## Preface — IMF/CARTAC mission on The Bahamas domestic LCBM (March 13–24, 2023)

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### Mission overview
- Joint IMF-CARTAC technical assistance mission to The Bahamas at the request of the Ministry of Finance and Central Bank of The Bahamas (CBoB).
- Mission team: Trevor Lessard (IMF, Mission Chief), Gregory Horman (CARTAC LTX), Laszlo Buzas, Bill Northfield (IMF external experts).
- Purpose: support development of the local currency bond market, assess domestic sovereign debt market stage, and formulate policy recommendations for the six building blocks in the Guidance Note for Developing Local Currency Bond Markets.
- The six building blocks: (i) Money Market; (ii) Primary Market; (iii) Secondary Market; (iv) Investor Base; (v) Financial Market Infrastructure; and (vi) Legal and Regulatory Framework.
- Deliverables: technical presentations (investor relations and issuance strategies), wrap-up meeting with MoF and CBoB, annex with detailed evaluation of each building block, and draft TA memorandum shared with authorities.

### Key assessments of the six building blocks
- Legal and Regulatory Framework: assessed at the “mature” stage.
- Financial Market Infrastructure (FMI): assessed on the cusp between “developing” and “emerging.”
- Investor Base: assessed as “emerging.”
- Primary Market: assessed as “developing.”
- Money Markets: assessed as “nascent.”
- Secondary Market: assessed as “nascent.”

### Strategic context and policy direction
- Authorities’ objectives: reorient government borrowing away from expensive external commercial debt toward primarily domestic financing; improve public financial management; develop the financial system; rebuild economic buffers.
- Rationale: domestic market development supports rebuilding buffers, financial market development, and reorienting some non-concessional external borrowing to domestic sources.
- Required mindset shift: move from price-maker, tap-sales approach to market-clearing, price-taker, auction-based issuance.
- Coordination/capacity challenge: difficulty attracting qualified staff and lack of coordination across MoF, CBoB, BISX; consider assigning an LCBM project lead with authority to coordinate reforms.
- Fee consideration: ensure trading fees (especially on BISX) do not impede secondary market liquidity.

### Implementation sequencing
- Implement recommendations sequentially.
- Initial phase: eliminate critical bottlenecks and pursue “quick win” reforms concentrated on primary market and investor relations.
- Subsequent phases: address secondary market and FMI.

### Selected high-level recommendations (by building block)
- Money Markets:
  - Allow market forces to determine money market rates.
  - Develop stronger cash and debt management coordination.
  - Develop a repo market and clarify legal parameters for repo markets.
- Primary Markets:
  - Improve granularity of ABP and issuance calendar; publish auction results immediately.
  - Accept market outcomes at domestic securities issuances; narrow sales window; publish rules for amounts; reduce fragmentation.
  - Analyze introducing 30-day and 364-day T-bill tenors.
  - Issue securities by auction or syndication rather than tap sale; reduce number of outstanding BRS using LMOs; develop benchmark issuance policy; consider a Treasury Single Account (TSA).
- Secondary Markets:
  - Introduce benchmark bond issuance policy; develop LMO capacity (buybacks, switch auctions).
  - Gradually reduce CBoB’s role as major market maker and liquidator of first resort; develop divestment strategy for CBoB holdings of BRS.
- Investor Base:
  - Increase investor relations with CBoB partnership; improve debt management publications; craft IR strategic policy; consolidate government securities information into a central portal; maintain investor activity database; develop investor relations website portal; support domestic investment management capacity and financial literacy.
- Financial Market Infrastructure:
  - Gather and publish trade-flow data by investor category; finalize plans on investor protection, repo markets, and enable OTC trading; consider bridging BGSD and BCSD.
- Legal and Regulatory Framework:
  - Refine MTDS and ABP content and granularity; include repo transactions in SIA redraft; sponsor adoption of the Global Master Repo Agreement (GMRA).

*IMF | The Bahamas Domestic Local Currency Bond Market Development — Preface (extracted content)*

---

### Key statistics and debt composition (as of December 31, 2022)

### Central government and national debt totals
- National debt: B$11,426.3 million, or 90 percent of GDP.
- Central government debt: B$11,036.4 million (97 percent of national debt).
- Contingent liabilities: B$389.9 million.

### Central government debt composition (Table 2 — as reported by CBoB‑Quarterly‑Statistical‑Digest. Feb‑2023)
- External debt: 4 840 44%
  - loans: 1 980 18%
  - securities: 2 860 26%
- Domestic debt: 6 196 56%
  - loans: 686 6%
  - T-Bills: 1 006 9%
  - Bonds: 4 170 38%
  - Advances: 335 3%
- TOTAL: 11 036 100%

### Additional portfolio details
- Central government debt split: 56 percent–44 percent between domestic and external debt.
- Domestic debt currency composition: 94.6 percent denominated in local currency.
- Domestic debt instruments:
  - Government securities: 83.5 percent of domestic debt.
  - Loans: 11.1 percent of domestic debt.
  - Central bank advances: 5.4 percent of domestic debt.
- Domestic securities share of total central government debt portfolio: 46.9 percent.

---

### Macroeconomic outlook, fiscal strategy, and financing needs

### Growth and fiscal objectives
- Recent growth and shocks:
  - Economy contracted by 23.8 percent in 2020.
  - Growth rebounded by 13.7 percent in 2021 and expanded by 11.0 percent in 2022.
  - Growth projected to decelerate to 4.3 percent in 2023 and trend toward 1.5 percent in subsequent years.
- Fiscal strategy:
  - Authorities aim for growth-friendly fiscal consolidation to achieve primary surpluses and reduce public debt to below 60 percent of GDP.
  - Legal target: reduce central government debt to 50 percent of GDP by 2031 (Fiscal Responsibility Act).
- Public debt trajectory:
  - Central government debt: 89.4 percent of GDP at end-2022 (peaked at 103.3 percent of GDP in the previous year).
  - Debt expected to decline to 81.7 percent in 2028.
- Gross financing needs:
  - Approximately 25 percent of GDP in 2022.
  - Expected to decline to 19 percent of GDP in 2027.
- Financing strategy: increase reliance on domestic financing and longer-dated debt; reduce shares of foreign-currency and short-dated debt.

### Risks to baseline
- Risks include implementation of fiscal consolidation, persistence of inflationary pressures, potential increases in borrowing costs, and susceptibility to climate shocks such as hurricanes.

---

### Debt Management Office (DMO) status and recommendations

### Current status and functions
- DMO established within MoF but understaffed and lacks capacity for most debt management functions.
- Under PDMA, DMO responsible for front, middle, and back-office functions.
- Interim reliance on CBoB to perform many functions as agent (front-office tasks: issuance of T-bills and BRS, debt service payments, debt recording, statistics).
- MoF and CBoB drafting memorandum of understanding to govern principal-agent relationship.
- DMO has begun performing some middle-office tasks.
- Debt management strategy: first released December 2021 and updated December 2022; update evaluated actual borrowing in 2021/22 versus announced ABP.

### Capacity development recommendations
- Recruit, train, and retain specialized staff; address MoF salary constraints via:
  - Receiving secondments of staff from the CBoB.
  - Hiring private-sector professionals on non-permanent consulting contracts.
- Increase coordination between MoF and CBoB; include MoF in regular market consultations currently undertaken by CBoB alone.
- Increase exposure of MoF staff to CBoB funding operations and market participants for skills transfer.
- Strengthen coordination of debt and cash management; improve multi-month cash forecast reliability and set a target for cash balance to reduce reliance on overdrafts and advances.

---

### Money market — assessment, features, and recommendations

### Assessment (LCBM framework)
- Money market assessed at stage 1.6 (“nascent”).
  - Outcome indicator “a well-functioning short-term securities and repo market”: stage 1.0.
  - Policy indicators relating to monetary policy framework and operations: stage 2.0.

### Monetary and market features
- Exchange rate peg with binding capital controls; no explicit inflation target.
- Domestic policy rate constant at 4 percent since May 2017.
- Commercial banks’ prime rate at 4.25 percent since 2017.
- Monetary transmission is poor.
- CBoB liquidity tools: CRR changes and sales/purchases of government stock from its own stock.
- CRR decreased from 10 to 7 percent in April 2021.
- T-bill issuance: most rollovers of maturing lines; some unscheduled auctions; nearly unchanged T-bill pricing over fifteen months.
- T-bill issuance amounts varied from B$91 million (June 2021) to B$492 million (January 2022).
- T-bill maturities: 91-day and 182-day issued on schedule.
- Market interest in new instruments: interest in 30-day T-bills and issuing 1-year Treasury Note as discounted 360-day T-bill via competitive auction.
- Repo market: no interbank repo market currently; BGSD supports repo trading and settlement; banks express interest; structural excess liquidity reduces near-term urgency but groundwork should be laid.

### Money market recommendations
Phase 1 (6 to 12 months)
- Allow market forces to fully determine short-term money market rates (e.g., T-bill prices).
- Develop and sponsor repo market development as secured interbank lending and cornerstone of money market activity.
- Develop stronger debt and cash management coordination and communication to refine money market issuance.

Phase 2 (12 to 24 months)
- Sponsor development of a reference rate for interbank markets.
- Clarify legal standing and enforceability of repo contracts (e.g., GMRA) via revisions to the Bankruptcy Law or a Law on financial collateral.

---

### Primary market — assessment, operational issues, and recommendations

### Assessment and supporting strengths
- Primary market assessed at stage 2.4 (“developing”).
- Strengths: scheduled issuance to a diversified domestic investor base; purchasing across a long-term yield curve with ATM of 6.9 years.

### Key weaknesses and operational issues
- Absence of market-based placement mechanism for BRS; continued use of tap issues at par with issuer-determined coupons.
- Lack of benchmark building policies; market fragmentation with 240 BRS lines outstanding at end‑2022.
- Outstanding notional amounts vary between B$100,000–500,000 and B$167 million.
- Tap sales have been significantly uncovered over past three years.
- T-Bills offered at competitive multiple-price auctions; T-Bill auction amounts (Jan‑2022 to Feb‑2023) varied between B$129 million and B$492 million. Aggregate accepted amount: B$3,844.5 million vs. B$3,764.5 million targeted/offered amount.
- Current average time-to-rollover of domestic debt: 5.5 years.
- Issuance practices exposing market risk:
  - Six-hour subscription window exposes participants to interest rate volatility.
  - Pre-set par pricing for tap issues limits market-determined clearing rates for BRS.
  - Shrink-or-grow option on issuances creates issuance uncertainty.
  - Lack of publication of investor-category purchases reduces market awareness.

### Liability and cash management issues
- Recommends LMOs (buybacks, switches) to consolidate smaller securities into larger benchmarks and manage rollover risk.
- Cash management shortcomings: unreliable multi-month forecasts; Treasury single account exists but no cash-balance target; sustained reliance on overdraft and advances; arrears to suppliers sometimes accumulate.
- Cash management should use proactive practices including repos and a cash buffer; advances/overdrafts should be last resort.

### Primary market recommendations
Phase 1 (6 to 12 months)
- Provide more information in ABP and Issuance calendar (delineate expected issuance across maturity buckets).
- Publish auction details immediately after finalizing auction decision (minimum, maximum and average prices/yields, number of bids received and accepted).
- Accept market outcomes for all domestic securities issuances (be price taker across the curve).
- Narrow sales time for issuance to reduce exposure to market risk.
- Publish rules/criteria for applying shrink/grow option.
- Publish general information on investor base for T-Bill and BRS issues regularly.
- Analyze feasibility of introducing 30-day and 364-day tenors to T-Bill issuance calendar.

Phase 2 (12 to 24 months)
- Ensure prices for existing securities reflect changes in underlying rates and interest accrual.
- Reduce number of outstanding BRS ISINs and increase benchmark BRS ISIN sizes via:
  - (i) LMOs for existing debt (buybacks and exchange/switch auctions).
  - (ii) New BRS issuance into a single ISIN per benchmark tenor with reopenings until targeted benchmark size reached.
- Develop LMO capacities for market maintenance and refinancing risk management.
- Improve debt and cash coordination; build larger cash buffer.
- Adopt a more proactive cash management structure.
- Move to a treasury single account located at the CBoB from a domestic bank with zero remuneration.

---

### Secondary market — assessment, constraints, and staged recommendations

### Assessment and preconditions
- Secondary market assessed at stage 1.2 (“nascent”) — outcome score 1.0 and policy indicators score 1.4.
- Low activity due to primary market practices, lack of competing investable assets, capital controls, and buy-and-hold investor behavior.
- Preconditions for secondary market development:
  - Active interbank repo market; predictable transparent issuance of a small number of benchmark securities at market-clearing prices; sufficient intermediaries (primary dealers/market makers); investors with varying profiles including some open to trading; efficient market infrastructure; supportive legal and regulatory environment.

### Market-making and CBoB role
- Non-competitive bids (less than B$500,000) may be accepted if offered amount unsold in competitive auction; remaining amount may be offered at “market-based weighted average price.”
- BISX listing rules: securities cannot be traded outside the Exchange; OTC reporting practices may create fees-based incentives for exchange/brokers.
- In practice:
  - Offers may be placed on BISX; if no counterparty in 2–3 days, seller may turn to CBoB.
  - CBoB publishes prices it is ready to trade BRS and sets a bid-offer spread of 5 cents across the curve.
  - CBoB market-making accumulates securities on its balance sheet; purchases count toward prudential exposure limits and can pressure CBoB capacity to extend advances.
- Suggested transition tactics:
  - Widen bid-ask spread on CBoB price sheets; differentiate spread across maturities.
  - CBoB should act as backstop for private market makers rather than primary market maker; gradual reduction of CBoB commitment may be prudent.

### Market structure impediments and fragmentation
- 240 government securities outstanding creates illiquid, fragmented market; lack of benchmark bond policy prevents financial institutions from acting as market makers across all lines.
- Recommendation: consolidate 240 BRS lines into fewer (20–30) benchmark lines using LMOs.

### Repo and securities lending
- Repurchase agreements needed to enhance secondary market liquidity by creating demand for government securities as collateral.
- Securities Lending Facilities (SLF) suggested as backstop to avoid settlement failures; access to SLF-type facilities may be costly and short-term to avoid crowding out interbank market.

### Secondary market recommendations
Phase 1 (6 to 12 months)
- Introduce a benchmark bond policy as foundational step to start secondary market.

Phase 2 (12 to 24 months)
- Develop capacities and train staff to conduct LMOs (buybacks and switches) to consolidate securities into fewer benchmark lines.
  - Buy back smaller lines entirely; offer switches for larger series maturing in same year.
  - New issuances should rely on reopenings to build large, liquid bond lines in key tenors.
- Clarify roles of MoF and CBoB as market makers; MoF as issuer should be backstop bidder using CBoB as agent.

Phase 3 (beyond 2 years)
- Gradually reduce CBoB role from major market maker to last-resort liquidity provider (as Agent for MoF).
- Develop repurchase agreements to enhance secondary market liquidity.

---

### Investor Base — assessment, composition, and investor relations recommendations

### Assessment and investor composition
- Investor base assessed at stage 3.0 (“emerging”).
- Domestic investor composition: domestic and foreign‑owned commercial banks, broker‑dealers, collective investment schemes, pension funds, general and life insurance companies, some households; non-resident participation negligible.
- Banking sector: 17 banks (3 domestic majority owned banks, 4 foreign bank subsidiaries and 10 credit unions).
- Bank and NBFI holdings (CBoB estimate): commercial banks hold 38 percent and NBFIs hold 39 percent of domestic government debt.
- Public sector debt by creditor type at Dec‑2022:
  - Central Bank, 14%
  - Commercial Banks, 38%
  - Public Corporations, 8%
  - Private Sector, 39%
- NBFI assets: equivalent to about 43 percent of GDP; mutual funds and NIB account for some 60 percent of NBFI assets.
- Insurance sector assets:
  - Long-term: 12 companies with assets of B$ 1.56 billion; 13 percent of GDP.
  - General insurance: 19 firms with assets of B$ 590 million; 4.5 percent of GDP.
  - Long-term insurers: 53 percent of long-term insurer assets held in government securities.
  - General insurance: government securities holdings represent 18 percent of general insurance assets; majority (52 percent) held in cash and term deposits.
- Pension sector:
  - Pension coverage estimated at 20 to 25 percent of residents.
  - NIB assets at end-2019: B$1.8 billion (nearly 13 percent of GDP).
  - NIB fixed income at end-2019: 86.4 percent in local government securities (T-Bills 0.2 percent, T-Notes 0.6 percent, BRS 85.6 percent).
  - No regulatory minimum/maximum limits on pension fund holdings of domestic government securities.
- Foreign investor participation negligible; capital controls limit timely access; government securities lack IOSCO-recognized ISINs and no clearing bridge to international CSDs.

### Investor behavior and constraints
- Predominant buy-and-hold culture; limited alternative investable assets.
- Liquidity abundant but investors hold to maturity.
- Low domestic market rates reduce foreign investor attractiveness.
- Lack of income or corporate taxes eliminates tax-related impediments to trading.
- Local investors have limited financial literacy.

### Investor relations (IR) gaps
- No formal IR policy, strategy, or IR management unit.
- MoF does not maintain investor contact database or dedicated DMO IR website portal.
- CBoB leads most interactions with financial community; MoF involvement increasing but irregular.
- Debt publications and dissemination are fragmented across agencies.

### IR recommendations
Phase 1 (6 to 12 months)
- Develop IR capacity in partnership with CBoB and jointly engage the financial community.
- Refine quarterly statistical report or develop a succinct quarterly debt bulletin (QDB).
- Craft IR strategy policy formalizing publication commitments, timetables and consultation fora.
- Request CBoB consolidate data and publications into a central portal.
- Leverage a stakeholder contact database for dissemination and targeted analysis.
- Ensure key policy documents and debt publications are regularly updated, fit for purpose, easily located, and timely.

Phase 2 (12 to 24 months)
- Develop a DMO IR website portal with links to CBoB data and statistics.
- Support efforts to improve financial literacy.

---

### Financial Market Infrastructure (FMI) — assessment, BGSD, and recommendations

### Assessment and systems
- FMI assessed at stage 2.3 (“developing”).
- Two CSDs exist:
  - One for government securities operated by CBoB (BGSD) recently automated.
  - Another CSD (BCSD) operated by BISX for corporate securities and equities.
- BGSD interfaces with RTGS and ACH; order entry for bidding automated via CBoB online portal.
- BGSD provides registration, settlement and payment within one system; uses gross settlement (DVP1) with T+2.
- BGSD is not subject to regulatory oversight by the Securities Industry Commission and no regulator oversees its conduct.
- No Central Counterparty (CCP) currently exists.
- Intraday netting (DVP2/DVP3) and a Settlement Guarantee Fund (SGF) are possible future enhancements; SGF and Investor Protection Fund (IPF) not operational at mission time.
- The BGSD currently does not charge custody/registry fees; CBoB contemplating platform fees from 2024 on cost-recovery basis.

### Market fragmentation and data gaps
- Two unconnected CSD systems may cause cross-market settlement delays and operational risk.
- 240 government bonds listed on BISX; unique securities identification codes generated by CBoB (not IOSCO ISINs).
- BISX reports comeled equity and debt turnover; no dedicated narrative for government securities despite dominance of 240 BRS lines.
- CBoB provides no regular transaction-flow information by investor class; scope exists to publish aggregated transaction volumes and investor-type flows.

### FMI recommendations
Phase 1 (6 to 12 months)
- Leverage CSD trade intelligence to publish aggregate investor activity summaries in accessible format.
- Finalize plans on investor protection, repo markets, and enable OTC trading.
- Consider establishing a bridge between BGSD and BCSD for cross-market settlement efficiency.

Phase 2 (12 to 24 months)
- Consider privatizing BGSD to allow private sector responsibility for key capital markets infrastructure.

---

### Legal and Regulatory Framework — assessment and priority reforms

### Overall assessment and key laws
- Legal and Regulatory Framework assessed at stage 3.8 (“mature”).
- Key laws: Public Debt Management Act 2021 (PDMA), Fiscal Responsibility Act 2018 (FRA), Central Bank of The Bahamas Act 2020 (CBoBA), Securities Industry Act 2011 (SIA), Investment Funds Act 2019 (IFA), Financial Transactions Reporting Act 2018.
- PDMA sets debt management objectives (section 4), vests borrowing authority in Minister of Finance (sections 16–17), specifies permitted purposes (section 18), and allows operations for cash/portfolio risk management including repo (section 14).
- PDMA designates CBoB as fiscal agent (section 20) and sets limits on advances and holdings (section 21).
- PDMA establishes DMO in MoF and requires MTDS and ABP publication and Cabinet approval (section 12).
- PDMA allows CBoB to establish a central securities repository within CBoB or facilitate establishment outside central bank (section 62).

### Market regulation, enforcement and investor protection
- SIA is principal regulatory act; issuer exemptions apply (section 92); SIA prohibits market manipulation (section 109) and related misconduct (sections 110–120, 115).
- Securities Commission empowered for investigation, inspection, reporting, and enforcement (sections 42–77, 132–137).
- BGSD guidelines require separate client/own accounts and allow for investor protection mechanisms; IPF and SGF not operational at time of mission.
- Repo framework: BGSD rules provide for repo transactions and third-party rights but GMRA not yet adopted in practice.
- IFA governs CIS; extensive disclosure and quarterly mark-to-market valuation required.
- Tax framework: no personal or corporate income tax on returns from government securities; tax neutrality exists.

### Legal and regulatory recommendations
Phase 1 (6 to 12 months)
- Refine content and format of MTDS and ABP for investor use; provide more ABP information including volumes of individual benchmark issues.
- Introduce repo transactions into SIA redraft.
- Strengthen commitment to adhere to published MTDS and ABP.

Phase 2 (12 to 24 months)
- Strengthen legal framework for financial collateral with insolvency carve-out.
- Sponsor adoption of GMRA to facilitate repo market development.
- Introduce close-out netting to secure enforceable rights for repo partners in court if default occurs.
- Modernize bankruptcy and financial collateral laws currently fragmented across multiple statutes.

---

### Conclusion and policy sequencing

### Enabling conditions and priorities
- The Bahamas’ macroeconomic framework is strong and conducive to developing the domestic government securities market: sustainable debt assessment, improving economic conditions, diversified investor base, existence of a yield curve and benchmark securities, and sizeable NBFI sector.
- Priority sequencing:
  - Focus initial efforts on improving the primary market (price-taking auction-based issuance and transparency).
  - Secondary market reforms should follow a vibrant, functioning primary market.
  - Improvements in investor relations and debt reporting can yield quick progress.

### Institutional coordination and monitoring
- Better coordination between CBoB and MoF is essential; weak coordination across CBoB, MoF, BISX, Securities Commission hinders development.
- Recommend follow-up IMF/CARTAC Fund TA to support reform acceleration.
- Progress should be monitored by a designated official with authority to lead reforms across agencies.
- Use the LCBM framework to evaluate and report improvements annually as part of MTDS.

*IMF | The Bahamas Domestic Local Currency Bond Market Development (excerpts).*

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

### Preface

### Mission overview
- A joint IMF-CARTAC technical assistance mission to The Bahamas took place from March 13–24, 2023, at the request of the Ministry of Finance and Central Bank of The Bahamas (CBoB).
- Mission team: Trevor Lessard (IMF, Mission Chief), Gregory Horman (CARTAC LTX), Laszlo Buzas, and Bill Northfield (IMF external experts).
- Purpose: support efforts to develop the local currency bond market, assess the current stage of The Bahamas’ domestic sovereign debt market, and formulate policy recommendations for the six building blocks in the Guidance Note for Developing Local Currency Bond Markets.
- The six building blocks: (i) Money Market; (ii) Primary Market; (iii) Secondary Market; (iv) Investor Base; (v) Financial Market Infrastructure; and (vi) Legal and Regulatory Framework.
- The mission delivered technical presentations (e.g., investor relations and issuance strategies) and presented main findings in a wrap-up meeting with Ministry of Finance and CBoB representatives.
- An annex provides detailed results of the evaluation of each building block.

### Key assessments of market building blocks
- Legal and Regulatory Framework: assessed at the “mature” stage, reflecting recent progress in passing a modern public debt law, strong investor protection, and an established legal environment for collective investment schemes.
- Financial Market Infrastructure: assessed on the cusp between “developing” and “emerging,” reflecting strong technology platforms, including the introduction of the electronic Bahamas government securities registry (BGSD).
- Investor Base: assessed as “emerging,” reflecting a strong set of heterogeneous investors (including foreign and commercial banks) and a diversified set of non-bank financial institutions (e.g., securities brokers, pension funds, insurance companies).
- Primary Market: assessed as “developing,” with well-established government securities issuance along the yield curve, including longer-term maturities, but with critical weaknesses (lack of market-determined pricing for most government securities; weaknesses in cash flow forecasting and cash buffers).
- Money Markets: assessed as “nascent,” reflecting the lack of a well-functioning short-term securities and repo market and some shortcomings in transparency.
- Secondary Market: assessed as “nascent,” given lack of market trading, fragmentation of Bahamian securities into over 200 separate instruments, and a challenging trading environment.

### Strategic context and policy direction
- Authorities’ objectives: reorient government borrowing away from expensive external commercial debt toward primarily domestic market financing, improve public financial management, develop the financial system, and rebuild economic buffers.
- Rationale: domestic market development is seen as key to supporting the rebuilding of economic buffers, supporting financial market development, and reorienting some non-concessional external borrowing to domestic sources.
- Macroeconomic backdrop: The Bahamas’ overall macroeconomic policy framework is described as strong and conducive to the development and deepening of the domestic government bond market; fiscal and borrowing plans are favorable to sustainably expand the domestic debt stock.
- Short-term headwinds: recent global monetary tightening and uncertainty from the Russia-Ukraine war are cited as headwinds to quickly improving the domestic government securities market, but not insurmountable.
- Mindset shift required: authorities will need to transition from a price-maker, tap-sales approach toward a market clearing, price-taker, auction-based approach.
- Fee consideration: authorities should ensure fees for trading securities, especially for future trades on the BISX, are not barriers to developing secondary market liquidity.
- Coordination and capacity challenges: difficulties in attracting qualified staff and lack of coordination across stakeholders (MoF, CBoB, BISX). Recommendation to consider assigning an LCBM project lead with authority and capacity to coordinate reforms.

### Implementation sequencing
- Recommendations should be implemented sequentially.
- Initial phase: eliminate the most critical bottlenecks and pursue “quick win” reforms to catalyze market development, largely concentrated on the primary market and investor relations building blocks.
- Subsequent phases: address other areas such as the secondary market and financial market infrastructure.

### Selected key recommendations (high-level)
- Money Markets: Allow market forces to fully determine money market rates; develop stronger cash management and debt management coordination; develop a repo market and clarify legal parameters for repo markets.
- Primary Markets: Improve granularity of the ABP and issuance calendar; publish auction results immediately; accept market outcomes at domestic securities issuances; narrow sales window for issuances; publish rules for amounts to be issued; reduce market fragmentation; analyze feasibility of introducing 30-day and 364-day T-bill tenors; issue all government securities by auction or syndication rather than tap sale; reduce number of outstanding BRS using LMOs; develop issuance policy for benchmark securities; consider a Treasury Single Account (TSA).
- Secondary Markets: Introduce a benchmark bond issuance policy centered around key tenors; develop LMO capacity (buybacks, switch auctions); gradually reduce CBoB’s role as major market and liquidator of first resort and develop a divestment strategy for CBoB holdings of BRS.
- Investor Base: Increase investor relations in partnership with CBoB; improve debt management publications; craft an investor relations strategic policy; consolidate government securities information into a central website portal; maintain a database of investor activity and stakeholder contacts; develop an investor relations website portal for the debt management office; support development of domestic investment management capacity and financial literacy.
- Financial Market Infrastructure: Gather and publish data on trade flows and trends by investor category; finalize plans on investor protection, repo markets, and enable over-the-counter trading; consider bridging BGSD and BCSD.
- Legal and Regulatory Framework: Refine the content and granularity of the MTDS and Annual Borrowing Plan; include repo transactions in redrafting the Securities Industry Act; sponsor adoption of the Global Master Repo Agreement (GMRA).

(Note: Table 1 in the report contains the full set of recommendations with Responsible party, Timeline, and Priority.)

### Key statistics on public debt (as of December 31, 2022)
- National debt: B$11,426.3 million, or 90 percent of GDP.
- Central government debt: B$11,036.4 million (97 percent of national debt).
- Contingent liabilities: B$389.9 million (debt raised by various public institutions).
- Table 2 — Debt of the Central Government as of December 31, 2022 (as reported by Central Bank of Bahamas (CBOB)-Quarterly-Statistical-Digest. Feb-2023):
  - External debt: 4 840 44%
  - loans: 1 980 18%
  - securities: 2 860 26%
  - Domestic debt: 6 196 56%
  - loans: 686 6%
  - T-Bills: 1 006 9%
  - Bonds: 4 170 38%
  - Advances: 335 3%
  - TOTAL: 11 036 100%

*IMF | The Bahamas Domestic Local Currency Bond Market Development — Preface (extracted content)*

### 3. The debt of the central government is split 56 percent–44 percent between

### 3. The debt of the central government is split 56 percent–44 percent between 

### Composition of central government debt
- Domestic vs external split: 56 percent–44 percent.
- Domestic debt currency composition: 94.6 percent denominated in local currency.
- Domestic debt instruments:
  - Government securities: 83.5 percent of domestic debt.
  - Loans: 11.1 percent of domestic debt.
  - Central bank advances: 5.4 percent of domestic debt.
- Domestic securities share of total central government debt portfolio: 46.9 percent.

### Fiscal strategy, market access, and recent developments
- Authorities’ objective: continue growth-friendly fiscal consolidation to achieve primary surpluses and reduce public debt to below 60 percent of GDP.
- Country context: upper-middle income with historically strong market access; recent rating downgrades led to a spike in external yields.
- Policy exception: CBoB granted an exception from capital control fees to facilitate domestic investors purchasing The Bahamas’ outstanding USD external bonds.
- Domestic issuance market conditions:
  - Some auctions undersubscribed.
  - Investor preference shifting from term debt to shorter maturity instruments, especially T-bills.
- Issuance capability: authorities have placed benchmark securities across the yield curve, with maturities extending up to 30 years.
- Expected demand drivers:
  - Increasing organic demand from life insurance and pension funds.
  - Limited alternative domestic investments due to shallow equities and corporate debt markets and capital controls.
- Legislative change: Public Debt Management Act (PDMA) expected to improve debt transparency and market outreach.

### Market infrastructure: Bahamas Government Securities Depository (BGSD)
- BGSD introduction: transition from manual, paper-based depository to modern electronic and automated process.
- Operational improvements:
  - Greatly reduces time and effort required to operate.
  - Linked to real-time gross settlement (RTGS) and automatic clearing house (ACH) systems.
  - Represent significant efficiency improvements favorable for future market development.

### Mission assessment, tools, and outputs
- Framework used: LCBM framework and associated excel based tool.
- Six relevant building blocks assessed:
  - (i) money market,
  - (ii) primary market,
  - (iii) secondary market,
  - (iv) investor base,
  - (v) market infrastructure,
  - (vi) legal and regulatory framework.
- Assistance provided:
  - Assessment of stages of development for the six building blocks.
  - Presentation on primary market issuance strategies and investor relations (at authorities’ request).
  - Draft technical assistance (TA) memorandum shared with authorities as basis for structured IMF/CARTAC engagement (subject to authorities’ agreement).

### Enabling conditions and macroeconomic outlook
- Recent growth and shocks:
  - Economy contracted by 23.8 percent in 2020.
  - Growth rebounded by 13.7 percent in 2021 and expanded by 11.0 percent in 2022.
  - Growth projected to decelerate to 4.3 percent in 2023 and trend toward 1.5 percent in subsequent years.
- Public debt levels:
  - Central government debt: 89.4 percent of GDP at end-2022 (peaked at 103.3 percent of GDP in the previous year).
  - Debt expected to decline to 81.7 percent in 2028.
  - Legal target: reduce central government debt to 50 percent of GDP by 2031 (Fiscal Responsibility Act).
- Gross financing needs:
  - Approximately 25 percent of GDP in 2022.
  - Expected to decline to 19 percent of GDP in 2027.
- Financing strategy: government intends to increase reliance on domestic financing and longer-dated debt and reduce shares of foreign-currency and short-dated debt over time.
- Risks to baseline debt path: implementation of fiscal consolidation, persistence of inflationary pressures, potential increases in borrowing costs, and susceptibility to climate shocks such as hurricanes.

### Financial sector and liquidity conditions
- Investor base: domestic and foreign-owned commercial banks, broker-dealers, collective investment schemes, pension funds, general and life insurance companies, some households; non-resident participation negligible.
- Investor behavior: some institutions reducing duration or limiting take-up of new securities due to internal credit exposure limits or sovereign risk concerns.
- Inflation and exchange rate:
  - Inflation reached 5.6 percent in 2022.
  - Projected to fall below 3 percent by 2025 and remain low and stable.
  - Exchange-rate peg remains credible; CBoB strengthened by Central Bank of The Bahamas Act (2020).
- Liquidity and bank capital:
  - Market operates under surplus liquidity.
  - Banking sector regulatory ratios: target 17.0 percent, trigger 14.0 percent, minimum 8.0 percent.
  - Average capital adequacy ratio for the sector: 26.4 percent at end-2021.
- Non-bank financial institutions: insurance companies, public corporations, mutual fund and pension fund managers report healthy liquidity; investment in BRS driven by lack of fixed income or equity alternatives.
- Cash management:
  - Treasury prepares cash-flow forecasts; reliability over multi-month horizon is not strong.
  - Treasury single account exists but there is no target for the cash balance.
  - Sustained reliance on overdraft facility and advances from the CBoB; arrears on payments to suppliers sometimes accumulate.

### Debt management office (DMO) status and recommendations
- DMO status:
  - Established within MoF but understaffed and lacks capacity for most debt management functions.
  - Under PDMA, DMO responsible for front, middle, and back-office functions.
  - Interim reliance on CBoB to perform many functions as agent (front-office tasks related to issuance of T-bills and BRS, payment of debt service, debt recording, compilation of statistics).
  - MoF and CBoB drafting memorandum of understanding to govern principal-agent relationship.
- DMO activities:
  - Begun performing some middle-office tasks.
  - Debt management strategy required by PDMA; first released December 2021 and updated December 2022.
  - Update included evaluation of actual borrowing in 2021/22 versus announced annual borrowing plan.
- Recommendations for DMO capacity:
  - Develop capacity over medium term via recruitment, training, and retention of specialized staff.
  - Address MoF salary constraints; explore modalities:
    - Receiving secondments of staff from the CBoB.
    - Hiring private-sector professionals on non-permanent consulting contracts.
  - Increase coordination between MoF and CBoB and include MoF in regular market consultations currently undertaken by CBoB alone.
  - Increase exposure of MoF staff to CBoB funding operations and market participants to facilitate skills transfer and issuer familiarity with market conditions.
  - Strengthen coordination of debt and cash management; improve reliability of multi-month cash forecasts and set a target for cash balance to reduce reliance on overdraft and advances.

### Money market: assessment and implications
- LCBM framework assessment: money market assessed at stage 1.6 (“nascent”).
  - Outcome indicator “a well-functioning short-term securities and repo market”: stage 1.0.
  - Policy indicators relating to monetary policy framework and monetary policy operations: stage 2.0.
- Monetary policy and market features:
  - Exchange rate peg with binding capital controls; no explicit inflation target.
  - Domestic policy rate constant at 4 percent since May 2017.
  - Commercial banks’ prime rate at 4.25 percent since 2017.
  - Monetary transmission is poor.
  - CBoB liquidity management tools: changes to reserve requirements and sales/purchases of government stock with end investors from its own stock.
- Reserve requirements and T-bill issuance:
  - CBoB relies on cash reserve requirement ratio (CRR); CRR decreased from 10 to 7 percent in April 2021.
  - Most T-bill issuances are rollovers of maturing lines; some unscheduled auctions driven by government cash needs.
  - Nearly unchanged pricing of T-bills over past fifteen months undermined credibility of T-bill rates as short-term benchmarks.
  - T-bill issuance amounts varied from B$91 million (June 2021) to B$492 million (January 2022).
- T-bill maturities issued by CBoB: 91-day and 182-day T-bills issued on schedule driven by redemption of outstanding T-bills.
- Market interest in new instruments:
  - Counterparts expressed interest in 30-day T-bills and issuing 1-year Treasury Note as discounted 360-day T-bill via competitive auction.
  - Introduction of two new money market lines would provide additional flexibility.
- Repo market:
  - No interbank repo market currently.
  - BGSD supports repo trading and settlement.
  - Leading banks express interest in repo activity and interbank trading.
  - Structural excess liquidity reduces near-term urgency to develop repo markets, but groundwork should be laid now.
  - Use of repo in central bank market operations recommended to catalyze money market development and support dealer activity in primary market.

*IMF | The Bahamas Domestic Local Currency Bond Market Development*

### 27. For the further development of the money market, adoption of the standardized

### tarea2024053-print-pdf - 27. For the further development of the money market, adoption of the standardized

### Money market development: context and responsibilities
- Adoption of the standardized GMRA is a precondition for further development of the money market.  
- Banks cite the lack of a clear and tested legal framework as a factor hindering willingness to prepare for future repo trading; local counterparts need certainty on the legal treatment and enforceability of ISDA contracts in domestic courts.  
- The CBoB is identified as best placed to promote money market development given repo complexity and the need for specialized knowledge in execution, risk management, and settlement.  
- Repo market progress requires parallel development of money and capital markets, a robust legal framework, supporting prudential regulation, efficient trading and settlement infrastructure, and coordination among a wide range of actors (interbank market makers, security dealers, asset managers, custodians, industry associations, regulators, Parliament, courts).

### Money market recommendations (Phase 1: 6 to 12 months)
- Allow market forces to fully determine short-term money market rates (e.g., T-bill prices).  
- Develop and sponsor repo market development as a means of secured interbank lending and as a vital cornerstone of money market activity.  
- Develop stronger debt and cash management coordination and communication to refine money market issuance.

### Money market recommendations (Phase 2: 12 to 24 months)
- Sponsor development of reference rate for interbank markets.  
- Clarify the legal standing and enforceability of repo contracts (e.g., GMRA) via revisions to the Bankruptcy Law or a Law on financial collateral.

### Primary markets: assessment and findings
- Under the LCBM framework, the primary market for domestic government securities in The Bahamas is assessed at stage 2.4 (“developing”).  
- Supporting strengths:
  - Scheduled issuance of government securities to a diversified domestic investor base.  
  - Purchasing across a long-term yield curve, resulting in an ATM of 6.9 years.  
- Key weaknesses keeping the building block at “developing”:
  - Absence of a market-based placement mechanism for BRS.  
  - Lack of benchmark building policies.  
  - Challenges between debt and cash management and limited transparency around debt management strategy development and implementation.

- Issuance practices and statistics:
  - Issuance follows the MTDS, ABP and an annual issuance calendar; the 2023 ABP would benefit from more detailed planned issuance by maturity buckets.  
  - Current issuance calendar gives information on aggregate issuance amount, but not various tenors to be offered.  
  - The current average time-to-rollover of the domestic debt is 5.5 years.  
  - At end-2022 there were 240 BRS lines outstanding, indicating no benchmark bond issuance policy. Outstanding notional amounts can vary between B$100,000–500,000 and B$167 million.  
  - BRS are placed as tap issues at par with coupon determined by the issuer (MoF) upon consultation with the CBoB; market participants cannot set prices in tap bids.  
  - Tap sales have been significantly uncovered during the past three years due to limited price discovery and perceived opaque pricing rationale.  
  - T-Bills are offered at competitive multiple-price auctions.  
  - During January 2022 to February 2023 amounts offered at monthly T-bill auctions varied between B$129 million and B$492 million. Aggregate accepted amount was B$3,844.5 million vs. B$3,764.5 million targeted/offered amount.  
  - T-Bills are issued with tenors of 91 and 182 days; fixed-rate BRS offered from 1 year up to 30 years. The 1-year note could be replaced by a 364-day T-bill; introduction of a 30-day instrument is suggested.

### Primary market risks and operational issues
- Market risk embedded in issuance:
  - Subscription window open for six hours exposes participants to interest rate volatility.  
  - Pre-set par pricing for tap issues limits market-determined clearing rates for BRS.  
  - Shrink-or-grow option on issuances creates uncertainty around final issuance amount.  
  - Lack of publication of investor-category purchases reduces market awareness of liquidity and breadth.

- Benchmark and fragmentation issues:
  - No benchmark building policy; most BRS lines are small in size and market remains fragmented.  
  - Increased size of benchmark BRS lines could attract wider investor participation and improve secondary market liquidity.

- Liability management and cash management:
  - Liability Management Operations (LMOs) such as buybacks and exchange/switch auctions could consolidate smaller securities into larger benchmark lines and manage rollover risk.  
  - Unexpected cash management shortfalls suggest need to improve resilience without special auctions. Recommendations include streamlining access for line ministries/SOEs to liquidate buffers, self-evaluation of forecast reliability, and developing a sufficiently large cash buffer via issuance to government securities.  
  - Cash management should move toward proactive practices including repos and a cash buffer for the Treasury; advances and overdrafts should be last-resort funding.

### Primary market recommendations (Phase 1: 6 to 12 months)
- Provide more information in the ABP and the Issuance calendar (delineate expected issuance across maturity buckets).  
- Publish auction details (minimum, maximum and average prices/yields, number of bids received and accepted) immediately after finalizing the auction decision.  
- Accept market outcomes for all domestic securities issuances (e.g., be a price taker across the curve).  
- Narrow the sales time for issuance to reduce exposure to market risk.  
- Formulate and publish rules or criteria for applying the shrink/grow option on issuances.  
- Publish general information on the investor base for T-Bill and BRS issues on a regular basis.  
- Analyze the feasibility of introducing 30-day and 364-day tenors to the T-Bill issuance calendar.

### Primary market recommendations (Phase 2: 12 to 24 months)
- Ensure that prices for existing securities reflect changes in the underlying rates environment and interest accrual.  
- Reduce the number of outstanding BRS ISINs and increase the size of benchmark BRS ISINs by:
  - (i) with regards to existing debt, deploy LMO strategies (buybacks and exchange/switch auctions);  
  - (ii) when issuing new BRS, offer into a single ISIN in each benchmark tenor for a longer period via reopenings, until it reaches the targeted benchmark size.  
- Develop LMO capacities for market maintenance and refinancing risk management purposes.  
- Improve debt and cash coordination, cash management, and build a larger cash buffer.  
- Adopt a more pro-active cash management structure.  
- Move to a treasury single account located at the CBoB from a domestic bank with zero remuneration.

### Secondary markets: assessment and preconditions
- The secondary market for government securities in The Bahamas is assessed at stage 1.2 (“nascent”) — outcome score 1.0 and policy indicators score 1.4.  
- Low score reflects lack of secondary market activity due to primary market issuance practices, lack of competing investable assets, capital controls, and buy-and-hold investor behavior.  
- Preconditions for secondary market development include:
  - (i) an efficient money market, particularly an active interbank repo market;  
  - (ii) predictable and transparent issuance of a small number of benchmark securities placed at market clearing prices;  
  - (iii) a sufficient number of intermediaries (primary dealers/market makers) trading non-negligible amounts with standard pricing during agreed times;  
  - (iv) investors with different investment profiles including some open to trading;  
  - (v) efficient market infrastructure; and  
  - (v) a supportive legal and regulatory environment (e.g., tax systems).  
- In The Bahamas the traditional secondary market is non-existent; a hold-to-maturity culture predominates. Two activities are accounted by authorities as secondary market trades: (i) allocation of government securities for non-competitive bids, and (ii) a buyback/sale window operated by the CBoB to provide early redemption options to investors. Limited information is released on the CBoB’s market-making activities.

*IMF | The Bahamas Domestic Local Currency Bond Market Development | excerpt*

### 48. Non-competitive bids, i.e., bids submitted for the auctions with a value less than

### 48. Non-competitive bids, i.e., bids submitted for the auctions with a value less than B$500,000

### Market-making and secondary market functioning
- Non-competitive bids (value less than B$500,000) may be accepted if the offered amount is not sold during the competitive auction; remaining amount may be offered to interested investors at the “market-based weighted average price” of the auction.
- In the absence of a “true” secondary market, investors may find it difficult to sell holdings before maturity.
- Offers may be placed on the BISX and after a certain period (usually 2–3 days) if no counterparty is found, the seller may turn to the CBoB to buy the relevant security.
- The CBoB regularly publishes prices on which it is ready to trade BRS with market participants.
- The bid-offer spread quoted for any security is set at 5 cents across the curve, regardless of maturity.
- A private sector market maker would find it challenging to replicate the 5 cents spread or quote tighter pricing and still make a profit and reasonable return on capital required to support the trading balance sheet.

### CBoB balance sheet management and market impact
- The CBoB pricelist is valid for one month, after which a new pricelist is published.
- Market-making by the central bank aims to maintain investor confidence in government bonds by ensuring holders can find a counterpart to exit investments early.
- As a result of market-making activity, the CBoB accumulates government securities on its balance sheet and, from time to time, needs to offer securities via auctions in the secondary market for prudential balance sheet management purposes.
- In 2022 the CBoB attempted to withdraw from providing public brokerage services but reversed the decision following significant pressure and continues to provide liquidity to market participants.
- Secondary market purchases by the CBoB are counted towards the CBoB’s prudential exposure limits to the central government; these purchases can pressure the CBoB’s capacity to extend further advances and may require discounting sales that result in losses for the CBoB’s trading book.

### Conflicts, backstop role, and suggested transition
- Questions raised by continued CBoB market-making:
  - (i) Parallel issuance of government securities in the market could create future conflicts if the MOF needs funding during a CBoB operation.
  - (ii) The CBoB should provide a backstop for private sector market makers (e.g., broker dealers) rather than be the primary market maker.
  - (iii) In conditions of excess liquidity and limited reinvestment alternatives, stopping central bank provision of the service could leave investors unable to find buyers; gradual reduction of CBoB commitment may be prudent.
- Suggested tactics to lower CBoB market-making strength:
  - Widen the bid-ask spread on the price sheets.
  - Differentiate the spread across maturity buckets.

### Market structure impediments and benchmark policy
- As government securities are listed on the BISX, according to the Securities Industry Act (SIA) they cannot be traded outside the Exchange, creating an impediment for developing an OTC market for government securities.
- Many countries use their stock exchange for trade reporting of OTC trades; arrangements in The Bahamas may have practical reasons but sometimes serve as financial support for the exchange and brokers via fees for reporting OTC trades.
- The large number (240) of government securities outstanding creates an illiquid and fragmented market.
- Given lack of a benchmark bond policy, it is not reasonable to expect financial institutions to act as market maker for all government securities.
- Recommendation: Consolidate the outstanding 240 BRS lines into fewer (20-30) benchmark lines by using LMOs to stimulate secondary market trades.

### Repurchase agreements and securities lending
- Repurchase agreements are needed to enhance secondary market liquidity by creating demand for government securities as collateral.
- Authorities in more developed debt markets create Securities Lending Facilities (SLF) to provide a backstop for securities to help dealers avoid potential settlement failures.
- Access to SLF-type facilities may be costly and only available for short periods to instill discipline and avoid crowding out the interbank market.

### Recommendations for market development
- Phase 1 (6 to 12 months)
  - Introduce a benchmark bond policy that can play a fundamental role in starting the secondary market – step by step.
- Phase 2 (12 to 24 months)
  - Develop capacities and train staff to conduct LMOs (buybacks and switches) to consolidate the large number of government securities into fewer benchmark lines.
    - Smaller lines may be bought back completely.
    - Larger series maturing in the same year could be offered a switch into one of these bonds.
    - New issuances should rely more on re-openings and building larger, more liquid bond lines in key tenors.
  - Clarify roles of the MOF and the CBoB as market makers in government securities. The MOF as issuer should take the role of backstop bidder using the CBoB as agent.
- Phase 3 (beyond 2 years)
  - Gradually reduce the role of CBoB from a major market maker to a last resort liquidity provider in government securities (as an Agent for MOF).
  - Develop repurchase agreements to enhance secondary market liquidity.

---

### E. Investor Base

### Assessment and stage
- The investor base for government securities in The Bahamas is assessed at stage 3.0 (“emerging”).
- Outcome indicator driven by depth and diversity of the non-banking sector and broad range of market participants.
- Policies and practices indicators suggest significant work is needed to bolster investor relations management with the predominantly buy-and-hold domestic investor base.

### Role of diversified investor base
- A relatively diversified investor base supports demand across maturities and strengthens funding resilience during market stress.
- Example: as some domestic banks with majority foreign ownership lowered exposure after Hurricane Dorian and the COVID-19 pandemic, local institutions offset this trend and increased holdings of government debt.
- The absolute size of the domestic financial sector largely defines domestic absorption capacity for government bonds and affects market liquidity.

### Market participants and holdings
- Liquidity in the financial system is abundant but lack of alternative investment opportunities leads many investors to hold bonds to maturity.
- Non-bank financial institutions (NBFI) are reasonably large and spread across mutual funds, insurance and pension fund sectors; demand from these investors for long-dated assets supports MoF extending maturities.
- Depth and diversity of banking sector:
  - Domestic banking system includes 17 banks (3 domestic majority owned banks, 4 foreign bank subsidiaries and 10 credit unions).
  - Bahamas has adopted Basel III regulations; bank demand for government securities partly driven by HQLA status.
  - Bank and NBFI holdings: commercial banks hold 38 percent and NBFIs hold 39 percent of domestic government debt (CBoB estimate).
- Public sector debt by creditor type at Dec-2022:
  - Central Bank, 14%
  - Commercial Banks, 38%
  - Public Corporations, 8%
  - Private Sector, 39%

### Non-banking sector specifics
- Total assets of NBFIs are equivalent to about 43 percent of GDP.
- The sector is dominated by mutual funds and the National Insurance Board (NIB) accounting for some 60 percent of all NBFI assets.
- Insurance sector:
  - Long-term: 12 companies with assets of B$ 1.56 billion; 13 percent of GDP.
  - General insurance: 19 firms with assets of B$ 590 million; 4.5 percent of GDP.
  - Long-term insurers: 53 percent of long-term insurer assets are held in government securities.
  - General insurance: government securities holdings represent only 18 percent of general insurance assets; majority (52 percent) held in cash and term deposit accounts.
- Pension sector:
  - Pension fund coverage estimated at only 20 to 25 percent of residents.
  - NIB had total assets of B$1.8 billion (nearly 13 percent of GDP) at end-2019.
  - NIB fixed income investment at end-2019: 86.4 percent in local government securities (T-Bills 0.2 percent, T-Notes 0.6 percent, BRS 85.6 percent).
  - No regulatory minimum or maximum limits on pension fund holdings of domestic government securities.

### Investor Relations (IR) management
- No formal IR policy, strategy or IR management unit exists.
- DMO capacity hampered by small staff and lack of front/middle/back office alignment.
- The CBoB works with the Meridian debt recording system, but periodic reports on the country’s debt portfolio are not published and are not easily located.
- The MoF does not maintain a database of investor contact details.
- Lack of a formal IR function limits issuer’s ability to assess market conditions, understand investor preferences, and mitigate risks in distressed periods.
- The MoF does not maintain a dedicated website on debt management operations; key policy documents exist but dissemination and signposting across multiple agencies (CBoB, MoF, Securities Commission, Insurance Commission, BISX) is weak.
- Interactions with the local financial community on government debt are mostly led by the CBoB; MoF has recently increased involvement but interactions are not held on a regularly scheduled basis.

### Central bank monetary financing and constraints
- The CBoB is prohibited from purchasing government securities in primary markets, but temporary advances to the government are allowed within circumscribed limits if Temporary Loan Capacity and Primary Market Capacity conditions are met.
- Interest on advances is based on the 91-day T-bill rate.
- Periodical recourse to this window reflects shortcomings in short-term debt and cash flow management.
- All secondary market purchases by the CBoB count towards prudential exposure limits to central government; reaching these limits pressures the CBoB’s capacity to extend advances.

### Foreign investors and buy-and-hold behavior
- Foreign investor participation in the domestic market is negligible.
- Existing capital controls limit timely access to BRS and T-bills.
- Government securities do not carry IOSCO-recognized ISINs and no clearing bridge exists between the BGSD and international clearing and settlement bodies.
- Low domestic market rates reduce attractiveness for foreign investors.
- Buy-and-hold culture persists; preference for keeping interest rates fixed for prolonged periods, limited corporate bond and equities markets, and visible investments in real estate and fixed assets with long-term horizons.
- Lack of income or capital gains taxes removes tax-related impediments to trading.
- Local investors lack financial literacy and do not always understand credit, liquidity or market risks.

### Recommendations for Investor Relations
- Phase 1 (6 to 12 months)
  - Develop IR capacity in partnership with the CBoB and jointly engage with the financial community.
  - Refine and reposition the quarterly statistical report or develop a more succinct, standalone, quarterly debt bulletin (QDB).
  - Craft IR strategy policy that formalizes publication commitments, timetables and consultation fora with market participants.
  - Request the CBoB to consolidate data, information and publications related to government securities into a central portal.
  - Leverage database of stakeholder contact details to enable dissemination of IR materials and tracking and targeted analysis of investment behavior.
  - Ensure key policy documents and debt management publications are regularly updated, fit for purpose, easily located, and distributed on a timely basis to domestic and external stakeholders.
- Phase 2 (12 to 24 months)
  - Develop a DMO’s IR website portal with links to the CBoB’s various data, statistics and information on government securities.
  - Support efforts to improve financial literacy.

---

### F. Financial Market Infrastructure

### Assessment
- In the LCBM Framework, The Bahamas’ Financial Market Infrastructure (FMI) is assessed at stage 2.3 (“developing”).
- This reflects existing technology platforms that handle security registration, clearing and settlement of fully dematerialized government securities.
- The Bahamas currently has two CSDs:
  - One for government securities owned by the CBoB that has only recently adopted automated processes.
  - Another CSD (the BCSD) operated by BISX for corporate securities and equities.

*Italic: IMF | The Bahamas Domestic Local Currency Bond Market Development — extracted content unit*

### 72. An efficient FMI is an important precondition of market development. Systems

### 72. An efficient FMI is an important precondition of market development. Systems

### Role and design of FMI in market development
- Systems used in settlement and clearing of financial transactions should be safe, cost efficient and convenient to use.
- The FMI framework should include systems necessary for the issuance (auction), settlement, registration and custody of securities, and payment systems for cash settlement.
- Within the LCBM development framework, the FMI is evaluated alongside five dimensions: (i) electronic platforms; (ii) efficient and low-risk custody and settlement; (iii) soundness and operating environment of FMI, (iv) repo markets; (v) transparency in the money, primary and secondary markets.
- Systems should be interconnected and provide for straight-through processing to minimize counterparty and market risk during clearing and settlement.
- Key risk-reducing features and functions cited: dematerialized securities; delivery versus payment; electronic link to the central bank’s Real-Time Gross Settlement (RTGS) system; a central counterparty (CCP) at advanced stages; liquidity support for repo transactions; introduction of DVP2 and DVP3 (intraday netting).
- Fragmentation risks: multiple CSDs or CSDs with limited functionality for multiple settlement methods may seriously hinder these functions.

### FMI governance, access, and transparency
- Sound governance and access policies of the FMI, and transparency of data and information, increase confidence of market participants.
- Pre-trade and post-trade transparency should support and facilitate secondary market trading.
- The CSD should be able to collect and publish aggregated data with regards to transactions and holders of securities.

### Assessment of The Bahamas FMI and BGSD operations
- In The Bahamas, systems for registration, issuance, and settlement of government securities are operated by CBoB.
- The CBoB maintains an electronic register of government securities in the newly launched BGSD, which interfaces with the country’s Automated Clearing House (ACH) and RTGS payment and settlement networks.
- Order entry for bidding in government securities is automated via an online portal maintained by the CBoB.
- Final payments and security transfers are protected by regulation.
- The BGSD provides payment, settlement and registration facilities within one system, but it is not subject to regulatory oversight by the Securities Industry Commission and there is no regulator overseeing its conduct.
- The BGSD uses gross settlement (DVP1) with T+2; other settlement cycles (T+0 and T+1) could be used in the system.
- Intraday netting DVP2 and DVP3 will be available once market development reaches a higher stage.
- No Central Counterparty (CCP) exists at present.
- BGSD guidelines require members to hold client assets separately from their own assets.
- BGSD may maintain a Settlement Guarantee Fund (“SGF”) to guarantee settlement of trades executed on the BGSD, but it is not in operation as yet.
- BGSD may establish and maintain an Investor Protection Fund (“IPF”) for protection of clients’ interests in the event clients suffer pecuniary losses arising from negligence of BGSD or by its members/participants while carrying out instructions of the client.

### Market structure, fragmentation, and data gaps
- The existence of two CSD systems may negatively impact future efficacy of market infrastructure.
- Institutions executing cross-market trades (e.g., selling corporate bonds to purchase government securities) might face delays and potential operational and settlement risk as the two systems are not connected electronically.
- Capital markets liquidity will be separated into different market segments; fragmentation is inimical to development of liquid capital markets.
- Alongside a small number of corporate bonds, 240 government bonds are listed on the BISX.
- Each security carries a unique securities identification code, similar to an ISIN but generated by the CBoB.
- Any trade conducted between two counterparts not involving the CBoB must be registered and “crossed” via the BISX.
- BISX publishes general summaries of primary and secondary capital markets activity on a regular basis, but reporting on turnover among equities and debt instruments is comingled and no dedicated narrative is offered for the government securities market, even though the 240 BRS lines dominate the BISX in terms of the number of listed instruments.
- The BGSD does not currently charge custody or registry fees; CBoB is contemplating introduction of platform fees from 2024 onwards on a cost-recovery basis.
- There is scope to provide information on aggregate transaction volumes, both over time and across different investor type classifications.
- Currently, the CBoB provides no information on transaction flows and publishes general summaries of holdings by domestic investor class sporadically.

### FMI recommendations (FMI systems and data)
Phase 1 (6 to 12 months)
- Leverage the trade intelligence embedded within the CSD system to understand better investment activity and publish aggregate summaries of investor in a more accessible format.
- Finalize plans on investor protection, repo markets, and enable over-the-counter trading.
- Consider establishing a bridge between the BGSD and BCSD for efficient cross-market settlement.

Phase 2 (12 to 24 months)
- Consider privatizing the BGSD to allow the private sector to take responsibility for a key component of the capital markets infrastructure.

### Legal and Regulatory Framework — overall assessment
- The legal and regulatory framework in The Bahamas is assessed at stage 3.8 (“mature”).
- The score reflects strength across all dimensions and attests to the strong legal and regulatory foundation as well as recent legislative reform (e.g. the new law on public debt management).

### Legal foundations and key laws
- The LCBM legal and regulatory diagnostics focus on: (i) the borrowing authority; (ii) market regulation and enforcement; (iii) investor protection; (iv) collective investment schemes; and (v) the legal framework for taxation.
- Key laws related to public debt and government debt management: Public Debt Management Act 2021 (PDMA), Fiscal Responsibility Act 2018 (FRA), Central Bank of The Bahamas Act 2020 (CBoBA).
- Key laws impacting the government securities market: Securities Industry Act 2011 (SIA), Investment Funds Act 2019 (IFA), Financial Transactions Reporting Act 2018.
- CBoB has prepared guidelines and business rules for the BGSD.

### Authority to borrow and debt management
- PDMA provisions: sets objectives for debt management (section 4), including promotion and efficient functioning of the local government securities market.
- The act confers authority to borrow solely on the Minister of Finance (section 16); that authority may not be delegated (section 17).
- The act defines purposes for borrowing (section 18) and allows operations for managing cash flows and portfolio risks (section 14), including repo transactions.
- CBoBA designates the CBoB as fiscal agent for the government (section 20) and sets limits on volume of credit via advances and holdings of securities (section 21).
- PDMA establishes the debt management office (DMO) within the MoF and assigns responsibilities including front, middle, and back-office functions (section 7).
- PDMA requires the DMO to develop, implement, review, and publish a medium-term debt management strategy (MTDS) and an annual borrowing plan (ABP); strategy should be approved by Cabinet (section 12).
- Many front and back-office activities are currently performed by the CBoB under a memorandum of understanding (preparing prospectuses, administration of auctions and tap sales, recording and registration of government securities, payment of debt service).
- PDMA provides for the CBoB to establish a central securities repository within the central bank or facilitate establishment as an independent private entity outside the central bank (section 62).
- The MTDS and ABP prepared to-date are comprehensive but lack clarity in places, reducing their value for informing investors, market participants, and other stakeholders.

### Market regulation and enforcement
- Principal act for regulation and enforcement in government securities market is the SIA.
- The government as issuer is exempted from certain filing requirements (section 92), but participants and trading fall under the act.
- SIA provisions prohibit market manipulation (section 109), false trading and market-rigging (sections 110 and 111), dissemination of false or misleading information (section 115), front-running (section 120), and other misconduct.
- Short-selling is permitted insofar as the act is silent; a new version of the SIA is in preparation and expected to be sent to parliament in late 2023 and will explicitly address short-selling.
- The Securities Commission is the main regulatory and enforcement body; the CBoB plays an important role in the government securities market.
- CBoB and Securities Commission share information monthly on jointly licensed entities; there are quarterly meetings of the entire group of financial services regulators.
- SIA empowers the Securities Commission to investigate (Section 42), obtain information (section 43), inspect (section 45), require reports (section 46), receive financial statements and auditor reports of registered firms (section 77), and more generally monitor market participants and activity.
- SIA authorizes the Securities Commission to issue compliance orders (section 132), take legal action (section 134), impose administrative penalties (section 135), remove benefits (section 136), and recover costs (section 137).
- Securities Commission reports it has both the authority and capacity to monitor the market and enforce conduct rules; market participants confirm this assessment.

### Investor protection
- CBoB published guidelines and business rules for the BGSD; BGSD launched in January 2023.
- Members must maintain separate accounts for each individual client and for own account, maintain separate records, and deliver periodic reports to clients and to the CBoB.
- CBoB monitors and can enforce compliance with guidelines and rules, including those to safeguard investor ownership rights.
- BGSD may establish an investor protection fund to compensate clients who suffer losses due to negligence of BGSD or BGSD intermediaries; at the time of the mission, the fund had not been set up.
- BCSD operated by BISX has similar protections, but BISX does not operate an investor compensation fund or a settlement guarantee fund.

### Repo and collateral framework
- BGSD guidelines and rules provide for repo transactions and third-party rights/encumbrances in respect of government securities.
- Given absence of repo transactions, market participants have not yet adopted the Global Master Repurchase Agreement (GMRA) standard contract.

### Collective Investment Schemes (CIS)
- Principal act for CIS regulation is the IFA; Securities Commission administers and enforces the act.
- IFA requires extensive disclosure and reporting to investors and to the Securities Commission, including quarterly mark-to-market valuation of holdings.
- CISs may mobilize household savings and spread financial literacy; some institutions already offer CISs but there is room for expansion.
- Government intends to introduce retail savings bonds in addition to the non-competitive bidding carve-out for retail investors in auctions; retail savings bond programs are typically administratively costly and seldom a reliable and stable source of financing.
- A preferable option suggested: encourage development of a government securities mutual fund to allow retail investors exposure to government securities.

### Legal framework for taxation
- The Bahamas has no personal or corporate income tax, including on returns from government securities.
- There is tax certainty and neutrality for both primary and secondary market transactions across major investor classes.

### Legal and regulatory recommendations
Phase 1 (6 to 12 months)
- Continue to refine the content and format of the MTDS and the ABP to improve their usefulness for investors and market intermediaries.
- Introduce repo transactions as one of the key revisions to the SIA.
- Provide more information in the ABP, including volumes of individual benchmark issues.
- Strengthen the commitment to adhere to the pubished MTDS and the ABP.

Phase 2 (12 to 24 months)
- Strengthen the legal framework for financial collateral, with a carve-out in the event of insolvency of a market participant.
- Sponsor the adoption of the GMRA standard contract to facilitate repo market development.
- Introduce close-out netting to ensure that the rights of the repo partners can be enforced in court, in case one of the parties defaults.
- Modernize the legal framework for bankruptcies and financial collateral, which is currently fragmented across multiple laws.

### Conclusion and policy sequencing
- The Bahamas’ overall macroeconomic framework is strong and conducive to further developing its domestic government securities market: debt assessed as sustainable, improving economic conditions, a diversified investor base, existence of a yield curve and benchmark securities, and a sizeable NBFI sector.
- Better coordination between the CBoB and MoF is essential to advance reforms and develop the local bond markets; weak coordination across agencies (CBoB, MoF, BISX, Securities Commission) is hindering market development.
- Initial efforts should focus on improving the primary market; secondary market reforms should await a vibrant, functioning, price-taking primary market.
- Improvements in investor relations and debt reporting (uncertainty regarding bond auctions, MTDS/ABP transparency, systematic outreach to creditors) can yield quick progress.
- Follow-up Fund TA by IMF/CARTAC would support authorities in accelerating reforms in key areas during initial phases.
- Progress should be monitored by a designated official with authority to lead and promote the reform process across agencies.
- The LCBM framework allows evaluation of progress on each area relevant to the domestic debt market; improvements could be reported annually as part of an MTDS to monitor progress and maintain high-level support.

*IMF | The Bahamas Domestic Local Currency Bond Market Development (excerpts).*

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_Source: https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024053-print-pdf.pdf_