Quoting obligation

Ministry of Finance

The Primary Dealers (PDs) are banks appointed to purchase, promote and distribute Dutch government bonds (DSLs). PDs are obliged to issue bid and offer prices on a continuous basis (Quotation Obligation). Quotation obligation ensures that Dutch government securities are liquid in the financial markets.

Last change on 16th of April 2025, at 12:47 (CET) | Publication Standard 1.0

• Publication category: Impactful algorithms
• Impact assessment: Field not filled in.
• Status: In use

General information

Theme

Public finance

Begin date

2018

Contact information

[e-mail]

Responsible use

Goal and impact

The Dutch State uses Primary Dealers (PDs). These are banks appointed to purchase, promote and distribute Dutch State Loans (DSLs) and Dutch Treasury Bills (DTCs). A one-year contract is concluded with the PDs. PDs have the exclusive right to participate in the DSTA's DSL auctions and to use the repo and strip facility. PDs also receive a financial remuneration that depends on the quantity of DSLs taken from issues. Against these rights there are also obligations; for instance, PDs are obliged to continuously issue bid and offer prices for DSLs, the so-called quoting obligation. PDs are also obliged to report monthly on secondary market activity.

The purpose of the quoting obligation is to ensure that Dutch government securities are liquid on the financial markets and thus easily tradable. Scoring well for the quoting obligation will encourage PDs to perform well during auctions so that they are entitled to the financial compensation.

Considerations

This algorithm measures and promotes the liquidity of government bonds in the secondary market. This brings many benefits, such as better pricing and tradability of Dutch issued sovereign debt.

Human intervention

No automated decision-making takes place. The programmed system sets parameters that filter the data. For example, outliers are removed from the dataset. Parameters such as the standard deviation and the number of minutes to be quoted can be changed manually.

Risk management

The risks of its use are low. The algorithm does not use personal data.

Risk of incorrect parameters is mitigated by the use of 4-eye principle in any changes of parameters.

Legal basis

Links to legal bases

Comptabiliteitswet 2016: https://wetten.overheid.nl/BWBR0039429/2023-09-26

Operations

Data

- Bid prices (Dutch government bonds)

- Ask prices (Dutch government bonds)

- Quote score

- Time of sale

Technical design

Primary Dealers have to quote daily on issued Dutch bonds. A score must fall within the set parameters;

Filter

1. Quotations must be made daily for an agreed period.
2. If the lower limit for the quotation period is not achieved, the score is not taken into account.
3. Zero scores are removed.
4. If more than 75% of the scores are left: scores that deviate two standard deviations from the mean are filtered out until at least 75% of the number of scores remain.
5. Quoter scores are filtered based on 2 criteria, namely the standard deviation and a minimum percentage to determine the number of Primary Dealers (PDs) that act as a lower bound. The standard deviation is currently 2. The lower limit is 75%. For example, if there are 10 PDs, at a rate of 75%, this equates to 8 PDs (rounded). This means that at least the quoting score is based on the mean of these 8 PDs, despite the fact that any number of standard deviations would cause more PDs to be excluded from the calculation. If the value 100 is entered here, the number of SDs is thus no longer relevant in the calculation, because by definition, the supplied values of all PDs are used to determine the quoter score.

Calculation

The remaining spread points are used to calculate the mean and standard deviation. This calculates two values against which the spreads are tested.

Scores up to 360 minutes within 1 standard deviation deviation are rewarded with 100%, scores within 2 standard deviations with 50%. The score of all quoted time over and above the first 360 minutes are then also rewarded according to the same measure. That is; within 1 standard deviation deviation from the mean by 100% times the number of 'extra' minutes and a score between 1 and 2 standard deviation deviations from the mean is rewarded by 50% times the number of 'extra' minutes (on top of the first 360 minutes).

Ranking

After assigning daily scores to all Primary Dealers, a summary follows with data of the scores of all Primary Dealers over the past three months. The average scores of all Primary Dealers over the past three (completed whole) months are compared with each other and a ranking is produced from the best (number 1) to the worst (number 13). This ranking contributes 50% to the total Non competitive ranking (thus consisting of half quote scores and half secondary market performance).