since 2010 after restructuring.
- Debt Management Strategy (DMS) for 2019–21 forecasts reaching 50 percent Debt/GDP by 2020.
- Composition as of end-September 2018:
  - Direct domestic debt: SCR 7,599.36 million (or 53 percent);
  - Domestic guaranteed debt: 5 percent;
  - External debt: 42 percent of the debt stock.
- Domestic debt instrument composition (including guarantees):
  - securities: 82.8 percent;
  - loans: 15.3 percent;
  - other liabilities: 1.9 percent.
- Debt Management Division of MoFTIEP:
  - primary responsibility for government and government guaranteed debt and monitoring nonguaranteed public enterprise debt;
  - staff: 3 members; recommended to increase resources.
- Public Debt Management Act of 2008 (amended 2009 and 2012) regulates public debt management.
- Annual Borrowing Plan (ABP) included in DMS and submitted to Parliament with Annual Budget.
  - 2019 DMS contains detailed plan for external debt but vague on domestic issuance schedule.
  - Recommendation: provide a more detailed borrowing plan with auction days, aggregated amounts for different T-bill maturities, and planned issuance of longer-term securities; supplement ABP with quarterly issuance plans.
- MoFTIEP aims to lengthen maturity profile to reduce roll-over risk; ATM of domestic debt is short (see Primary Market).

### Primary Market
- MoFTIEP issues discount T-bills with tenors of 91, 182 and 365 days at regular auctions conducted by CBS weekly on Tuesdays and Fridays.
  - Tuesday auctions conducted for monetary policy purposes (to mop up excess liquidity).
  - Friday auctions follow fiscal policy/cash management objectives of MoFTIEP.
- No regular issuance of longer-term domestic securities; occasional issues of 3, 5 and 7-year bonds in 2014 and 2017.
- Government guaranteed 3-year bond by Development Bank of Seychelles in 2017.
- Bonds represent about 10 percent of domestic government securities outstanding.
  - Average Term to Maturity (ATM) of domestic debt: 2.3 years (vs. 6.1 years of external debt).
  - Share of domestic debt maturing in 1 year: 72 percent — exposing government to significant roll-over risk.
- New bonds planned for 2019 to lengthen maturity profile; likely require higher coupon.
- Market distinguishes T-bills by auction purpose despite identical characteristics:
  - Tuesday (MP) investor base tilted toward financial institutions; average rates and tendered amount tend to be lower.
  - Friday (FP) auctions see higher tendered amounts and higher accepted yields.
- Government account balance at CBS is not remunerated; recommendation for MoFTIEP to accept more bids when tendered amounts are high to create cash buffers and reduce exposure to changes in market demand.
- Auction participation open to all investor types; process is not electronic—bids via Tender Box at CBS or secured e-mail.

### Investor Base
- Commercial banks:
  - hold 54 percent of outstanding T-bills and 50 percent of T-bonds;
  - out of 9 banks in Seychelles, only 5 have government securities positions;
  - all securities are marked Held-to-Maturity (HTM) and not available for sale or trading.
- CBS holds 23 percent of outstanding T-bills in its portfolio under a Memorandum of Understanding with MoFTIEP dating back to 2010.
  - Purposes: (a) temporary/permanent adjustments in liquidity by collateralized transactions or selling T-bills for sterilization; (b) earn income to ensure independence and enhance CBS standing—latter purpose has become more predominant as liquidity situation erodes CBS balance sheet.
- Non-bank financial institutions hold 8 percent of outstanding T-bills and 22 percent of T-bonds.
- Others (mainly retail investors and some non-financial corporates) account for 15 percent of outstanding T-bills and 28 percent of T-bonds.
- Investment funds incorporated in Seychelles currently not active in domestic market due to lack of investable assets.
- Foreign investors: currently not present in domestic market in official statistics (anecdotal evidence suggests possible indirect participation via resident intermediaries but no statistical confirmation).

### Legislation and Regulation
- Financial Institutions Act (2004) enables banks to buy/sell debt securities for own account or customers, engage in safekeeping and administration, and provide portfolio management/advisory services.
  - Transactions with or guaranteed by government are exempt from large credit limits.
- Securities Act (2007) limits dealing in securities to licensed dealers; financial institutions licensed under the Financial Institutions Act are exempt from licensing requirements for dealing by way of offering for underwriting, subscription or inviting to purchase securities on the first sale thereof.
- Government securities are explicitly excluded from the definition of securities under the Securities Act (an instrument creating or acknowledging indebtedness "other than ... any instrument creating or acknowledging indebtedness in respect of money raised by the Government of Seychelles or any public authority created thereby").
  - As government securities do not fall under the Securities Act, it is unclear if they can be introduced (listed) on the Seychelles Securities Exchange.
  - If government securities were listed, the Act would make trading outside the Exchange impossible: "no dealing in a security listed in Seychelles shall take place in Seychelles except on the Seychelles Securities Exchange on which it is listed in accordance with this Act and any regulations or rules made hereunder."

*Source: 1sycea2020002 - 7.      At the request of the Government to create the necessary preconditions for*

### 40.      Short selling, per se, is not prohibited by the Act, but naked short selling is.

### 1sycea2020002 - 40.      Short selling, per se, is not prohibited by the Act, but naked short selling is.

### Short selling and ownership of securities
- Short selling is not prohibited by the Act; naked short selling is prohibited.
- Prohibition: "Except in accordance with regulations made by the Minister, on the recommendation of the Securities Authority, a person shall not sell any listed securities which that person or that person’s principal does not own either for that person’s own account or for the account of another person."
- Covered short selling permitted based on the statutory definition of ownership. A person is treated as owning securities only if that person (or his agent):
  - (a) is legally entitled to the securities;
  - (b) has purchased the securities, or has entered into an unconditional contract to purchase the securities, even if he does not yet have title to them;
  - (c) owns other securities convertible into or exchangeable for the securities and has tendered the other securities for conversion or exchange;
  - (d) has an option to acquire the securities and has exercised the option;
  - (e) has rights or warrants to subscribe to the securities and has exercised the rights or warrants, and that person or that person’s agent has received or will receive a fixed or currently ascertainable amount of the securities at a fixed or currently ascertainable price.
- Enforcement: "A person contravening this regulation commits an offence and may face fines and/or imprisonment."

### Licensing, taxation, and non-bank financial investors
- Licensing and operation of non-bank financial investors are regulated by:
  - the Seychelles Pension Fund Act (2005);
  - the Mutual Fund and Hedge Fund Act (2008);
  - the Insurance Act (2008);
  - supplemented by relevant guidelines.
- Non-resident access and taxation:
  - Since removal of capital controls in 2008 non-residents may have unlimited access to securities issued in Seychelles.
  - Foreign investors: "Government securities can be purchased by any individual and in the case of a body of persons they should be incorporated or registered under the laws of their country of domicile."
  - Withholding tax on interest income on T-Bills: 5 percent for non-residents that are non-financial institutions; zero rate if they are financial institutions.
  - Residents: zero rate on interest earnings on T-bills.
  - No capital gains tax in Seychelles.
  - A number of states have double taxation agreements with Seychelles (countries listed in the source).
- Accounting standards:
  - Financial institutions in Seychelles currently apply IAS39 rules, changing to IFRS9 in 2019.
  - Government securities purchased by banks are marked as HTM and kept in the banking (investment) portfolio.
  - Banks do not hold a trading book and there are no securities Available for Sale (AFS), impeding secondary market sale and trading.

### Public Debt Management Act (PDM) and government securities issuance
- Authority: under the PDM Act (2008) the Minister of Finance "has exclusive right to, for and on behalf of the Government, in the manner provided for in this Act, raise debt from within the Republic of such sums which in the opinion of the Minister are necessary to defray expenditures which may be lawfully defrayed".
- Definition: under the PDM Act securities are debt instruments issued under the authority of the Minister and include bonds and bills issued under section 9.
- Issuance rules for government securities:
  - (i) shall, to the best possible extent, be auctioned through market-based procedures;
  - (ii) may be traded or transferred in a manner consistent with regulations governing securities, trades, and transfer;
  - (iii) shall be held by investors in book entry system, the system of which shall be maintained by the Central Bank or by whoever conducts security auctions on behalf of the Government.
- Process described in the Operational Guidelines for the Issuance and Management of Government Securities (2018).
- Monetary policy issuance:
  - The Minister may raise debt by issuing bills and bonds for the exclusive use of monetary policy of the Central Bank; terms determined by the Ministry and the Central Bank and proceeds held in an account with the Central Bank.
  - Issuance for monetary policy purposes regulated by an MoU concluded between the Ministry of Finance and the Central Bank in 2012.
- CBS role:
  - CBS Act (2004) allows the Government to appoint the CBS as agent to undertake the issue and management of securities.
  - National Payment Systems Act (2014) authorizes the CBS: "the Central Bank may act as a central securities depository."

### Market infrastructure and operational constraints
- Key missing infrastructure required for functioning money, FX, and securities markets:
  - Nation-wide payment system (RTGS).
  - Interface between securities settlement and RTGS.
  - Central Securities Depository (CSD) and dematerialization of securities.
  - Electronic auction platform for Debt Management Office or Central Bank.
  - Trading platforms and connectivity to Stock Exchange/Securities Exchange.
- Consequences of missing infrastructure:
  - Lack of RTGS is a major impediment to interbank trading and intraday position certainty.
  - Absence of a CSD: settlement of primary and secondary market transactions occurs in CBS registry; securities are immobilized (represented by a global note) not dematerialized, complicating secondary trading and early redemption.
  - Repo market impediments: no Global Master Repo Agreement (GMRA); immobilization of securities series; need to review Seychelles Bankruptcy and Insolvency Act (2013) and dematerialize securities to facilitate repos.
  - Clearing, custody, and custodian services lacking domestically; International Business Companies open accounts in Mauritius due to lack of local custodian capacity.
- Current partial infrastructure:
  - Seychelles Securities Exchange and limited-operation clearing/depository institutions (AfriClear and AfriDep) exist; other systems absent.
  - OTC transactions often cannot be completed and settled efficiently (example: overnight repo concluded by phone cannot be settled in timely manner).

### Policy recommendations and "The Way Forward" — Monetary policy operations and money market
- CBS operational flexibility:
  - Reduce number of short-term liquidity management operations (already done).
  - CBS should retain flexibility to adjust final allotment amount based on latest liquidity information; announce intended allotment amount as indicative to adjust tender rates consistent with policy rate.
- Secured interbank credit lines:
  - CBS could support banks to set up secured interbank credit lines, with CBS providing written confirmation to lenders that borrower mobilized appropriate collateral.
  - A web of secured credit lines could support a collateralized interbank market until horizontal repos introduced.
- Central bank bills:
  - As T-bill issuance for monetary policy decreases, option to replace them with central bank bills with tenors up to two months.
  - Benefits: stronger incentives for secondary market development; clearer signal of monetary policy stance.
  - Legal/financial implication: "CBS bills are considered monetary liabilities, and the CBS’ capital is appropriately required by law to be maintained above 10 percent of monetary liabilities."
- Technical assistance (TA) needs:
  - Money and FX market development, continued FPAS TA, possible legal assistance for implementation of repos.
  - Assumption: World Bank continues support of the payment system project, including legal aspects and review of some acts.

### Policy recommendations — Primary market, debt management, and investor base
- Temporary buy-back window:
  - Treasury (via the CBS) could offer a buy-back window for households needing early redemption of T-bills and bonds until a secondary market is established.
- Listing and longer-term issuance:
  - Authorities could list securities on the securities exchange to improve accessibility for foreign investment and trading in absence of OTC infrastructure.
  - MoFTIEP should replace some T-bills with longer term bonds to smooth domestic debt profile, reduce roll-over risk, and support secondary market development.
  - The planned new issuance of bonds in 2019 is a starting point; "looking forward more bonds will be needed."
- Auction calendar and cash-flow forecasting:
  - MoFTIEP should publish an auction calendar with annual, quarterly, and monthly estimates of government financing requirements.
  - Calendar may be indicative initially but should become more accurate as deadlines approach; requires improved cash-flow forecasts.
- Fees and remuneration:
  - CBS and MoFTIEP should consider introducing fees for CBS services and remunerating the government account to incentivize optimal behavior, reduce frequency of auctions, and encourage opportunistic allotment flexibility.
- Widening investor base:
  - Promote collective investment schemes domestically and abroad.
  - Incentivize savings in voluntary private pension funds (e.g., tax benefits).
  - Offer easier access for non-residents combined with necessary technical infrastructure to ensure stable medium- and long-run demand for government securities.
- Expected TA needs:
  - Debt and cash management, implementation of a buy-back window, listing of securities, primary and secondary market operations, building a market maker/primary dealer system and investor base development.

### Legal and infrastructural reforms, CSD and market-making options
- CSD options:
  - New automated payment system intended to include a CSD function at the CBS; an in-house CSD has pros and cons.
  - Pros include possible capacity advantage, trusted authority, easier linkage to RTGS and ACH, and ease of accommodating OTC trading.
  - Cons include having 2 CSDs in the country leading to higher cost and connectivity issues, potential concentration of responsibilities and resource constraints, and the existing Securities Act assigning regulatory/licensing responsibilities for a CSD to the FSA.
- Listing preconditions:
  - To list government securities on the securities exchange requires:
    - Amendments to the Securities Act regarding definition of government securities and trading OTC; and
    - Dematerialization and separability from the global note.
- Repo facilitation and legal changes:
  - CBS drafting a general agreement to facilitate repos/reverse repos with financial institutions as interim solution; likely requires changes in the Bankruptcy and Insolvency Act to cater for default, otherwise CBS would bear all the risk.
- Counterparty agreements and market maker considerations:
  - CBS may implement counterparty agreements with institutions using the automated payment system stipulating terms, conditions, and annual fees across degrees of usage (eligible counterparty in money market operations; eligible counterparty for FX operations; use of payment system for transfers).
  - Such agreements could include obligations to support market development and public financial education.
  - Market maker system pros:
    - Would limit retail customer access to primary market and increase client trade for banks;
    - Should generate trade between banks;
    - Will come with obligations tied to auction purchases and secondary market trading;
    - Increased transparency (daily fixing/trade reporting), market information and marketing.
  - Market maker system cons:
    - May be viewed as favoring banks and be difficult to gain support for;
    - Limiting number of banks may not increase participation (only half participate in auctions);
    - Increased risk for collusion;
    - Difficult to implement ahead of new infrastructure project.
- Interim access restriction:
  - Pending decision on market maker system, restrict primary auction access to a distinguished circle of financial institutions; domestic and foreign corporates, non-bank financial institutions and retail investors could submit bids through these banks.
- Expected TA needs:
  - Primary and secondary market operations, building a market maker/primary dealer system and investor base development.

### Appendix I — Case study: Mauritius (selected findings)
- Weekly Treasury Bill auctions introduced in 1992; market informed two months in advance of range of Treasury Bills for tender.
- Government Notes and Bonds issuance per issuance calendar defined at fiscal year start; mix of short- and longer-term securities based on desired maturity profile.
- From 2004 significant increase in medium to long-term securities (3-5 year bonds) to lengthen maturity structure.
- Primary dealer system implemented in 2002 with four banks initially; by 2017 primary dealer system was reformed to four primary dealers with exclusive right to bid at primary auctions and more stringent obligations (underwrite entire auction, transfer at least 50 percent of primary market purchases to trading books, provide continuous two-way pricing, achieve success and turnover ratios), which increased secondary market trading and helped establish a yield curve.
- Technical infrastructure improvements:
  - Securities dematerialized; book-entry system in use.
  - All transactions cleared and settled electronically through Mauritius Automated Clearing and Settlement System.
  - 2017: Bank of Mauritius introduced online auctioning and a secondary market trading platform with continuous two-way pricing obligations and transaction reporting.
- Public debt management improvements: creation of a Public Debt Management Unit responsible for debt management strategy, risk management, debt recording and servicing, and debt reporting.

*Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1sycea2020002.pdf*

### Box 2. Case Study: Market Development in Hungary

### Box 2. Case Study: Market Development in Hungary

### Market evolution and instruments
- Sporadic issuance of government securities for retail customers via subscription started at the end of the 1980s; market remained small and illiquid as main source of budget financing were loans extended by the National Bank of Hungary (NBH).
- Starting 1991 with the new central bank Act, monetary financing was gradually phased out and by 1996 the government had no other alternative for financing but the development of the domestic government securities market.
- During the 1990s the legal and institutional frameworks were modernized, and technical reforms were implemented to create the basis and preconditions for market development.
- Regular government securities issuance started in the early 1990s with short term (1-month, 3-months, 6-months, 12-months) Treasury bills targeting both wholesale and retail customers.
- Auctions were conducted by the NBH where main investors were banks and non-bank financial institutions; the same securities were also available via subscription to retail investors immediately following the wholesale auction.
- Extension of maturity profile: issuance of 1.5- and 2-year bonds; first 5, 10, and 15-year fixed rate bonds were issued in 1995, 1999, and 2001 respectively.
- Introduction of the Primary dealer (PD) system: participation at the auction became a privilege of PDs, obliged to take customer orders and submit them at the auction.
- Benchmark bonds were introduced to decrease the number of outstanding securities series and assist PDs in market making; roll-over risk managed by regular buyback and exchange auctions.
- Retail securities available today include interest bearing bills, floating rate notes, inflation-linked, FX-denominated bonds and physical paper.
- Market infrastructure and transparency:
  - Government securities indices and benchmark fixings occur daily and are published on the website of ÁKK, Reuters, Bloomberg.
  - Best bid-offer prices for off-the-run securities published daily.
  - PDs obliged to quote fixed spread bid-offer prices for benchmark securities on the MTS platform.
  - OTC market based on request for quote via phone, Bloomberg and Reuters dealing systems.
  - ÁKK operates a standing repo facility for PDs via the Reuters dealing.
  - Annual borrowing plan published every December together with an auction calendar; quarterly plans published on a rolling basis.
  - All relevant information available on the website both in Hungarian and English in pdf and excel, with searchable archives.

### Primary market and debt management — findings, implications, options, risks/issues
- Frequency of Auctions (twice a week)
  - Implication: No need for a secondary market.
  - Options:
    1. Gradually reduce the number of auctions/issuances of T-bills for FP and MP purposes to once per month (i.e., MP and FP every other week).
  - Risks/Issues:
    1. Government may become short of liquidity during the month.
    2. Cost may increase.
    3. Increased difficulties in liquidity management by banks and the CBS, at least temporarily.
- No differentiation between MP and FP auctions; interest rates are quite different between auctions
  - Implications: CBS views MP issuance as part of policy tools and thus MP stance; both perceived equally inflationary by market and may push rates up; confusing for market participants and opportunity to arbitrage; hampers price discovery.
  - Options:
    1. Replace Government T-bills by CBS bills and limit participation to Banks—part of MP toolkit and clearer signal of MP stance.
    2. Keep status quo but make a clear difference about purpose and ensure rate setting procedures consistent.
  - Risks/Issues:
    1. May become costly for the CBS.
    2. Rates not reflective of market conditions as they should be (T-bills not a MP instrument).
- Primary market auctions open to all
  - Implication: No need for a secondary market.
  - Options:
    1. Limit access to primary market to financial institutions.
    2. Limit access to market makers.
  - Risks/Issues:
    1. Banks may still buy and hold to maturity as excess liquidity is large.
    2. May not make a difference since only a few banks participate.
    3. Both options increase risk for collusion.
    4. May be viewed as “unfair” and thus difficult to implement, limiting savings options for the public.
- No “blind” allotment
  - Implication: Risk for bias in allotment procedures and detrimental for credibility.
  - Option:
    1. Allotment must always be done “blindly”, committee must not be allowed to see the identity of the bidder.
- Thin investor base—auctions dominated by Banks (in particular a few)
  - Implication: Risk for collusion.
  - Option:
    1. List securities on Stock exchange to attract investors, both foreign and domestic.
  - Risk noted: Risk for collusion.
- Debt-target—decrease in T-bills for MP
  - Implication: More excess liquidity will have to be absorbed in the CBS DAAs; may cause (or increase) excess demand for T-bills, thus lessen trade incentives and push rates.
  - Options:
    1. Replace Government T-bills by CBS-bills and limit participation to Banks (1–2-month maturity) – part of MP toolkit and clearer signal of MP stance.
    2. Increase issuance of DAAs but not tradeable on a secondary market (nor anywhere else).
  - Risks/Issues:
    1. Too costly for the CBS?
    2. Stock of tradeable bills and bonds too low.
- Only bills, no bonds
  - Implications:
    - No longer instruments available for pension funds and insurance companies.
    - Trade often done with longer instruments—thus not inducive of secondary market trade.
    - Increase roll-over risk in domestic debt.
    - Mismatch between long-term financing needs and short-term financing.
  - Option:
    1. Reduce the issuance of T-bills and replace by Bond issuance twice a year (maturities 2-5 years and once every other year or so issue a 7–10 year bond).
  - Risks/Issues:
    1. May increase cost.
    2. Need a more forward-looking approach and better planning/forecasting.
- No auction calendar
  - Implication: Difficult for market to plan and prepare for Bond issuance that are very rare and irregular.
  - Option:
    1. Introduce an auction calendar for 2019, for estimated needs on an annual, quarterly and monthly basis, and map the volumes to the less frequent auctions. Calendar may be preliminary at start of the year, with indicative intervals and more precise as deadline approaches.
  - Risks/Issues:
    1. Estimates may need big adjustments if cash-flow forecasts are too poor—credibility issues.
    2. But should contribute to hold rates down as market is not surprised.
- FP actions all cash-flow driven
  - Implications: Leave very little flexibility; if/when known to market may push rates higher; makes them too frequent.
  - Options:
    1. Longer cash-flow forecast and less frequent auctions.
    2. Be more opportunistic and issue more than tender amount when rates on bids are low.
  - Risks/Issues:
    1. Increased cost as money may not be used instantly and hence not remunerated while stored.
- Debt-management strategy and report
  - Findings: Maturity profile for domestic debt too heavy on the one-year horizon, high roll-over risk and mismatch to financing maturity needs; too vague about the domestic portfolio and maturity profile; alternative scenarios quite brief and not clear which scenario is followed.
  - Options:
    1. Even out the profile gradually by replacing some T-bills with longer bonds.
    2. Better clarify issues in the 2019 debt strategy.
  - Risks/Issues:
    1. May increase cost by lengthening the maturity and by issuing Bonds for which demand may have built up over time.
- No remuneration or service fees between Government and CBS
  - Implication: No incentive for optimal behavior; fees would reduce the frequent demand for auctions and remuneration of the government account would provide incentive for opportunistic auction behavior from government.
  - Option:
    1. Introduce fees for the service that the CBS is providing for government and remunerate the government account.
  - Risks/Issues:
    1. Should be cost neutral.
    2. Not opportunistic (doesn’t allow for an increase in volume when beneficial).

### Legal and infrastructure — findings, implications, options, risks/issues
- Securities Act: Government securities are not defined as securities in the Act
  - Implication: Cannot be listed on the Securities Exchange and therefore cannot be traded on the Securities exchange.
  - Option:
    1. Change the law accordingly (exempt the government), and include government securities into the definition of securities and list them.
  - Risk/Issue: Securities traded on the Securities Exchange cannot, according to the Securities Act, be traded elsewhere (e.g., OTC).
- Securities Act: Only licensed securities dealers can trade securities
  - Implication: Banks, who own securities, have not applied for securities dealer license, therefore cannot trade government bonds on the Securities Exchange; the Securities Exchange does not offer the banks attractive conditions.
  - Option:
    1. Introduce membership in a separate fixed income section of the Exchange and offer it to banks at an affordable rate and build infrastructure that would enable them to participate in other sections.
  - Risks/Issues: Banks may still not join because of the fees, increased supervision, reporting, etc.
- Securities Act: Naked short selling is not allowed, but covered short selling is, which can help market making
  - Implication: A number of cases defined in the law would make short-selling covered; if deemed naked short selling it is considered a criminal offence and has serious consequences (fine, imprisonment); no market maker would risk going short.
  - Options:
    1. Naked short-selling should not have criminal consequences, should be punished by fines, or suspension of license only.
    2. Repos and Securities Lending should be introduced to minimize the risk of an uncovered short position.
  - Rationale: Needed to make institutions comfortable with market making.
- Securities Act: Banks are exempt of licensing in certain types of securities transactions
  - Implication: This relates only to issuance of securities (management and placement of securities in the initial offering) not trading; currently, it does not relate to government securities as they are not considered as securities in the Act.
  - Note: This would be useful if more securities would be issued in the domestic market.
- Financial Institutions Act
  - Finding: Banks may engage in buying and selling of debt securities and provide services (safekeeping, and administration of securities, portfolio management, and advisory services).
  - Implication: Banks can participate in government securities auction on their own behalf, or on behalf of customers and could take orders from customers.
  - Options:
    1. Limit primary auction access to banks in exchange for certain obligations (i.e., providing bid prices for customers in case they want to sell back).
    2. Limit primary auction access to banks and non-financial institutions.
  - Risks/Issues:
    1. Option 1 may be viewed as a monopoly granted to banks.
    2. Option 2 more difficult to implement a market making function. Excluding only households.
    3. Education and capacity building among market participants will be required.
- Central Bank Act and Memorandum of Understanding
  - Finding: The CBS can issue T-Bills for monetary policy purposes.
  - Options:
    1. Replace the Government T-Bills with CBS bills on shorter maturity only (1–2 months).
    2. Replace the Government T-bills with CBS Bills and Bonds on short to medium term maturity.
  - Risks/Issues:
    1. Issuing CBS-bills would increase transparency and accountability of the CBS and be part of the MP-toolbox.
    2. These could create competition to government securities especially if tenors do not differ significantly.
- PDM Act
  - Finding: National Debt Management Committee and Technical Debt Management Committee do not meet regularly.
  - Implication: Little apparent coordination between the CBS and Ministry of Finance on debt management strategy and implications for liquidity management and monetary policy implementation.
  - Option:
    1. Establish a regular forum for Ministry and CBS officials to discuss cash-flow forecasts, planned issue of T-bills, and impact on liquidity in the system.
- Bankruptcy and Insolvency Act
  - Finding: The definition of insolvency is not an exemption in case of collateral posted in repo transactions.
  - Implication: For introduction of a GMRA the legal status of collaterals should be unequivocal.
  - Option:
    1. Modify the Bankruptcy and Insolvency Act so that the position of counterparties in a repo, or other collateralized transactions are not endangered by legal uncertainty.
  - Risk/Issue: Absence of legal clarity concerning financial collaterals can hinder development of money market.
- Draft General Repo Agreement
  - Note: Instead of GMRA the CBS intends to introduce a General Repo Agreement.
  - Options:
    1. Use the GRA as a temporary solution, but the GRA needs to be tested in court.
    2. Wait until possible to introduce a GMRA.
  - Risk/Issue: Legal consequences for horizontal repo are not clear; may be insufficient to incentivize interbank market trade.
- Regulation of non-bank financial investors (Mutual and Hedge Fund Act, Seychelles Pension Fund Act and the Insurance Act)
  - Finding: Mutual and Hedge Funds set up as International Business Companies with offshore operations; only one Pension fund under the Seychelles Pension Fund Act; only 5 functioning insurance companies (only 2 which offer life insurance).
  - Option:
    1. Government should incentivize collective investment funds to widen the investor base of government securities.
  - Implication: Pension funds and insurance companies typically invest on the long end of the yield-curve; current numbers may be insufficient for creating enough demand.
- Accounting rules
  - Finding: No trading books, or securities Available for Sale (AFS); banks buy securities as investors and mark them as Held-to-Maturity (HTM).
  - Implication: To be able to sell securities in the secondary market (Securities Exchange) minimum requirement is to have securities AFS; trading book or AFS securities have implications on profit and loss, and on capital—banks may be unwilling.
- Trading infrastructure
  - Finding: Platforms for securities trading and money and FX markets are missing.
  - Option:
    1. The Banking Association should coordinate to agree on systems banks should purchase and implement.
  - Risk/Issue: Systems may prove costly and forecasted volume may not be sufficient.
- Existing Securities Exchange (Trop‑X)
  - Options:
    1. Allow Government securities to also be listed on this exchange and traded on the exchange.
    2. Only introduce government securities to be traded OTC.
    3. Allow for both.
  - Risks/Issues:
    1. Legal impediments and not typical, too limiting in the long run.
    2. May not spur market as fast.
    3. Optimal but has both legal and technical impediments.
- Existing Central Securities Depository (CSD) for non-Gov Securities (Trop‑X), but no CSD or clearing house for Government Securities
  - Options:
    1. CBS intends to set up a CSD for government securities.
    2. New central bank CSD is regulated by the FSA (Securities Act)? Amend regulation/set-up MoU – joint regulation?
    3. Possibility to transfer the CSD function for government securities to Trop‑X.
  - Risks/Issues:
    1. Trop‑X currently only capable of handling trades on the securities exchange; risk of complications adapting to OTC.
    2. If trade allowed both on securities exchange and OTC, systems need connectivity, high investment cost, complications and delays.
    3. Two institutions would create redundant capacities at high cost and could lack efficiency.
    4. Regulation by FSA may create “tensions” between CBS and FSA over who is in charge.
- Securities settlement system – No Real-Time Gross Settlement System (RTGS)
  - Implication: The CSD would need a RTGS and a settlement system for securities; without RTGS: settlement risks and delays.
  - Note: Project is in motion with WB support. CSD and legal issues must be catered for as well.
- An electronic auction system and electronic trading platform (ETP) are missing
  - Implication: Current “paperwork” for auctions is not efficient.
  - Options:
    1. Several off‑the‑shelf systems offered for electronic auctions.
    2. As a starting point either Bloomberg or Reuters may be requested (e.g., Bloomberg Auctioning System and E-Bond platform or Reuters Fixed Income Callouts).
  - Risks/Issues:
    1. In-house development costly and time consuming.
    2. Issuing agency and auction participants may find it expensive to subscribe to Bloomberg.

### Financial markets and monetary policy operations — findings, implications, options, risks/issues
- No interbank money market and large structural excess liquidity
  - Implications:
    - Banks rely exclusively on CBS for liquidity management.
    - No overnight money market rate.
    - Unnecessary access to the SFs.
  - Options:
    1. Issue long-term CBS security or government bond to remove structural excess.
    2. Mop-up short-term in DAA.
    3. Mop up short-term in reverse Repo – What underlying security to use?
       a) CBS-Bill;
       b) Government T-bill.

*Source: Box 2. Case Study: Market Development in Hungary — 1sycea2020002*

### 1. Higher cost for either CBS or government and

### 1. Higher cost for either CBS or government and possible government debt increase

### Key findings and concerns
- Higher cost for either CBS or government and possible government debt increase.
- Government has minimal financing need; most extra liquidity may go into CBS instruments.
- Potential hampering of Government Securities market development, while possibly stimulating the interbank market.
- Government may find it difficult to meet cash requirements, or have to pay up significantly.
- Would allow government to focus more on medium and long-term funding.
- Market sentiment hampering trade and set-up of new Banking Association: "No trust- no trade; No credit lines; Weak BA."
- No interbank FX market, asymmetric FX liquidity distribution: no price discovery; no reference rate.
- Very frequent OMOs and main instrument is not tradeable (and likely not usable as collateral between banks): no incentive for banks to trade among themselves; no incentive to be forward looking in liquidity management.
- New MP framework under implementation with uncertain period: effectiveness in managing liquidity; effectiveness for inflation expectations and interest rate formation.
- Lack of dealing capacity at banks—banks not aware/interested in trading opportunities; no trading/information platforms at banks (Reuters, Bloomberg): no transparency; price discovery difficult; lengthy process to complete transactions; settlement risks.
- Difficulty for foreigners to open bank account: foreign investment in securities constrained.

### Options, policy measures, and market adjustments (enumerated)
- Envisage collateralized interbank transactions – repos.
- Amend counterparty agreement between commercial banks and CBS.
- Request banks to establish credit lines among one another.
- Code of Conduct (see below).
- Establish market code of conduct based on best international practices e.g., FX Global Code. Should preferably be done by/via the SBA, but currently very weak with no consensus.
- Adjust asymmetry in FX liquidity distribution by:
  - Selling FX (via auction?);
  - Linking the Bureau the Changes tighter to the market.
- Implement a market maker system.
- Reduce frequency of auctions (averaging of MRR already in place).
- Open repo window and intraday credit facility.
- Issue tradeable CBS security.
- Require ACI dealing certificate for a minimum amount of staff.
- Improve communication via secure electronic means e.g., digital signature, encrypted mail.
- Establish portal and website – centralized at CBS?
- Implement the new automated payment system.
- Contact vendors for group deal discounts.
- Clarify AML/CFT guidelines; ensure compliance to ease foreigner account opening.

### Risks and implementation issues (enumerated)
- Collateralized interbank transactions – repos: Currently no legal support for repos – difficult to establish.
- Amend counterparty agreements: Possible to amend? Counterparties may refuse due to cost – incentives/force?
- Request banks to establish credit lines: May refuse due to cost – incentives/force?
- Code of Conduct: No market Code of Conduct; No functioning rules/guidelines to frame market behavior and encourage well-functioning markets. SBA currently very weak with no consensus.
- FX measures: 1) Decrease in FX reserves; 2) Less players increase risk of collusion.
- Tradeable CBS security and open repo window:
  1) Possible steep learning curve – temporary loss of liquidity control;
  2) Legal issues to overcome;
  3) Higher cost for CBS.
- New MP framework: Mis- or not fully understood; Communication difficulties; More changes on the horizon; Too swift—can market and CBS keep up with the changes?
- Trading platforms and information systems: Difficulty and cost to implement; settlement and operational risks.
- Foreign investor constraints: AML/CFT clarification needed to reduce barriers.

### Appendix V — Analysis of Liquidity Management by Banks (findings)
- Re-introduction of an interest rate corridor in July 2017 implied a positive rate on the deposit facility.
- The 7-day DAA rate has since been kept inside the corridor.
- Despite incentives, banks appear to underbid for the DAAs; individual banks do not seem to try to place excess liquidity in the DAA.
- Positive rate on the SDF should induce banks to place excess at end of day in the SDF instead of on current accounts; evidence shows this does not always occur.
- Possible explanations for bank behavior:
  - The level of PLB may be elevated due to the inactive interbank market and the high cost of accessing the SCF, exacerbating underbidding.
  - Continuous presence of the CBS on the market provides a recurring opportunity, reducing banks' need to plan liquidity carefully and contributing to underbidding.
  - Unannounced volumes for frequent T-bill auctions may cause banks to withhold liquidity for primary market participation since rates are generally higher, hence underbidding in the DAA.
  - The window and process of accessing the SDF may be untimely and/or too lengthy; banks may not know their position in time to apply for access, leaving liquidity on the current account.
- To spur competitiveness and rational behavior, CBS should accept first the most competitive bids. Given significant excess liquidity, this may result in a fall in rates, but volatility should be mitigated by the interest rate corridor and through better calibration of liquidity-absorbing operations (and if needed possibly by a tighter corridor).
- There are instances during 2018 when the average tender (bid) rate from a bank was lower than the average accepted rate for the same bank; accepted amounts have been lower than tendered amounts by rejection of competitive bids.

### Market instruments and rate observations (listed)
- Interest rate instruments referenced: 91-day TB, 182-day TB, 365-day TB, 7-day DAA.
- Timeline reference: Jan-15, Apr-15, Jul-15, Oct-15, Jan-16, Apr-16, Jul-16, Oct-16, Jan-17, Apr-17, Jul-17, Oct-17, Jan-18, Apr-18, Jul-18, Oct-18.

*Source: 1sycea2020002 - 1. Higher cost for either CBS or government and possible government debt increase*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1sycea2020002.pdf_