Appendix I. The Structure of Financial Regulation in Costa Rica
Appendix II The Pricing Vector developed by the Bolsa Nacional De Valores
The pricing vector is a system that generates a unified price report for a selected group of securities. Below are its main methodological elements.
It is based on the observations from trades carried out in the stock exchange. Thus, if observations exist for a particular issuance the system will be fed with the prices from those trades. In the absence of observations from the market, prices are estimated based in methodologies that have been developed for different categories of securities.
The current pricing vector comprises seven different categories of securities:
Issuances that comprise the sovereign yield curve (SYC)
Other public debt issuances
Private debt issuance
Unit of close-end funds
Premium for other debt issuances of public entities
It only takes into account prices generated by outright sales that are settled in the same currency of the issuance.
Only prices from trades that fall within certain volume thresholds are taking into account. The stock exchange has developed different thresholds depending on the type of securities. As of today, those limits are:
For issuances that are part of the SYC
Inferior Superior Colones 30,000,000 350,000,000 Dollars 100,000 2,000,000 Inferior Superior Colones 30,000,000 350,000,000 Dollars 100,000 2,000,000
For all other bonds
Inferior Superior Colones 10,000,000 350,000,000 Dollars 35,000 1,000,000 Inferior Superior Colones 10,000,000 350,000,000 Dollars 35,000 1,000,000
Inferior Superior Colones 5,000,000 350,000,000 Dollars 15,000 1,000,000 Inferior Superior Colones 5,000,000 350,000,000 Dollars 15,000 1,000,000
- The stock exchange determines the “weighted average price” (WAP) or the “weighted average yield” (WAY) for each category of securities. The WAP or the WAY is obtained directly from the observations (trades) of each trading session. For issuances that are part of the SYC the system requires at least three trades (transactions) during a trading day to run the calculations; for all other issuances the system requires one trade.
Pi,j,: Price observed in trade i for the issuance j
Yi,j,: Yield observed in trade i for the issuance j
FVi,j,: Face value observed in the trade i for the issuance j
WAPj: Weighted Average Price for issuance j
WAYj: Weighted Average Yield for issuance jAnd the WAY is calculated as follows:
The system works with:
Clean prices, that is, accrued interest is excluded.
The annual nominal yield
All data included in this paper were taken from official documents of the Superintendencia General de Valores de Costa Rica. In addition, the analysis of the international and local conditions relies on reports prepared by the Superintendencia.
The only exceptions were trusts administered by commercial banks and pension funds administered by pension fund managers. However, as stated above, the Securities Act required trusts to be regulated and supervised according to the rules developed for mutual funds, which reduced the incentive to manage CIS through this vehicle.
Over time the prudential framework has been transformed into a classification tool with consequences only for the purpose of disclosure. Thus, fund managers are authorized to structure non diversified funds, but are subject to more stringent disclosure requirements.
That framework has not yet been approved. However, new regulations for the mutual funds industry were enacted in 2006, which do address the issues stated above.
This feature known as the “drag along” method to calculate prices meant that if the price of a particular security dropped by 20 points, then the price of all other securities linked to it would drop by 20 points too, regardless of whether there were trades for those particular securities or not.
Both the Ministry of Finance and the central bank are issuers of securities. If registered with the Superintendencia General de Valores, their issuances are authorized for public offering and therefore could be held by both retail and institutional investors. By law institutional investors can only invest in issuances authorized for public offering.
Figures add up to 101 percent (taken from the SUGEVAL).
A bubble refers to a situation where the prices of an asset increase significantly without a change in the fundamentals, which in the long run should determine its “fair price” See Arce, Jose Luis, Ajuste en los precios de los instrumentos de deuda emitidos por el Gobierno de Costa Rica en moneda extranjera y la turbulencia de la industria de inversión colectiva, 2005.
The spread is the premium that an issuer would have to pay over the yield generated by a similar type of asset that is considered risk-free. Typically U.S. treasury bonds are used as the benchmark.
See Arce, op.cit., p. 3.
See GFSR, April 2004, pp. 60-70.
See Arce, op. cit.
Income funds are funds where interest from assets is distributed to investors on a periodic basis.
Growth funds are funds where interest from assets is capitalized.
See GFSR, September 2004, pp. 8 ss.
Government issuance in dollars with short-term maturity.
See SUGEVAL, 2004, Informe Anual del Mercado, p. 21.
As stated above, the regulatory framework did allow mutual funds to invest their portfolios in foreign securities.
In fact the new framework for mutual funds recently approved does require the inclusion of those warnings. Some countries are following a similar approach. Spain, for example, requires the use of different colors for the prospectus, depending on the level of risk of the product.
See, for example, the efforts by the Monetary Authority of Singapore.