Colombia and the World Bank sign an agreement to support the development of a sovereign debt Exchange Traded Fund in the local bond market

The Ministry of Finance and Public Credit of Colombia and the World Bank signed a collaboration agreement, taking the first step towards launching the Issuer-Driven Exchange Traded Fund (ID ETF) program.

The ID ETF program is a global initiative designed by the World Bank to support the development of domestic bond markets and increase the financial stability in emerging market economies. The ID ETF also aims to democratize access to capital markets and increase competitiveness with financial services.

An ETF is a security that tracks an index, a commodity, or a basket of assets, and trades like a stock on an exchange. As with any stock, ETF units are quoted and traded throughout the day on a stock exchange, and can be bought and sold without the active intervention of a fund manager.

This innovative ID ETF has the direct participation of the underlying security issuer in the structure, allowing the government to design and align the tool with market development objectives. Local currency debt securities are particularly important to finance the fiscal needs without currency mismatch and increase long term finance flows. The introduction of the ID ETF tends to increase the liquidity and transparency of the underlying securities at lower cost, improving price discovery and broadening the investor base.

Cesar Arias, Director of Public Credit and National Treasury highlighted that “in the case of Colombia, the underlying asset of the sovereign ETF will be a basket of local currency TES Bonds, which represent the most liquid security in the country, with a diversified base of national and foreign investors and a solid program of primary dealers. We are confident that the launch of the sovereign ETF, with the technical support of the World Bank, will be a key milestone in the development of capital markets in Colombia”.

Anderson Caputo Silva, Long-term Finance Program Manager at the World Bank noted that “we are proud to have reached this important phase in our collaboration with Colombia as part of our global Issuer-Driven ETF program. The World Bank looks forward to working together with Hacienda to launch of the Issuer-Driven ETF in the coming months – this will be a significant addition to Hacienda’s ongoing debt management strategy and local capital markets development objectives”.

The ID ETF will be a new tool to stimulate the liquidity and transparency of the underlying assets, which may support the capital markets development. In this sense, the partnership between the government and the World Bank to promote ID ETF in Colombia aims to foster innovation, efficiency and diversification in the development of government and non-government bonds, thus helping to reduce transaction costs and risks for issuers and market participants.

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