The Case for Official Market-Makers in Central Government Securities in South Africa

Abstract

Well-developed financial markets play an important role in any economy. Despite the fact that discount houses were accorded privileges normally reserved for official market-makers in fixed-interest securities, they were not successful in sufficiently developing the market for central government securities in South Africa. This failure stemmed from the emphasis on discount policy in the monetary control system. However, the Reserve Bank, taking on the role of market-maker, was successful in dramatically increasing the level of activity in the market for government bonds since the early nineties. Notwithstanding the success of their operations, the potential negative consequences of the Bank’s market-making activities should convince them to rather appoint market-makers. This would require shifting the emphasis in the monetary control system to open-market operations.