All
Scheduled Banks / NBFIs
Dear
Sirs,
SELECTION
OF PRIMARY DEALERS FOR CONDUCTING
GOVERNMENT SECURITIES BUSINESS
With a view to streamline trading
in the Government securities and in order to encourage the
development of secondary market, the State Bank considers
it expedient and essential to put in place a Primary Dealer
System that commands the confidence of all the players of
financial market. For this purpose the State Bank has developed
criteria, to be complied with by the financial institutions
duly incorporated in Pakistan under the relevant laws, including
foreign banks authorised to commence/carry on banking business
in Pakistan under Section 27 of BCO 1962, who are qualified
to be appointed as Primary Dealer. The salient features
of the Criteria, obligations and privileges of the Primary
Dealers, and other details are as under: -
A)
Selection Criteria:
1. The applicant for the status
of Primary Dealer (PD) must be a financial institution duly
incorporated under the relevant law including foreign banks
authorised to commence/carry on banking business in Pakistan
under Section 27 of BCO 1962.
2. As a measure of financial
stability, the institution applying for membership must
have a minimum paid up capital of PKR 500 million to be
raised to PKR 1000 million by the end of 2 years from the
date of appointment of the PD. Thus after two years of introduction
of Primary Dealer system, every new applicant shall be required
to have a minimum paid up capital of PKR 1000 million to
become eligible for appointment as PD.
3. As an indication of strong
managerial / trading capabilities, PDs 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 which may be relaxed for staff
possessing professional qualifications like C.F.A, A.C.I.
diploma etc. Risk Management / Back office personnel would
be expected to be equipped with modern risk management tools
such as Gap management, understanding of intricacies of
changes in the yield curve and risk management procedures
to assess risks connected with interest rate changes, credit
extension and liquidity management.
4. 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 prices reflective of market sentiment and
keeping trading window open throughout the day with active
trading in all major money market products confined initially
to TBs and other rupee denominated Government Bonds.
5. While considering the application
for PD, initially the applicants’ level of participation
in the Auctions for the last six months would be given due
consideration. Afterwards, participation in the secondary
market would also become a criterion to allow entry to new
applicants.
B)
Rules binding the status of a Primary Dealer:
1. After an applicant is found
fit by the State Bank, 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 fulfil
the existing criteria. The renewal 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 the tenure. Alternatively where a PD does not wish to
continue as PD, it will have to inform the SBP 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 formal functioning as a Primary Dealer.
2. No Primary Dealer shall
act as interbank broker.
3. In case a Primary Dealer
is found involved in activities not worthy of PDs status,
the State Bank 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.
4. Appointment or termination
of a Primary Dealer would be the sole discretion of the
State Bank.
C)
Primary Dealer’s Privileges:
1. 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.
2. In case a PD is unable to
square its short positions, the State bank, at its discretion,
would help him using various options depending upon the
situation. Decision of the SBP in this regard shall be binding.
3. 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.
4. 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 local working days.
5. PDs would deposit the funds
to the State Bank against their accepted bids in spot value.
6. Since PDs would be the main
source of market information for the regulators the State
Bank will regularly consult them initially on weekly and
afterwards on monthly basis. For this purpose, they will
set up an elected body having all PDs as its members.
D) Obligations:
1 - PDs would actively participate
in all the auctions of tradable Govt Securities initially
confined only to TBs and Federal Govt Bonds with floor and
ceiling of their bids ranging between 10% to 30% respectively
( for T-Bills) of the target amount. The minimum underwriting
target of 10% for each PD may exceed depending upon the
DTL of the respective PD. The State Bank would separately
announce an estimated amount to be raised by Government
through auction through T-Bills and Long Term Paper.
2 - An important responsibility
of the PDs will be to underwrite the auctions of Govt Securities
offered by the State Bank. 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.
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 ( On July-June
basis in line with Fiscal Year) and compliance to this shall
not be restricted on each Auction basis. The PD shall however
have to ensure that the 3.5% underwriting target is observed
in all tenures to avoid attempts on the part of any PD to
concentrate his holding in instruments of shorter maturities.
4 - Each PD shall be eligible
to claim underwriting commission, to the extent of his underwriting
obligation or the bid amount which ever is less, in respect
of auction of long term debt only at each auction participated
by him. The claim for underwriting commission shall be lodged
on day falling immediately after the settlement date.
5 - The underwriting commission
shall be paid at the following rates:-
Ø For instruments upto
3 years maturities (excluding T-Bills 5 paisa for Rs 100
of face value
Of 3,6 and 12 months)
Ø For instruments with
maturities of more than 3 years. 10 paisa for Rs 100 of
face value
6 - If a PD fails to meet his
underwriting commitment in respect of long term paper, fully
or partially during the prescribed period he shall be liable
to pay fine of 25 paisa for Rs 100 of face values for the
quantum of delinquency. His delinquency on this count shall
be determined immediately after the settlement date of the
last auction of the respective fiscal year. The rate of
penalty shall be reviewed after evaluating behavior of market
participants. The frequent non compliance for underwriting
requirements by PD may affect renewal of its Primary Dealership
for next tenure.
7 - It would be compulsory
for all the PDs to quote their prices to other PDs, if the
transaction volume is in between PKR 100-400 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 each PD would quote two
way prices regardless of the volume, subject to availability
of limit.
8 - 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. a price of 102/102.5
would depict bond price at a premium of 2 & 2.50 for
bid and offer respectively.
9 - 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.
10 - At any given day end,
a PD’s holding in a single issue will not exceed 30%
of the total issue amount.
11 - The PD will not be allowed
to short sell in a particular issue more than 5% of the
total issue amount, even during the “When issued”
trading period.
12 - In order to ensure a minimum
level of compliance, certain reports will be required to
be submitted to the State Bank. Each PD will be separately
advised in this regard.
13 - Each PD shall be required
to maintain separate book in respect of Government Securities
involving transaction through Primary Dealership.
14 - In future, the outright
trading volumes in Govt. securities would be among the main
characteristics of a PD. This may at least be set at twice
the volume of accepted bid of the PD. Any activity more
than that would obviously add up more value to the credentials
of the PDs.
E)
Other Details
1 - The State Bank may also consider to provide liquidity
comfort to the PDs if price distortions are created due
to short positions carried by any one of them. But this
comfort will always come with proper recognition, which
may also affect renewals in future, if the facility is frequently
availed. Similarly, if the PDs got stuck on the long side
due to market conditions, SBP would be willing to offer
them medium term (90 Days) repo facility at a price, which
would be equivalent to the SBP’s discount rate.-
2 - The State Bank would announce
the tenure wise auction date and target amount of its long
term paper 14 days prior to the auction date. The PDs would
be allowed to carry out “When issued” trading
in that paper during the interim period of auction announcement
and result dates.
3 - All PDs shall submit their
sealed bids to the SBP by 10:00 am. In turn SBP would announce
the results positively by 3:00 p.m. on the same date.
4 - While present system regarding
announcement of schedule of auction / OMO and their results
through Fax/Telephone, Print Media, shall continue, in future
SBP will preferably arrange such announcements through a
uniform medium like Reuters in addition to existing arrangements.
5 - There will be no underwriting
restrictions for OMOs but SBP will sell papers to PDs only.
6 - After each auction, the
State Bank would publicly announce the statistical details
of the auction containing data on total volume/number of
bids received (tenure wise), volume of accepted/rejected
bids (bank wise, tenure wise). To enable the market forecast
liquidity position, discounting facilities availed during
a day would also be announced (e.g. on Reuters).
7 - Only banks / NBFIs which
are required to maintain SLR with the State Bank shall be
eligible to have SGLA with the State Bank in addition to
Primary Dealers.
8 - In case bid by the PD in
case of long term paper of any maturity is largely out of
market, the SBP would give an opportunity to the PD to modify
his bid, without disclosing the bidding pattern of other
PDs. In case the PD is not able to modify his bid accordingly,
he will be eligible to have his underwritten amount at the
weighted average rate of the particular issue or withdraw
his bid. However this indulgence shall not be frequent,
and would have adverse affect on his eligibility for PD
in the next tenure. Likewise the SBP shall have sole discretion
to issue papers from unsold stock of a particular issue
at the time of its auction or any time, to any PD, in case
a request is made. Such sale shall be at a rate determined
by SBP, which shall not be less than the weighted average
rate.
2. Any financial institution, as defined in para 1 (A) (1)
who is interested in becoming Primary Dealer and fulfil
the above criteria may approach this Department within 30
days from the issuance of this circular for consideration
of its request.