All
Banks / DFIs /Investment Banks / Listed Brokerage Houses
Dear
Sirs,
Rules
Governing Primary Dealer System
In
order to make Primary Dealer system more broad based and meaningful
the following new Rules are being issued in suppression of
earlier Rules circulated vide EDMD Circular No. 1 and EDMD
Circular No. 3 dated 19th June 2000 and 13th October 2000
respectively.
The salient features of the Criteria, obligations and privileges
of the Primary Dealers and other details under the new Rules
are as under:
A)
Selection Criteria:
-
The
applicant for the status of Primary Dealer (PD) must be
a Bank / DFI / Investment Bank / Listed Brokerage House.
-
As
a measure of financial stability, the institution applying
for Primary Dealership must have a minimum equity (net
of provisions and capitalized losses if any) of PKR 500
million.
-
As
an indication of strong managerial /trading capabilities,
PD’s treasury operations have to be fully computerized.
All PDs must also be equipped with standard treasury equipment
including dealing terminals, phone recording systems,
broker’s hotlines, Telex/swift, Fax machines etc. with
telephone recordings retained for a period of 90 days.
To ensure competent and knowledgeable staff, a minimum
of five years of relevant professional experience would
be required for main treasury / front office and back
office personnel. At the time of scrutinizing the application
for PDs State Bank Of Pakistan may inspect on spot the
above infrastructure of the applicant.
-
PDs
would actively contribute in keeping the market liquid
by their commitment to both the primary & secondary
markets. To win the status of PD, the applicant has to
be a “PRICE MAKER”, quoting two-way price reflective of
market sentiment and keeping trading window open through
out the day with active trading in all marketable Government
securities.
While
considering the application for PD, applicants’ level of
participation in the secondary market for the last one year
would become a criterion to be selected as PD.
B)
Rules binding the status of a Primary Dealer:
1.
After an applicant is found fit by the State
Bank Of Pakistan, a letter would be issued for its appointment
as Primary Dealer for a period of one Year renewable
every financial year provided the PD continues to fulfill
the existing criteria. The renewals would be decided
at least 30 days prior to the expiry of previous appointment.
As such each PD shall be under obligation to submit
request for reappointment, at least two month prior
to the expiry of tenure. Alternatively where a PD does
not wish to continue as PD, it will have to inform the
State Bank Of Pakistan about its intention before the
commencement of last quarter of his tenure. The market
would be intimated about a new appointee, 30 days prior
to its
ormal functioning as a Primary Dealer.
2.
In case a Primary Dealer is found involved in
activities not worthy of PD’s status, the State Bank
Of Pakistan will serve it with a show cause notice.
In case, the explanation offered by the Primary Dealer
is found unsatisfactory, his dealership shall be terminated
with a 30 days notice period.
3.
Appointment or termination of a Primary Dealer
would be the sole discretion of the State Bank Of Pakistan.
C)
Primary Dealer’s Privileges:
- Only
PDs would be eligible to participate in the auctions of
Govt. Securities. The requirement of other banks/Institutional
investors would be covered from these PDs or from other
secondary market players. However, PDs will sell the government
securities to other banks and financial institutions after
auction on the market prices. PDs will not be allowed to
entertain pass through bids.
- In
case a PD is unable to square its short position the State
Bank Of Pakistan, at its discretion, would help using various
options depending upon the situation. Decision of the State
Bank Of Pakistan in this regard shall be binding.
- PDs
would be allowed to carry a short position in securities
managing it through repos up to a maximum of four consecutive
weeks for bonds and one week for T-bills.
- All
security trading activity by the PDs in the secondary market
shall be done in spot value unless specified otherwise.
The spot value would be considered as T+2 working days.
- PDs
would deposit the funds to the S.B.P. B.S.C. (Bank) against
their accepted bids on settlement date.
- Since
PDs would be the main source of market information for the
regulators the State Bank Of Pakistan will regularly consult
them in periodical meetings.
D)
Primary Dealers obligations:
- PDs
would actively participate in all auctions of tradable government
securities. The State Bank of Pakistan would announce maturity
wise, pre-auction target amount in long-term government
securities. Non-competitive bids however as 10% of pre-announced
auction target will be accepted by State Bank Of Pakistan
of Investors other than banks/DFI's/NBFI's through Ds.
- An
important responsibility of the PD will be to underwrite
the auctions of Long term paper offered by the State Bank
of Pakistan. 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.
- Each
PD shall be required to ensure compliance of minimum underwriting
target of 3.5% in case of long term paper over one year
(July –June) and compliance to this shall not be restricted
on each auction basis. The non-compliance for underwriting
equirements by PD may affect renewal of its primary dealership
for next year.
- Each
PD shall be eligible to claim underwriting commission, to
the extent of his underwriting amount as 3.5% of the target
amount announced or the bid amount accepted, whichever is
less, in respect of auction of Long Term securities. The
claim for underwriting commission shall be lodged by PD
after the settlement date.
- The
underwriting commission shall be paid to PD at the rate
of paisa 5 per Rs. 100 irrespective of maturities in long
term government securities sold in auctions.
- If
a PD 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. It’s determined
immediately after the settlement date of the last auction
of the respective fiscal year. The rate of fee shall be
reviewed after evaluating behavior of market participants.
The frequent non-compliance for underwriting requirements
by PD may affect renewal of its rimary dealership for next
tenure.
- It
would be compulsory for all the PDs to quote their prices
to other PDs, if the transaction volume is upto PKR 100
million subject to availability of limit. For volumes other
than that, there would be no mandatory requirement to quote
a price. But in case of deals with other secondary market
players e.g. Non-PDs, institutional investors etc. each
PD would quote two way prices regardless of the volume,
subject to availability of limit.
- In
the secondary market, all PDs would be bound to make prices
within a maximum bid/offer spread of 50 paisa. The quotes
would be in price terms and not in terms of yield. The base
price of a security would be considered in terms of 100
units. e.g. price of 102/102.5 would depict bond price at
a premium of 2 & 2.50 for bid and offer respectively.
- To
stir up activity in the Govt. paper, the rates would be
regularly displayed by the PD on its Reuters pages on the
news terminal and /or in the branches active in Govt. paper
trading. If the PD desires, it can also mention the volumes
for which the rates would be applicable. For amounts exceeding
the displayed volumes, the treasury may entertain its customers
directly.
- At
any given day end, a PD’s holding in a particular issue
will not exceed 30% of the total issue amount and 15% for
non-PD ank.
- The
P.D will not be allowed to short sell 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.
- In
order to ensure a minimum level of compliance, certain reports
will be required to be submitted to the State Bank Of Pakistan
on tradable securities on prescribed format.
- Each
PD shall be required to maintain separate book in respect
of Govt. Securities involving transaction through Primary
Dealership. In case of listed brokerage house they shall
maintain a firewall between their brokerage and PD business.
E)
Other details:
- The
State Bank of Pakistan would announce the tenor wise auction
date and target amount of its long term paper 14 days prior
to the auction date. The PD’s would be allowed to carry
out “When issued” trading in that paper during the interim
period of auction announcement and result dates.
- All
PD’s shall submit their sealed bids to the State Bank Of
Pakistan by 10:00 am. In turn SBP would announce the results
positively by 3:00pm on the same date.
Institutions
who fulfil the criteria a laid down in Para A above and desiring
to become Primary Dealer to conduct government securities
business for the current fiscal year i.e. 2003-2004 may send
their applications latest by 12th July 2003 (Saturday)
along with documents supporting their credentials.
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