Mongolia: Government Bond Market Development

Sovereign Project | 45522-001

Summary

The TA will help to develop the government bond auction system. A comparative analysis of several options to improve the government bond auction platform needs to be conducted. Currently, there are three possible options for the MOF: (i) continuing to use MSE's auction platform, (ii) integrating it with the Bank of Mongolia's auction platform for central bank bills, and (iii) developing a new auction platform customized to the MOF's needs. Each alternative has its own strengths and weaknesses. To name a few, MSE's auction system is open to all investors including non-banking financial institutions and individual investors while BOM's system is only accessible to banks. However, BOM's auction system might be more efficient and secure than other alternatives in terms of its connectivity to the payment system. Meanwhile, the new system can be developed to meet market's needs most effectively although it might cause some concerns on cost and duplication of investment.

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Project Name Government Bond Market Development
Project Number 45522-001
Country Mongolia
Project Status Approved
Project Type / Modality of Assistance Technical Assistance
Source of Funding / Amount
TA 7971-MON: Government Bond Market Development
Financial Sector Development Partnership Fund US$ 500,000.00
Strategic Agendas Inclusive economic growth
Regional integration
Drivers of Change Governance and capacity development
Partnerships
Sector / Subsector Finance - Finance sector development - Money and capital markets
Gender Equity and Mainstreaming Some gender elements
Description The TA will help to develop the government bond auction system. A comparative analysis of several options to improve the government bond auction platform needs to be conducted. Currently, there are three possible options for the MOF: (i) continuing to use MSE's auction platform, (ii) integrating it with the Bank of Mongolia's auction platform for central bank bills, and (iii) developing a new auction platform customized to the MOF's needs. Each alternative has its own strengths and weaknesses. To name a few, MSE's auction system is open to all investors including non-banking financial institutions and individual investors while BOM's system is only accessible to banks. However, BOM's auction system might be more efficient and secure than other alternatives in terms of its connectivity to the payment system. Meanwhile, the new system can be developed to meet market's needs most effectively although it might cause some concerns on cost and duplication of investment. The detailed strengths and weaknesses of each option will be analyzed and then a recommendation will be made for the upgrading of the auction platform, either by improving one of the existing systems or designing a new system. While upgrading the auction platform, the TA will also give careful consideration to enhancing the security of transactions. In addition, the TA will consider how to improve the overall auction design, including pricing, scheduling, and control over participants. Finally, the TA will also provide capacity development opportunities for MOF staff and market participants.
Project Rationale and Linkage to Country/Regional Strategy
Impact Financial markets based on more efficient government debt market developed
Project Outcome
Description of Outcome A well functioning primary government bond market established
Progress Toward Outcome
Implementation Progress
Description of Project Outputs

1. Upgrade of the government bond auction platform

2. Improvement of general auction design

3. Policy recommendation on long term development of government bond market

4. Capacity development of government staff and market participants

Status of Implementation Progress (Outputs, Activities, and Issues)

The following activities were completed:

PHASE I

" Inception meetings with MOF office, Deputy Minister, Head of Debt Management and Treasury Department;

" Meetings with other stakeholders;

" Identification of activities that need to be carried out under the TORs of the Team Leader

" Request for government bond auction data, legal and regulatory documents on government bond issuance and secondary markets, earlier studies on Mongolian government bond auction system, etc.

" Review of current government bond auction system including payment and settlement system;

" Review of the CBB auction system of the Bank of Mongolia

" Preparation of Inception Report.

PHASE II

" Reviewing the current government bond auction system including legal, regulatory frameworks and market conditions

- Collecting materials on the current government bond auction system and

- platform in Mongolia

- Collecting data of government bond auction in Mongolia

- Reviewing the legal and regulatory frameworks

" Study on international best practices of government bond auction system

- Study on the case where MOF delegates bond auction administration

- responsibilities to the central bank and accordingly the central bank runs

- its own auction platform

- Study on the case where MOF or its agency runs its own auction platform

- (internally developed or third party vendor platform) and undertakes all

- the government bond issuance processes

- Study on the necessity of legal and regulatory changes in each of these

- alternatives

" Organizing a workshop or seminar

- Presentation on other country cases for international best practice

PHASE III

" Comparative analysis of auction system

- Analysis on pros and cons of central bank administering system and MOF administering system

- Identification of necessary organizational capacity, legal and regulatory amendment issues, and payment and settle arrangement issues

" Comparative analysis of auction platforms

- Analysis on strengths and weaknesses of auction platform alternatives such as the current Bank of Mongolia bond auction platform and Bloomberg government bond auction platform

- Identification of the required features as well as the desirable features of the new bond auction platform that Mongolian government will adopt

" Upgrade of auction platform hardware and software

- Upgrade of the auction platform hardware and software once the auction system and platform is selected by the Mongolian government

- Support on the procurement of new auction software and related services from a globally renowned service provider if procurement is necessary

" Submission of Interim report

- Preparation of interim report based upon the project outcomes and submission of the report by December, 2012

- First draft of final report is being prepared and circulated for comments

- Final workshop for dissemination of the final report is scheduled on November 2014.

Geographical Location
Summary of Environmental and Social Aspects
Environmental Aspects
Involuntary Resettlement
Indigenous Peoples
Stakeholder Communication, Participation, and Consultation
During Project Design

In preparation: discussion with the Ministry of Finance expected in mid-March, 2011.

Reconnaissance mission was conducted in March 14. The MOF and the BOM expressed their interest in having ADB assistance for the development of the government bond market. They requested that ADB provide assistance in such issues as (i) facilitating the longer term issuance; (ii) developing the yield curve; (iii) strengthening institutional investors; and (iv) establishing the primary dealer system. (17 March 2011)

During Project Implementation
Business Opportunities
Consulting Services The TA will engage three international consultants for 20 person-months and three national consultants for 20 person-months. The government bond market expert will be the team leader. Consultants will be engaged by ADB in accordance with its Guidelines on the Use of Consultants (2010, as amended from time to time).
Procurement Equipment will be procured in accordance with ADB's procurement guidelines.
Responsible ADB Officer Seung Min Lee
Responsible ADB Department East Asia Department
Responsible ADB Division Public Mgt, Financial Sector and Regional Coop Division, EARD
Executing Agencies
Ministry of FinanceGovernment Building-2
Negdsen Undestnii gudamj-5/1
Ulaanbaatar-210646, Mongolia
Timetable
Concept Clearance 15 Jul 2011
Fact Finding 27 Jun 2011 to 01 Jul 2011
MRM -
Approval 14 Dec 2011
Last Review Mission -
Last PDS Update 29 Sep 2014

TA 7971-MON

Milestones
Approval Signing Date Effectivity Date Closing
Original Revised Actual
14 Dec 2011 30 Jan 2012 30 Jan 2012 31 Dec 2013 31 Dec 2014 -
Financing Plan/TA Utilization Cumulative Disbursements
ADB Cofinancing Counterpart Total Date Amount
Gov Beneficiaries Project Sponsor Others
0.00 500,000.00 0.00 0.00 0.00 0.00 500,000.00 14 Dec 2011 774,955.29

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