Financial Instruments

1. TREASURY BONDS IN GENERAL

Issuer of Treasury bonds under the Bonds Act (No. 190/2004 Coll., § 25, paragraph 1) is the Czech Republic represented by the Ministry of Finance.

For the purpose of financing short-term state debt, treasury bonds with maturity up to 1 year (T-bills) are issued and sold on money market. The first issue of treasury bills on Czech market was realized on 4 January 1993.

Treasury bonds sold on capital market with maturity over 1 year (T-bonds) are used, above all, for financing medium-term and long-term state debt, and in the cases of adopted deficit state budget, also for financing short-term debt. The first issue of such bonds was issued on 18 March 1993.

Savings government bonds are issued and sold to retail clients, especially to citizens of the Czech Republic. These bonds are non-tradable. The first series of savings government bonds was issued on 11 November 2011.

Issuance calendars of T-bills and Issuance calendars of T-bonds are published on a monthly basis each time on the 2^nd or 3^rdMonday of the month preceding the respective month, unless in justified cases the Ministry decides and announces otherwise.

As of 6 October 2014, all member states of the EFC Sub-Committee on EU Sovereign Debt Markets agreed to support a harmonized implementation of T+2 as standard settlement period in OTC Secondary Markets for transferable government securities. New standard settlement period was also discussed with the representatives of all Primary Dealers in Czech Government Securities at the Eight and Ninth Primary Dealer Committee Meeting held on 15 May and 15 September 2014. Commencing on 6 October 2014 all trades conducted via MTS CR and XETRA and also all OTC trades are settled in CSD Prague as a T+2.

2. TREASURY BILLS (T-BILLS)

Characteristics of issued treasury bonds:

• money market bonds are issued without coupons and sold at a lower price than is the face value (the yield is the difference between the issue price and the face value)
• the calculation of the yield to maturity is made according to the standard convention (act/360)
• face value CZK 1 million
• issued with standard maturities of 13, 26, 39 and 52 weeks
• book-entered securities
• holder register is kept by the Czech National Bank
• sold through Dutch auction (uniform price auction)
• auctions are announced on websites of the Ministry of Finance and of Czech National Bank, by Reuters, Bloomberg and other media
• sold to Primary Dealers in the Czech government bonds only
• T-bills are used as collateral for repo operations within to the State Treasury liquidity management

3. MEDIUM AND LONG-TERM TREASURY BONDS (T-BONDS)

Characteristics of issued medium-term and long-term treasury bonds:

• fixed-interest or floating-interest bearing bonds
• with repayment of nominal value on maturity date
• accrued interest is calculated under standard 30E/360, ACT/360 or ACT/ACT ICMA
• face value of CZK 10.000
• maturity 3 years and more
• book-entered securities
• registered by the Central Securities Depository in Prague
• sold to Primary Dealers in primary auctions through Bloomberg electronic system, auctions are announced on websites of the Ministry of Finance, Czech National Bank, by Reuters, Bloomberg and in other media
• two bonds are offered on one auction date  with different characteristics (e.g. fixed-rate and floating-rate, medium-term and long-term bond)
• sold to Primary Dealers in the Czech government bonds only
• traded within the framework of direct sales, TAP sales or buy-backs on secondary market via the electronic trading platform MTS Czech Republic or Thomson Reuters Dealing 3000 
• used also as a collateral for lending facility in the form of repos with Primary Dealers up to 90 days
• strippable selected issues

3. SAVINGS GOVERNMENTS BONDS

Characteristics of savings government bonds:

• fixed-interest or floating-interest bearing bonds
• bonds with limited or excluded transferability
• not-tradable on regulated market
• the repayment of the nominal value on the maturity date, also possible prior to the scheduled maturity date at a pre-agreed dates
• accrued interest is calculated under standard ACT/ACT
• face value of CZK 1
• maturity 1 year and longer
• book-entered securities
• recorded in a separate register of government bonds maintained by the Ministry of Finance
• sold to retail investors through contractual distributors and now also through electronic access to asset account
• are announced on websites of the Ministry of Finance and in other media
• different types: zero-bond, premium bond, coupon bond, reinvestment bond or inflation-indexed bond
• For more information: www.sporicidluhopisycr.cz

4. REPO OPERATIONS

Repo operations may be used for the purpose of liquidity management under § 35 of No. 218/2000 Coll., Budgetary Rules Act and Some Related Acts Amendment Act.

5. DERIVATE OPERATIONS

The Ministry of Finance realized the first derivate operation in the form of plain vanilla IRS (simple interest swap) on 28 November 2002. Since that time, financial derivatives have become an integral part of the management of Czech state debt and are serving as a very flexible instrument for the risk management of financial flows of debt service of the central government in relation to the expenditure side of the state budget.

General authorization of the Ministry of Finance to realize financial derivatives on the account of the Czech Republic within the management of state debt is contained in Act No. 218/2000 Coll., Budgetary Rules Act and Some Related Acts Amendment Act, § 35, paragraph (2), which authorizes the Ministry of Finance to conclude transactions using other investment instruments including derivatives for the purpose of the reduction of interest and currency risks, or any other risks.

Derivate transactions are concluded by the Ministry of Finance separately through a specialized expert office (Risk management and portfolio strategy unit). The transactions are concluded exclusively with international and Czech subjects having at least A/A2 rating, with which the Ministry of Finance has concluded ISDA Master Agreement“ (ISDA = International Swaps and Derivatives Association, Inc.) including the respective Annex. The general ISDA Agreement and its Annex were approved by the Czech Government Resolution No. 1188 of 25 November 2002. In substantial accordance with the above model agreement, the ISDA agreements are being concluded with the individual partners so as to standardize the legal and economic setting for the procedures of the management of credit risk operations with the aim of preventing the advantaging of any concrete subject in that respect. If a given subject is not able or willing to accept the conditions in accordance with the Resolution, the Ministry of Finance in principle does not accept major departures and does not conclude any agreement with such a subject. Likewise, it never comes into consideration that the Ministry of Finance should ever in the future conclude a derivate transaction with a subject with which it has not concluded a valid ISDA Agreement including the Annex.

The Ministry of Finance uses the whole spectrum of financial derivatives for the purpose of sophisticated management of interest and currency risk and costs on the debt portfolio, which can be in that way realized irrespective of the implementation of other objectives, particularly in the field of the stabilization of the refinance and liquidity risk which is carried out solely through the realization of issuance policy on Czech and foreign markets. Most of the realized transactions have mainly a character of simple variants of interest and currency swaps and options. At the same time, strictly respected is a principle that the Ministry of Finance shall only enter into such transactions, which the Ministry is able to re-value and model solely with its own analytical means and „know-how“ available, so that all operations may be responsibly included into the debt portfolio and their parameters regularly reported and monitored in a consistent way.

6. DIRECT LOANS FROM INTERNATIONAL INSTITUTIONS

The financial requirements of the Czech Republic are also provided by long-term loans from international financial organizations (so far from the European Investment Bank and the Council of Europe Development Bank). The acceptation of these loans is conditioned by the approval of a special act on loan (paragraph 1, § 2, of Act No. 218/2000 Coll., Budgetary Rules Act and Some Related Acts Amendment Act).