All Banks/DFIs/Investment Banks/Listed Brokerage Houses
Dear Sirs,
Rules
Governing Primary Dealer System
In
order to make Primary Dealer system more broad based and
meaningful the following new Rules are being issued in supersession
of earlier Rules circulated vide EDMD Circular No. 08 dated
5th July 2003.
The salient features of the Criteria, Obligations and Privileges
of the Primary Dealers and other details under the new Rules
are as under:
A.
Selection Criteria
1. The applicant for the status of Primary Dealer (PD) must
be a Bank / DFI / Investment Bank / Listed Brokerage House.
2.
As a measure of financial stability, the institution applying
for Primary Dealership must have a minimum equity (net of
provisions and capitalized losses if any) of PKR 500 million.
3.
As an indication of strong managerial /trading capabilities,
PD’s treasury operations have to be fully computerized.
All PDs must also be equipped with standard treasury equipment
including:
a. Dealing Terminals,
b. Phone Recording Systems,
c. Broker’s Hotlines,
d. Telex/Swift,
e. Fax machines,
f. Telephone recording equipment with records 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.
At the time of scrutinizing the application for PDs State
Bank of Pakistan may inspect on spot the above infrastructure
of the applicant.
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 price reflective
of market sentiment and keeping trading window open through
out the day with active trading in all marketable Government
securities.
While
considering the application for PD, applicants’ level
of participation in the secondary market for the last one
year would become a criterion to be selected as PD.
B.
Rules binding the status of a Primary Dealer
1. After an applicant is found fit by the State Bank of
Pakistan, 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 fulfill the
existing criteria. The renewals 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 tenure. Alternatively where a PD does not wish to continue
as PD, it will have to inform the State Bank of Pakistan
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.
In case a Primary Dealer is found involved in activities
not worthy of PD’s status, the State Bank of Pakistan
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.
3.
Appointment or termination of a Primary Dealer would be
the sole discretion of the State Bank of Pakistan.
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. 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.
2.
In case a PD is unable to square its short position, State
Bank of Pakistan, at its discretion, would help using various
options depending upon the situation. Decision of the State
Bank of Pakistan 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 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 format.
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 working days.
5.
PDs would deposit the funds to the S.B.P. B.S.C. (Bank)
against their accepted bids on settlement date.
6.
Since PDs would be the main source of market information
for the regulators, State Bank of Pakistan will regularly
consult them in periodical meetings.
D. Primary Dealers’ Obligations
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 pre-announced auction target will be accepted by State
Bank of Pakistan of investors other than banks/DFIs/NBFIs
through PDs.
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 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 (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.
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.
5.
The underwriting commission shall be paid to PD at the rate
of paisa 5 per Rs. 100 irrespective of maturities in long
term government securities sold in auctions.
6.
If a PD fails to meet its underwriting commitment in respect
of long term paper, fully or partially during the prescribed
period it shall be liable to pay fee of 25 paisa for Rs.
100 of face value for the quantum of delinquency. It shall
be determined immediately after the settlement date of the
last auction of the respective fiscal year. The rate of
fee 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 term.
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.
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. price of 102.00/102.50 would depict bond
price at a premium of 2.00 & 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 particular
issue will not exceed 30% of the total issue amount and
15% for non-PD bank.
11.
The PD will not be allowed to short sell a particular issue
more than 5% of the total issue amount, during the “When
issued” period. Short selling will be allowed only
up to the time of auction and will be available only if
the auction is accepted.
12.
In order to ensure a minimum level of compliance, certain
reports will be required to be submitted to the State Bank
of Pakistan on tradable securities on prescribed format.
13.
Each PD shall be required to maintain separate book in respect
of Govt. Securities involving transaction through Primary
Dealership. In case of listed brokerage house, they shall
maintain a firewall between their brokerage and PD business.
E. Performance Criteria
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).
2.
Each Primary Dealer should short-sell a minimum of 1.0%
of auction target of long term paper during a year.
3.
Each Primary Dealer should bring a minimum of 5.0% of NCB
target of long term paper during a year. However, for non-competitive
bidding, instead of the fixed ceiling of PKR 10.0 Million,
the ceiling will now be linked with auction target, i.e.
0.25% of auction target or PKR 25.0 Million, whichever is
higher.
4.
Each Primary Dealer’s turnover in secondary market
should be minimum of 5.0% of overall market turnover (for
PIBs and MTBs separately). In case of PIB, out of the minimum
turnover of 5%, at least 1% (of total turnover) should be
with non-banks. Further, to ensure that each PD is performing
its obligation as price maker on both sides, i.e., buying
and selling of MTBs and PIBs, out of the above minimum turnover,
PDs should ensure a minimum of 25:75 on either side.
F.
Other Details
1. The State Bank of Pakistan would announce the auction
date and tenor wise auction target of GoP's long term paper
14 days prior to the auction date. PDs would be allowed
to carry out “When issued” trading in that paper
during the interim period of auction announcement and auction
time.
2.
All PD’s shall submit their sealed bids to the State
Bank of Pakistan by 10:00 am. In turn, SBP would announce
the results positively by 3:00pm on the same date.