Domestic Derivatives Market
a. Current Derivatives Market:
State Bank has allowed limited number of derivative products (swaps and options) to the derivative market participants with certain reporting and disclosure obligations and the market is used only for hedging purpose.
State Bank of Pakistan allows four types of derivative instruments namely:
i. Interest Rate Swaps: An interest rate swap is an agreement between two parties where one stream of future interest payments is exchanged for another based on a given principal amount.
ii. Forward Rate Agreements: A forward rate agreement (FRA) is an over-the-counter contract between parties that determines the interest rate or exchange rate to be paid or received on an obligation beginning at a future start date.
iii. Third Currency Options: they are used for exchange rate related risk hedging for trade related transactions such as LC, exports, imports etc
iv. Cross Currency Swaps: A cross-currency swap is an over-the-counter derivative agreement between two parties to exchange interest payments and principal on loans denominated in two different currencies. In a cross-currency swap, a loan's interest payments and principal in one currency would be exchanged for an equally valued loan and interest payments in a different currency.
b. Authorized Derivative Dealers:
“Authorized Derivatives Dealer (ADD)” are institutions that are licensed by SBP to undertake certain derivative transactions. There are currently the following 07 Authorized Derivative Dealers in Pakistan:
1. Citibank N.A.
2. Deutsche Bank AG
3. Faysal Bank Limited
4. Habib Bank Limited
5. MCB Bank Limited
6. Standard Chartered Bank (Pakistan) Limited
7. United Bank Limited
c. Non-Market Maker Financial Institutions:
Non-Market Maker Financial Institutions are financial institutions that execute derivatives transactions with its customers with the intention to make a spread. It does not undertake any Market Making and covers the transaction on a back-to-back basis. There is currently only one NMI I.e. The Bank of Tokyo-Mitsubishi UFJ, Ltd. (FX Options Only)
d. Financial Derivatives Business Regulations:
Financial Derivatives Business Regulation is a framework formulated to permit, regulate, and supervise financial institutions entering into derivative transactions. Financial institutions are required to obtain approval from the State Bank of Pakistan before engaging in derivatives and would be subject to supervision and scrutiny from the State Bank of Pakistan as a supervisory authority.
The State Bank of Pakistan may suspend or withdraw the status of a Financial Institution as an NMI or an ADD to carry out Derivative Business if it finds that the financial institution is in violation of these regulations. The FDBR discusses the permissible derivative transactions for ADDs/NMIs.