Gilts trading

The date used as the point for calculation is the settlement date for the bond, the date on which a bond will change hands after it is traded. For a new issue of bonds the settlement date is the day when the bond stock is delivered to investors and payment is received by the bond issuer. The settlement date for a bond traded in the secondary market is the day that the buyer transfers payment to the seller of the bond and when the seller transfers the bond to the buyer. Different markets will have different settlement conventions for example, UK gilts normally settle one business day after the trade date (the notation used in bond markets is T+ 1) whereas Eurobonds settle on T + 3. The term value date is sometimes used in place of settlement date, however the two terms are not strictly synonymous. A settlement date can only fall on a business date, so that a gilt traded on a Friday will settle on a Monday. However a value date can sometimes fall on a nonbusiness day. 

Members of the LSE mnst follow its conduct of business rules. In addition, there are specific rnles that apply to GEMMs. These include the requirement to report all gilt trades to the LSE, except gilt repo and stock loan trades. The LSE pnblishes market trading statistics that include the monthly turnover, by volnme, of gilt transactions. It also publishes the Daily Official List, the list of closing prices for all securities listed on the London market. 

The basic concept of the CGO within CREST remains the same—that is, the provision of secure settlement for gilt-edged securities through an efficient and reliable system of electronic book-entry transfers in real time against an assured payment. The CGO is a real-time, communication-based system. Settlement on the specified business day (T + 1 for normal gilt trades) is dependent on the matching by CGO of correctly input and authenticated instructions by both of the parties and the successful completion of presettlement checks on the parties stock account balances and credit headroom. 

LIFFE s Bund future was a story of success. Eollowing its release, this contract powered ahead of the volnme in gilt trading in its first full year of trading. Exhibit 16.2 illustrates this point and the tremendons interest in the Bund contract compared to the gilt at least np nntil the end of 1997. 

The Euro market has not only become the largest government bond market in size but also in number of issues. This market had in February 2003 over 250 liquid issues (over 1 billion outstanding and 1-year maturity), significantly more than the 108 issues in the Treasury market or the nearly 170 JGB issues. There are just around 25 liquid issues trading in the UK gilt market. 

Index-linked gilts, like all other linkers covered in this chapter, are known as capital indexed bonds, where the income and principal are adjusted for changes in a consumer price index, subject to a lag. In the United Kingdom, the index is the RPI and the lag is eight months. The market trades on a clean price basis, with the quoted price a cash price (not a real price), including inflation accretion. 

In Exhibits 8.14 and 8.15, we use the same data to construct two efficient frontiers of portfolios—one without index-linked gilts as an available asset choice and one where index-linked can be selected. For the first frontier below, without linkers, gold is still selected for the lowest risk portfolios because of its diversifying characteristics, in spite of its dreadful risk-return trade-off over the 21 years. Flowever, it quickly disappears from optimal portfolios along the frontier if risk tolerance is raised a tiny bit. The asset mixes of a selection of portfolios along the frontier are also detailed. 

The gilts market is primarily a plain vanilla market, and the majority of gilt issues are conventional fixed interest bonds. Conventional gilts have a fixed coupon and maturity date. By volume they made up 82% of the market in June 2002. Coupon is paid on a semi-annual basis. The coupon rate is set in line with market interest rates at the time of issue, so the range of coupons in existence reflects the fluctuations in market interest rates. Unlike many government and corporate bond markets, gilts can be traded in the smallest unit of currency and sometimes nominal amounts change hands in amounts quoted down to one penny ( 0.01) nominal size. 

Individual gilts are given names such as the 5% Treasury 2012 or the 9% Conversion 2011. There is no significance attached to the name given to a gilt, they are all identical in makeup and credit quality, and they all trade in the same way. Most issues in existence are now Treasury issues, although in the past it was sometimes possible to identify the purpose behind the loan by its name. For example a Conversion issue usually indicates a bond converted from a previous gilt. The 3V2% War Loan on the other hand was issued to help refinance loans raised to help pay for the 1914-18 war. The 3% Gas 1995/98 was issued to finance the nationalisation of the gas industry and was redeemed in 1998. 

Gilts are registered securities. All gilts pay coupon to the registered holder as at a specified record date the record date is seven business days before the coupon payment date. The period between the record date and the coupon date is known as the ex-dividend or ex-div ( xd ) period during the ex-dividend period the bond trades without accrued interest. This is illustrated in Exhibit 9.1. 

Gilt strips are zero-coupon bonds created from conventional coupon gilts. Only issues actually designated as strippable gilts may be stripped. They trade as conventional zero-coupon bonds and are deemed as conventional gilts in terms of their creditworthiness. 

For instance the 2Vi% Annuities gilt was issued in 1853. You won t find too many market makers who are keen to trade in it though ... 

A trading relationship with the DMO whenever it wishes to buy or sell gilts for market management purposes. 

The gilt market forms the cornerstone of the sterling asset markets. Therefore the exchange-traded market in gilt derivatives is an important feature of the debt capital markets as a whole. In terms of derivatives... 

On LIFFE serial expiry months are available for its exchange-traded options serial options are expiry months other than the traditional quarterly months of March, June, September, and December, gilt option expiry months are listed such that the two nearest serial months and the two nearest quarterly months are always available for trading. 

We consider first a classic repo in the United Kingdom gilt market between two market counterparties, in the 5.75% Treasury 2009 gilt stock. The terms of the trade are given in Exhibit 10.3 and illustrated in Exhibit 10.4. Note that the terms of a classic repo trade are identical, irrespective of which market the deal is taking place in. So the basic trade, illustrated in Exhibit 10.3, would be recognisable for bond repo in European and Asian markets. 

The Bank of England discourages sell/buybacks in gilt repo and it is unusual, if not unheard of, to observe them in this market. However, we use these terms of trade for comparison purposes with the classic repo example given in the previous section. The procedure and the terms of the trade would be identical in other markets such as Italy and Portugal where sell/buyback trades are the norm. In the Italian market for example, sell/buybacks are actually called repos. ... 

EXHIBIT 10.10 Bloomberg Screen BSR Page 2 for Sell/Buyback Trade in 5.75% 2009 Gilt, Shown at Exhibit 10.9... 

Let s illustrate variation margin as it is applied to during the term of a trade. Exhibit 10.18 shows a 60-day repo in the 5% Treasury 2004, a UK gilt, where a margin of 2% is taken. The repo rate is 5V2%. The start of the trade is 5 January 2000. The clean price of the gilt is 95.25. 

Assume that one month later there has been a catastrophic fall in the bond market and the 5% 2004 gilt is trading down at 92.75. Following this drop, the market value of the collateral is now ... 

The average volume in gilt contracts over the period 1983-1985 was 663,829. In 1986 volume rose to 2.6 million contracts and settled down to an annual average of approximately 5.6 million between 1987-1991. A second surge in interest in the contract saw trading hit a peak of 19.6 million contracts in 1997, however, from 1998 onwards interest in the contract has slumped to late 1980s levels with annual average of 6.8 million contracts between 1998 and 2001. 

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