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Bond Market Development in El Salvador

Project Development Objective (PDO)

The objective of this technical assistance is to strengthen the regulatory framework for issuance of and investment in nongovernment debt instruments.

Background

In recent years, Salvadoran authorities have requested support to strengthen the ability of El Salvador’s capital markets to address important financing gaps. Salvadoran authorities initially focused on infrastructure financing, but the more general goal is to ensure that capital markets can support long-term financing. 
This project supports two priority engagements in the Central America region: (a) the creation of an enabling environment for public private partnerships (PPPs), as part of the Programmatic Approach for PPPs (P14683), and (b) the strengthening and diversification of the financial sector, as part of the Programmatic Approach for Financial Sector Development (P152455).

Activities

The technical assistance will consist of the following four components:
1.  Legal, regulatory, and supervisory framework for issuance of nongovernment debt securities
     This component is concerned with streamlining issuance requirements and processes for
     nongovernment (NG) debt securities, while also ensuring that requirements and processes
     are robust and appropriate for different types of instruments. Specifically, the project team is
     drafting both new and revised regulations and legal amendments to introduce both an improved
     public offer regime and an alternative issuance regime.
2.  Investor base: Regulations and capacity building
     This component revises appropriate investment regulations in an effort to align them with
     measures introduced on the issuance side, thus facilitating greater investment by institutional
     investors in NG debt products. This effort involves drafting new and revised guidelines, rules,
     and regulations, as well as legal amendments when necessary, so that institutional investors
     can increasingly participate in the NG debt segment. 
3.  Intermediary conduct obligations
     To further increase investments, the project team is strengthening regulation and supervision of
     intermediaries to ensure that their product offerings and distribution practices are (a) appropriate
     for the types of investors and products available in the Salvadoran market and (b) in line with
     international practices. 
4.  Pricing and secondary market liquidity 
     Finally, the project team is exploring ways to improve the pricing and liquidity of NG debt
     instruments. The team is also providing recommendations to (a) further develop and
     strengthen the government debt yield curve, (b) improve and standardize both potential
     pricing methodologies and draft regulations, and (c) improve secondary market liquidity.

Expected Outcomes

The main expected outcomes of the project are as follows:
1.  Developing an improved regulatory framework for NG debt issuance 
2.  Increasing investment in NG debt products by institutional investors
3.  Improving regulation and supervision of intermediaries
4.  Improving pricing methodologies and practices for NG debt securities