Circulars/Notifications - Exchange and Debt Management Department  
 EDMD Circular No. 3
October 13, 2000 

All Scheduled Banks / NBFIs

Dear Sirs,

SELECTION OF PRIMARY DEALERS FOR CONDUCTING GOVERNMENT
SECURITES BUSINESS

Please refer to the matter resting with our Circular No.1 dated 19th June 2000 on the captioned subject.

2. In order to ensure that applications to become Primary Dealer are received from a wide range of institutions that are active in developing market of the Government securities, the competent authority has been pleased to make some modifications in the criteria for selection of Primary Dealers. Accordingly following changes may be made in our circular referred to above:-


Para Original Modified
 

Preamble
  With a view to streamline trading in the Government securities and in order to encourage the development of secondary market, the State Bank considers it expedient and essential to put in place a Primary Dealer System that commands the confidence of all the players of financial market. For this purpose the State Bank has developed criteria, to be complied with by the financial institutions duly incorporated in Pakistan under the relevant laws, including foreign banks authorised to commence /carry on banking business in Pakistan under Section 27 of BCO 1962, who are qualified to be appointed as Primary Dealer.  The salient features of the Criteria, obligations and privileges of the Primary Dealers, and other details are as under: -

 

 
With a view to streamline trading in the Government securities and in order to encourage the development of secondary market, the State Bank considers it expedient and essential to put in place a Primary Dealer System that commands the confidence of all the players of financial market. For this purpose the State Bank has developed criteria, to be complied with by the financial institutions duly incorporated in Pakistan under the relevant laws, including foreign banks authorised to commence/carry on banking business in Pakistan under Section 27 of BCO 1962, as also companies having Investment Advisory License under Investment Companies and Investment Advisers Rules 1971, to qualify for appointment as Primary Dealer. The salient features of the Criteria, obligations and privileges of the Primary Dealers, and other details are as under: -

  A 1.  

The applicant for the status of Primary Dealer (PD) must be a financial institution duly incorporated under the relevant law including  foreign banks authorised to commence/carry on banking business in Pakistan under Section 27 of BCO 1962
 

The applicant for the status of Primary Dealer (PD) must be a financial institution duly incorporated under the relevant law including foreign banks authorised to commence/carry on banking business in Pakistan under Section 27 of BCO 1962. Companies having Investment Advisory License under Investment Companies and Investment Advisers Rules 1971 are also eligible to apply.

 
A 2. As a measure of financial stability, the institution applying for membership must have a minimum paid up capital of PKR 500 million to be raised to PKR 1000 million by the end of 2 years from the date of appointment of the PD. Thus after two years of introduction of Primary Dealer system, every new applicant shall be required to have a minimum paid up capital of PKR 1000 million to become eligible for appointment as PD. As a measure of financial stability, the institution applying for membership must have a minimum equity (net of provisions and capitalised losses if any) of PKR 500 million to be raised to PKR 1000 million by the end of 2 years from the date of appointment of the PD. Thus after two years of introduction of Primary Dealer system, every new applicant shall be required to have a minimum equity (net of provisions and capitalised losses if any) of PKR 1000 million to become eligible for appointment as PD.

 
B 2. No Primary Dealer shall act as interbank broker. No Primary Dealer shall act as interbank broker. The applicant who are neither commercial banks nor NBFIs, and intends to seek status of a Primary Dealer, shall have to establish an independent subsidiary having legal entity with firewalls to ensure separation of activities of their company acting as PD and as interbank broker. Further such entity shall be subject to periodic, special inspection by State Bank besides being liable to submit reports as required by SBP from time to time for  surveillance of its PD activities. It is clarified explicitly that such a company shall have to meet the criteria prescribed by us for considering its request for appointment as PD.

 

 

D.1
 

P.D’s would actively participate in all the auctions of tradable Government Securities initially confined only to TBs and Federal Government Bonds with floor and ceiling of their bids ranging between 10% to 30% respectively (for T.Bills) of the target amount. The minimum underwriting target of 10% of each P.D may exceed depending upon the DTL of the respective P.D. The State Bank would separately announce an estimated amount to be raised by Government through auction through T.Bills and Long Term Paper.

 

 

P.D’s would actively participate in all the auctions of tradable Government Securities initially confined only to TBs and Long Term Bonds. The State Bank would separately announce an estimated amount to be raised by Government through Long Term Paper.
D.2 An important responsibility of the PD will be to underwrite the auctions of Government Securities offered by the State Bank. To avoid any out of market quotes, the bid price both for T.Bills and long term paper would be confined to a range of +/- 50 paisa from the one prevailing on the last working day.

 

An important responsibility of the PD will be to underwrite the auctions of Long Term paper offered by the State Bank. To avoid any out of market quotes, the bid price both for T.Bills and long term paper would be confined to a range of +/- 50 paisa from the one prevailing on the last working day.
D.6 If a P.D fails to meet his underwriting commitment in respect of long term paper, fully or partially during the prescribed period he shall be liable to pay fine of 25 paisa for Rs 100 of face value for the quantum of delinquency. His delinquency on this count shall be determined immediately after the settlement date of the last auction of the respective fiscal year. The rate of penalty shall be reviewed after evaluating behaviour of market participants. The frequent non-compliance for underwriting requirements by P D may affect renewal of its primary dealership for next tenure.


 
If a P.D fails to meet its underwriting commitment in respect of long term paper, fully or partially during the prescribed period it shall be liable to pay fee of 25 paisa for Rs 100 of face value for the quantum of delinquency. Its delinquency on this count shall be determined immediately after the settlement date of the last auction of the respective fiscal year. The rate of fee shall be reviewed after evaluating behaviour of market participants. The frequent non-compliance for underwriting requirements by PD may affect renewal of its primary dealership for next tenure.
D.11 The P.D will not be allowed to short sell in a particular issue more than 5% of the total issue amount, even during the “when issued” period. The P.D will not be allowed to short sell in a particular issue more than 5% of the total issue amount, even during the “when issued” period. However, short selling will be allowed only up to announcement date of cut off results in case of Long Term paper as well as in M.T.Bills.

Other terms and conditions of our above circular remain unchanged
Yours faithfully,
(Muhammad Shakir)
Director

       
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