Financial Markets

Financial markets are (physical or electronic) platforms for trading of financial instruments, including money, securities, stocks, commodities, foreign exchange and derivatives. Well-developed financial markets play a key role of intermediating between the lenders (savers) and the borrowers (investors), reducing information asymmetries, and enabling central banks to implement monetary and exchange rate policies. There are broadly two types of Financial Markets.

• Primary Market: The market in which new issues of financial instruments/ securities are sold initially. The examples are:
  • When a company launches an IPO at Pakistan Stock Exchange (PSX)
  • When the Government of Pakistan issues new bonds or sukuk through SBP or PSX

• Secondary Market: A market for buying and selling of securities in the period between their issue and maturity. A liquid secondary market enhances the attractiveness of financial instruments/securities to investors.

Money Market: Money Market (MM) is a financial market in which only short-term debt instruments (maturity of upto one year) are traded. MM is primarily for trading of short term financial instruments, and for transactions in wholesale short term loans and deposits. In Pakistan, the money market is a platform where banks and financial institutions borrow and lend money for a short period, mainly to manage their daily liquidity. Examples include:

• Treasury Bills (T-Bills) issued by the Government of Pakistan
• Repo/Call Money Market where banks and non-bank financial institutions lend to each other overnight
• Open Market Operations (OMOs) conducted by SBP

Major players in the money market are:

• Central Bank and Government
• Primary Dealers/Market Makers
• Banks
• Non-bank financial Institutions
• Money Market Funds & Corporate
• Money Market Brokers

The role of SBP in Financial Markets

The State Bank of Pakistan (SBP) plays a central and supervisory role in ensuring the smooth functioning, stability, and development of Pakistan’s financial markets. SBP implements its monetary and exchange rate policies through money and foreign exchange markets. It formulates and implements monetary policy with the primary objective of ensuring price stability. A statutory Monetary Policy Committee sets the policy rate. In a market-based implementation mechanism of monetary policy, market liquidity is managed through Open Market Operations (OMOs) and interest rate corridor facilities to maintain overnight money market repo rate close to the policy rate. SBP also regulates and supervises banks and financial institutions. SBP acts as banker to the government by issuing Treasury Bills, PIBs, and Sukuk. Furthermore, SBP regulates the foreign exchange market, manages exchange rate operations, and maintains foreign exchange reserves. Through financial market reforms and the introduction of new instruments, SBP promotes the development of money, bond, and Islamic financial markets in Pakistan.

Money Market Operations

To implement its monetary policy, SBP operationally focuses on controlling short-term interbank interest rate – overnight money market repo rate – through the use of various monetary policy tools (OMOs, Interest Rate Corridor, Reserve Requirements, FX Swaps, etc.). The changes in short-term rates translate into other longer-term market interest rates, such as KIBOR, that are used as benchmark for lending to businesses and households. In the transmission mechanism, well-developed financial markets increase the efficiency and effectiveness of monetary policy transmission by reducing various uncertainties and improving translation of short-term interest rates to pricing of longer-term loans.

InvestPak is a digital platform developed to digitize the process of investment in government securities by individuals and corporate customers. The portal provides investors with secure, transparent, and efficient access to government securities (MTBs and PIBs), offering real-time information and streamlined investment execution. Detailed guidelines for investment in government securities are available here:

SBP conducts multiple-priced auctions of marketable government securities on behalf of the Government of Pakistan based on a pre-announced auction calendar. The auction calendar is decided by the Government and circulated by SBP to the market through Bloomberg, Refinitiv and SBP Website. MTB auctions are conducted on a fortnightly basis, while PIB auctions are conducted on need basis. The auctions are conducted on Wednesdays and the settlement takes place at T+1, i.e. the following Thursday. Primary Dealers (PDs) and Special Purpose Primary Dealers (SPDs) of government securities are eligible to participate in the auctions of government securities (MTBs, PIBs). For Shariah compliant GIS and Islamic Sukuk, all Islamic Banks and Islamic Banking Branches of conventional branches are currently working as Islamic PDs for their clients.

The auction calendar provides auction and settlement dates, maturing amount and auction target amount. The calendar is issued at the start of every month for the next three months on rolling basis on SBP website, Bloomberg and Refinitiv. The auction results cut-off yields/ accepted amounts are decided by the Government and circulated to the market by SBP on the same day on which the auction is conducted.