Question

describe a noncompetitive bid in a treasury auction process? what is a competitive bid? what happens to the bidders whose bid is higher than the stop out yield?

Answer 1

Answer for all 3 questions are given below :

Meaning of treasury auction

• Bill auction is a public auction , held weekly by us treasury of federal debt obligation , as treasury bills , which range maturity from one month to one year .
• On February 2020 , there are 24 authorized primary dealers participate in auction , and bid directly on each issue .
• Bill auction is the official manner , which all us treasury bills are issued .
• T bills are issued via electronic bill auction , govt conducts every week
• Its open to public , institutional and individual investors , 24 primary dealers , financial institutions…etc.
• There are participants as competitive and non competitive bidders .
• Competitive bidders determining the discount rate paid on each t bill issue
• Non competitive bids accepting the rate set by competitive bid .
• Lowest rate , meets supply of debt being sold serves as winning yield .
• Competitive bid is limited to 35 % of offering amount for each bidder and bidder specifies rate , discount margin or yield that is acceptable .
• Non competitive bid limits to purchase dollar 5 million per auction . they agree to accept rate or discount margin set by competitive bid.
• Bid limits apply cumulatively to methods that are used for bidding in a single auction .
• On closing of auction , treasury awards all non competitive bid which comply with auction rules and then accepts competitive bids in ascending order of rate , discount margin or yield , till quantity of awarded bids reaches the offering amount . bidders will accept same rate or yield at highest accepted bid .   
• Auctions are open to public , following us treasury services are available :
• Treasury direct account : individuals , trusts, corporations , estates , ..etc
• TAAPS: treasury automated auction processing system is a computer network system , developed by federal reserve bank .

Treasury securities trade via auction process in primary market . TAAPS receive tenders from brokers . every bid is processed automatically by TAAPS , comply with treasury uniform offering circular .

• Issuance is below :
• On issue day , treasury delivers security to bidders . in exchange , treasury charges the accounts of those bidders for payment of securities ..
• T bills are issued at par or discount and paid at par at maturity period . purchase price results press release and expressed as price per hundred dollars .
• Floating rate notes are quarterly interest payments and issued at par , discount or premium and stated spread. Purchase may sometimes to pay accrued interest .
• For TIPS ,interest payments and final payments are based on inflation adjusted principal value of security . sometimes includes accrued interest .

meaning of non competitive bid in a treasury auction process :

• Non competitive bid is made by small investor for purchasing debt issue , its price based on average price of all competitive bids submitted .
• Its one of the method of distribution , used primarily by us treasury and a bid process to buy debt issue .
• Its only for small investors , not for large institutional investor as in competitive bid
• This bid have a dollar 10000 minimum submitted by small investor . these investors are bidding a bit blind . they do not know the exact final price they will receive at closing time .
• These bid investors accept the rate , set by competitive bidders
• Its closing time for bills is 11 am eastern time on a auction day .
• Bids are accepted within 30 days in advance of auction and it may sometimes via electronically through TAAPS or by mail.
• Every non competitive bidder limits to purchase dollar 5 million per auction .
• Thus, non competitive bidding is termed as a bidder participating in auction of dated government securities without have quote to yield or price in that bid .

• After the auction : on the issue day , treasury delivering securities to non competitive bidders . in exchange treasury charges accounts of them for payment of securities . discount rate , final price and yield released to public within 2 hours of auction closing time .

Non competitive bidding facility for dated securities and treasury bills of government of India are below :.

1. Here , in non competitive bidding , retail investors are participated .they are any person includes individuals, companies ,firms, trusts…etc prescribed by RBI
2. Availability of this bid is announced with press release and information is available in Reserve bank website
3. These bids up to 5% of notified amount will allowed within notified amount . that means , if notified amount is 1000 crore , 50 crore is of non competitive and 950 crore is put up for competitive bids
4. Eligible investors can participate through a facilitator
5. A facilitator is a scheduled bank or primary dealer or any stock exchange permitted to manage bids from investors . also submit single bid in non competitive segment in auction .
6. Minimum amount will be rs.10000 and its multiples . maximum amount for non competitive bid only for auctions of GOI dated securities , not exceed rs.20000000 per security per auction .
7. Investor can make only a single bid . here facilitator clears that , investor is not making bid via other facilitator .
8. Here is application form available in reserve bank website . facilitator manages it .
9. Non competitive bidder make payment to facilitator via , which he has put bid and receive his securities from them .
10. The facilitator charges for this service , up to 6 paise per rs.100 as commission
11. These type bidder knows modalities of payments through facilitator
12. The allotment to non competitive bids will be at weighted average price of all allotments to competitive bidders .
13. RBI allot bids under non competitive bid via facilitator , which allocate to bidders .
14. RBI issues securities only in SGL form . and also credit securities to CGSL account of facilitator. Then in turn credit to dematerialized account of investors .
15. If non competitive bid amount is more than reserved amount , then RBI made allotment on pro rata basis . if its less than reserved amount , it will be allotted in full and then shortfall amount is added to amount available for competitive bid .
16. It’s the duty of facilitator to allocate securities in either fully or partial to investors in which they are allotted the bids .
17. In case the payment is made by investor after date of issue of securities to facilitator , then consideration includes accrued interest .
18. Transfer of securities are completed within 5 working days from date of auction , which is the duty of facilitator .

Meaning of competitive bids :

• It is associated with proposal and price submitted by service provider to a soliciting firm for business opportunity involving goods or services
• It is part of large scale business deal
• this bidding help the buyer gets best price and contract terms for their proposal .
• this allows them to get most qualified sellers , while keeping costs on low .
• this is a process which issue a public bid with the intent that companies put together best proposal and compete for good . as law , this process needed for each government agency that issues bid .
• it creates transparent environment , open and fair .
• in IPO , private companies solicit competitive bids from underwriters to support this IPO
• interested IPO underwriters creates proposal detailing services of them and also include assessment of estimated IPO valuation .
• after collection of these bids from underwriters , issuer awards contract to underwriter with best price and terms of contract ..
• mergers and acquisition also involves competitive bidding . companies may solicit it , if they merge with other company or sell business fully.
• The acquiring company needed to prepare competitive bid proposal in the process of merge with other one . here , acquirer needed to full details the value , which they willing to pay .
  

What happens to bidders whose bid is higher than stop out yield :

• Competitive bidders whose bid is higher than stop out yield , not accepted .
• Starting from lowest yield bid , all competitive bids are accepted , till the amount distributed to those bidders is completely allocated .
• So , the stop out yield , is highest yield accepted by treasury .
• In competitive bid, bidder names rate ,he will accept . and also security amount he will purchase . if this yield falling within this range of accepted , he sells this quantity , unless he is stop out yield or accepting highest yield
• Individual bidders competitively bid up to 35% of security s offering amount .
• Non competitive bidders agree for buy security at rate determined by auction and also receive quantity of those security they seek .
• Non competitive bidding restricted to dollar 5 million per auction .

• Large investors are more likely than individual investors to bid competitively due to that , they tend to familiar with auction process , and able to make good competitive bids . they likely purchase more than dollar 5 million as limit in competitive bids .
• At the closing time of auction , treasury first inform or sells to non competitive bidders , total quantity is subtracted from initial offering amount for determining range of yield , which will accepted .
• Thus competitive bids are in ascending order of yields , till the stop out yield is reached . bids accepting at this price are allocated proportionately , thus , amount of security issued not exceed offered amount ..
• Thus competitive bids higher than stop out yield is not accepted .
• Here using uniform price method by the treasury to auction its securities . it means , both 2 type of bidders purchasing their securities at stop out yield . thus , stop out yield is also a discount .
• So, uniform price method help to encourage aggressive bid and drive up security price .

Thus we can understand that , a bidder whose bid is higher than stop out yield is not accepted.

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