Circulars/Notifications - Domestic Market & Monetary Management Department  
 DMMD Circular No. 07 of 2021 April 12, 2021

All Heads of Schedule Banks/DFIs/Investment Banks/
Listed Brokerage Houses/Securitiesí Depositories/
Clearing Institutions

Dear Sirs/Madam,

Master Circular - Rules Governing Primary Dealer System

Please refer to DMMD Circular No. 12 of 2012 and subsequent instructions issued in the Rules governing the Primary Dealer (PD) system.

Since the inception of PD system in June 2000, the marketable Government securities market has grown in terms of size, number and diversity of participants and infrastructure. Accordingly, over the years, State Bank of Pakistan (SBP) has been making changes to the rules governing the PD system in Pakistan in line with changing market conditions. SBP is now further strengthening the Rules governing the PD system as a major step towards widening the investor base of government securities, enhance liquidity, transparency and market development. These revisions are being made after a comprehensive review of international best practices and experiences of other countries, and detailed consultations with financial market stakeholders.  Accordingly, the amendments introduced hereby and instructions issued from time to time on the subject have been consolidated in the form of this master circular.

A. Categories of Primary Dealership

  1. SBP has decided to introduce two additional categories of dealers, in addition to the full-fledge Primary Dealers, under the Primary Dealers System of marketable Government Securities. Hence, there shall now be three categories of Primary Dealership, namely:

    1. Primary Dealers (“PDs”)
    2. Preliminary Primary Dealers (“PPDs”)
    3. Special Purpose Primary Dealers (“SPDs”)

(Hereinafter, the above categories may be referred to collectively as “Dealers”, whereas each individual category shall be referred to by its dealership status).

  1. The above three categories shall have their respective selection criteria, privileges, obligations and performance targets.

B. Selection Criteria

The applicants for the status of PDs, PPDs and SPDs shall have to meet minimum criteria for selection in the respective category of Primary Dealership. Depending upon the Dealership category, the selection criteria include the eligible list of institutions, financial soundness and capital requirements, submission of a Business Plan, professional experience and technical infrastructure requirements, adequate risk management systems, among others.

Selection criteria for the eligible participants for the status of PD, PPD and SPD are specified at Annexure A.

C. Selection Process:

  1. Selection process shall begin with invitation of applications from eligible participants for appointment of PDs, PPDs and SPDs by SBP each year vide a circular. All eligible applicants shall submit an application, signed by the CEO/COO/Treasurer, along with the following documents: (i) Business Plan approved by the ALCO in case of banks and DFIs, and by the Board of Directors (BoD) in case of all other eligible institutions; (ii) Latest Audited Annual report; (iii) Latest Schedule of Business Charges relevant to Dealership activity. Further, it shall be binding for each applicant to furnish to the SBP any such information as the SBP may consider necessary for the purpose of assessing the suitability of the applicant to be appointed as a PD/PPD/SPD.

  2. Each new applicant shall be evaluated in the light of the selection criteria. However, performance of existing Dealers shall be measured against performance benchmarks defined in this Circular and the performance against the targets set by the respective Dealer in their business plans of the preceding year.

  3. At the time of scrutinizing the application for PD/PPD/SPD status, SBP may require on-site inspection/audit teams to assess compliance of requirements mentioned in the selection criteria.

  4. Applicants selected as per the criteria shall be informed by SBP, through a letter for its appointment as a PD/PPD/SPD for a period of one fiscal year.  However, SBP may also grant an applicant provisional/conditional status of a PD/PPD/SPD subject to periodic performance review. Further, the PD/PPD/SPD selected for a given fiscal year shall continue to serve as such until the new list of Dealers is issued by the SBP for the subsequent fiscal year.

  5. SBP shall also inform the market about the appointment of PDs/PPDs/SPDs for the next fiscal year prior to their formal functioning as a PD/PPD/SPD. Appointment of a Dealer would be the sole discretion of SBP.

D. Role of Dealers:

  1. All the Dealers shall be required to perform the following key roles with a view to improve participation in primary auctions, enhance distribution, diversify investor-base and develop market for government securities:

    1. Actively participate in the primary market by bidding in the auctions of Government securities as conducted by SBP from time to time.

    2. Distribute Government securities to non-PD banks and other retail/institutional clients.

    3. Play an active role in Government securities market development to enhance liquidity and turnover and widen the investor base of Government securities by creating awareness among investors and taking other meaningful initiatives. For this purpose, the PDs, PPDs and SPDs must also continuously upgrade their infrastructure in terms of both physical equipment and skilled manpower.

    4. Provide efficient custody services to its customers (Investor’s Portfolio of Securities Accounts) for Government securities holding, collection and, payment of profits & maturity proceeds.

  2. Additionally, PDs and PPDs shall also act as market makers in Government securities by quoting two-way prices in the secondary market.

E. Dealers’ Privileges

Depending upon their Dealership status, PDs, PPDs and SPDs shall be offered privileges in order to incentivize performance of their roles and obligations. These privileges include direct access to primary auctions and buyback auctions, right to submit pass-through bids and Non-Competitive Bids (NCBs), claim commission on underwriting and mobilizing NCBs in the primary auctions, option to purchase additional securities for their own account through Non-Competitive Subscriptions (NCS), among others.

Accordingly, PDs, PPDs and SPDs shall be entitled to privileges as applicable to their respective category as specified at Annexure B.

F. Dealers’ Obligations

Depending upon their Dealership status, PDs, PPDs and SPDs shall comply with certain obligations to ensure adequate performance of their respective roles. These obligations include mandatory participation in each auction, minimum underwriting commitment, quoting two-way prices as per the defined maximum bid-ask spreads and lot-sizes, among others.  

Accordingly, PDs, PPDs, and SPDs shall be subject to obligations as specified at Annexure C.

G. Performance Criteria

The performances of PDs, PPDs and SPDs shall be evaluated by SBP in accordance with their respective Performance Evaluation Criteria. In this regard, SBP shall announce top performing PDs and PPDs vide a Circular on annual basis. SBP may also communicate relative performances of each PD, PPD and SPD on individual performance benchmarks to the respective Dealer.  

Accordingly, the respective Performance Evaluation Criteria for PDs, PPDs and SPDs are provided at Annexure D.

H. Non-Compliance of Rules and Termination Procedure

  1. Non-compliance or circumvention of the Rules governing Primary Dealers system may lead to cancellation of PD/PPD/SPD status, rejection of PD/PPD/SPD application for subsequent years, withdrawal of any of the privileges offered to PDs/PPDs/SPDs, and/or demotion into a lower category of Dealership as the SBP may deem fit, in the circumstances including, but not limited to, the following:

    1. Violation/circumvention of the rules governing the Primary Dealers system issued by SBP from time to time.

    2. Violation of Code of Conduct for banks, DFIs and PDs issued by SBP.

    3. Failure to meet the performance criteria and capital requirements on a continuous basis.

    4. Failure to provide reasonably competitive quotes in the primary auctions and/or secondary market of Government securities.

    5. Involvement in market manipulation, provision of incorrect, inaccurate or incomplete information; making incorrect representation or certification.

  2. SBP shall notify the Dealer of its intention to terminate the Dealership status, demotion into a lower category of dealership or any other disciplinary action, and shall provide the Dealer with an opportunity to clarify its position, before taking the final decision.
  3. In case of termination or demotion of dealership status, if the explanation offered by the Dealer is found unsatisfactory, its respective dealership status could be terminated/demoted by SBP with a 30-day notice period.

  4. SBP shall communicate its decision to the Dealer regarding cancellation or demotion of the Dealership status. SBP’s decision shall be final in this regard.

The above instructions shall be effective from the fiscal year starting from July 01, 2021. The Dealers appointed for FY2020-21 would continue to function till the new list of appointed PDs/PPDs/SPDs is issued by the SBP for FY 2021-22.

Annexure-A: Criteria for Selection for Dealers
Annexure-B: Privileges of Dealers
Annexure-C: Obligations of Dealers
Annexure-D: Performance Criteria for Dealers
Annexure-E: Guidelines for the Submission of Business Plan
Annexure-F: Format for submitting Pass-through bids
Annexure-G: Example of Underwriting Commission Calculation
Annexure H: Example of NCB Commission Calculation Methodology
Annexure I: Example NCS Pricing Computation


Yours truly,

(Rizwana Rifat)
Additional Director

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