Circulars/Notifications - Financial Markets Strategy & Conduct Department  
 FSCD Circular No. 07 of 2009
June 06, 2009 

All Head of Scheduled Banks/DFIs/Investment Banks/
Listed Brokerage Houses

Dear Sir/Madam,

CHANGES IN RULES GOVERNING PRIMARY DEALER SYSTEM

 

        Please refer to EDMD Circular No. 11 dated August 27, 2005 in which rules governing primary dealer system were stipulated. In order to further rationalize and to align those with market practices following changes (highlighted in bold letters) are being made in existing PD rules:

 

No.

Current Rules

New Amended Rule

Primary Dealer's Privileges:

C-1

Only PDs would be eligible to participate in the auctions of Government 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.

Only designated PDs would be eligible to participate in the auctions of Government Securities. The requirement of other banks/ institutional investors would be covered from these PDs or from other secondary market players.

PDs will be allowed to entertain Pass-through bids, but such volumes will not be counted towards secondary market performance evaluation of the respective PD.

C-3

PDs would be allowed to carry a short position in securities managing it through repos up to a maximum of three consecutive months for bonds and two weeks for T-bills. However, they would be required to mark to market their short positions on weekly basis and report them to SBP on prescribed formats.

PDs would be allowed to carry a short position in securities managing it through repos up to a maximum of three consecutive months for bonds and two weeks for MTBs. However, they would be required to mark-to-market their short positions on daily basis and report them to SBP on prescribed formats.


No.

Current Rules

New Amended Rule

Primary Dealer's Obligations:

D-1

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 the pre-announced auction target will be accepted by the State Bank of Pakistan for investors other than banks/ DFIs/ NBFIs through PDs.

PDs would actively participate in all auctions of tradable government securities. The State Bank of Pakistan would announce pre-auction target amount in short-term as well as in long-term government securities.

Non-competitive Bids (NCBs) will be allowed for both MTBs and PIBs. Non-competitive bids however will be accepted as 15% of the pre-announced auction target by the State Bank of Pakistan for investors other than banks/ DFIs/ NBFIs through PDs.

D-2

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 for 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 of Pakistan. To avoid any out of market quotes the bid price for long-term paper would be confined to a range of + 50 basis points from the respective tenor prices appearing on Reuters PKRV page on the last working day prior to bidding.

D-3

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 requirements by PD may affect renewal of its primary dealership for next year.

Each PD shall be required to ensure compliance of
minimum underwriting target of 3.5% to be applied on the Pre-auction target or the issued amount, whichever is lower, for respective tenors of PIBs (July - June) and compliance to this shall not be restricted on each auction basis. The non-compliance for underwriting requirements by PD may affect renewal of its primary dealership for next year.

D-4

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.

Each PD shall be eligible to claim underwriting commission, to the extent of minimum underwriting target (as explained in rule D-3) 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.

D-7

It would be compulsory for all the PDs to quote their prices to other PDs, if the transaction volume is up to 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.

It would be compulsory for all the PDs to quote two-way prices to other PDs, Non-PDs, and institutional investors etc. as per instructions contained in rule D-8, subject to availability of limit.

D-8

In secondary market, all PDs would be bound to make prices within a maximum bid/offer spread of 50paisa. The quotes would be in price terms and not in terms of yield.

In secondary market, all PDs may quote in terms of yield rather than price. In case of PIBs, the maximum bid/offer spread will be 15bps for on the run issues up to 10 years tenor bonds. In case MTBs, the maximum bid/offer spread for on the run issues will be 25bps.

PDs have to ensure two-ways prices in secondary market within above defined maximum bid/offer spreads for marketable lot-size for both MTBs and PIBs. The marketable lot-size for MTBs will be in range of PKR 100.0mln - 300.0mln (multiples of PKR 100.0mln).The marketable lot-size for PIBs will be in range of PKR 50.0mln - PKR 200.0mln (multiples of PKR 50.0mln).

On-the-run issues defined for above obligation would represent last the two issues in the market.

D-10

At any given day, a PD’s holding in a particular issue will not exceed 30.0% of the total issue amount and 15.0% for Non-PD. 

At any given day, a PD's holding in a particular issue with days to maturity greater than 1-year will not exceed 30.0% of the total issued amount or PKR 1.5billion, whichever is higher in each tenor. However for Non-PDs the limit will be 15.0% or PKR 1.5 billion, whichever is higher, in each tenor.  The PDs issue-wise holding limit of 30.0% will run-down to 15.0% of the issued amount on expiry of 90days from the purchase date of that particular issue. This revised limit would apply only on issues sold during FY'08 and onward.

Compliance to above instructions on current holding as on date of this circular by PDs, be effectively met by 30Sep2009.

PD Performance Criteria:

E-1

Each PD should be required to ensure compliance of minimum underwriting target of 3.5% in case of long term paper over one year (July-June).

Each PD should be required to ensure compliance of minimum underwriting target of 3.5% to be applied on the Pre-auction target or the issued amount, whichever is lower, for respective tenors of PIBs (July-June).

E-3

Each PD should bring a minimum of 5.0% of the NCB target of long term paper during a year. However, for non-competitive bidding, the ceiling will be linked with auction target i.e. 0.25% of the auction target or PKR 25.0 million whichever is higher.

Each PD should bring a minimum of 5.0% of the NCB target of MTBs and PIBs during a fiscal year. However, for non-competitive bidding, the ceiling for one investor will be linked with pre-auction target i.e. 0.25% of the auction target or PKR 25.0million, whichever is higher. In case of breach of this limit through submission of multiple bids in one tenor, all such bids would be treated as void.


All other instructions given in above referred circular will remain unchanged. Above changes will be effective from July 01, 2009.


Yours truly,

(Athar Ghafoor)
Junior Joint Director
Market Policy & Regulations Division

       
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