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STATE BANK OF PAKISTAN
EXCHANGE & DEBT MANAGEMENT DEPARTMENT
CENTRAL DIRECTORATE
KARACHI
EDMD Circular No. 1
19th June 2000
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 authorized 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 authorized 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 internet 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 this 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 Dealers for a period of one year renewable every financial year
provided the PD continues to fulfill the existing criteria. The renewal would be decided
at least 30 days prior to the expiry of previous appointment. As such each PD shell 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, 20 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 regulations the State
Bank will regularity 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 20% respectively (for T-Bill’s) of the target amount. The
minimum underwriting target of 10% of 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 auction 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 restriction 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:--
| > For instruments upto 3
years maturities (excluding T-Bills of 3, 6 and 12 months) |
5 paisa for Rs. 100 of face value |
| > For instruments with maturities of more than 5 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 on this count shall be
determined immediately after the settlement date of this 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 effect
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 a.m. 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 fulfill the above criteria may approach this Department within 30 days
from the issuance of this circular for consideration of its request.
Yours faithfully,
Sd/-
(Muhammad Asghar Baig)
Joint Director
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