Karachi : State Bank of Pakistan SBP on Tuesday amended certain rules governing Primary Dealer System in order to streamline and further strengthen this system. The purpose of amendments is to create a balance between privileges and obligations of Primary Dealers PDs to achieve objective of development of debt market in Pakistan.
According to amendments, all banks, DFIs interested in Primary Dealer PD status, will have to ensure that their charges on Investor Portfolio Securities IPS accounts are reasonable and in line with SBP s objective to broader investor base of Government securities. PDs have been instructed to provide efficient IPS account related services to customers. PDs will be eligible to claim commission @ 10 paisa per Rs 100 for all accepted Non Competitive Bids NCBs of individuals, employee provident, pension funds and corporate except Asset Management Companies AMCs, Mutual Funds, Insurance, Mudarba, Leasing companies in Market Treasury Bill MTB and Pakistan Investment Bond PIB auctions. A maximum limit of Rs 250 million is placed for submitting NCB by any one investor in any one tenor of PIB, MTB auction. PDs will be required to display prices of Government Securities on Reuters, Bloomberg, EBND and at their branches.
SBP in a Master Circular (DMMD Circular No. 12) issued today to all heads of Scheduled Banks, DFIs, Investments Banks, listed Brokerage Houses has consolidated instructions issued from time to time on rules governing primary dealer system.
New instructions on PD system are:
A. Selection Criteria The applicant for status of Primary Dealer PD must be a Bank, DFI, Investment Bank, Listed Brokerage House. 2. As a measure of financial stability, Banks, DFIs applying for Primary Dealership must have met minimum paid-up capital requirement of SBP as of last financial year end. All other applicant should have minimum equity (net of provisions and capitalized losses if any) of PKR 1,000 million. 3. As an indication of strong managerial, trading capabilities, applicant s treasury operations have to be fully computerized. All applicants must also be equipped with standard treasury equipment including:
a. Dealing Terminals including Reuters & Bloomberg, 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.
4. Applicant must have adequate risk management systems to measure, manage and provide for risks emanating from PD activity.
5. All PDs will have to adhere to quoting obligations as specified by SBP from time to time. To secure PD status, applicant has to be a PRICE MAKER , quoting two-way price keeping trading desk open throughout the day for marketable Government securities.
6. Applicants level of participation in secondary market for last one year would also be a criterion for selection as PD.
7. An applicant applying for PD status must display complete information regarding process, methodologies, charges and forms required for investment in Government securities, on their official website.
8. Charges imposed by applicant on Investor s Portfolio of Securities Account should be reasonable and in line with SBP s objective to broaden investor base of Government securities.
9. At time of scrutinizing application for PDs, SBP may conduct on-site inspection to ensure compliance of aforesaid requirements.
B. Selection Process:
1. Applications for appointment of Primary Dealers will be invited by SBP each year vide a circular. All applicants including existing PDs shall submit an application for appointment as a Primary dealer and shall be accompanied by documents referred to in circular. It will be binding for each applicant to furnish to SBP any such information as SBP may consider necessary for purpose of considering suitability of applicant to be appointed as a PD.
2. Each new applicant will be evaluated in light of selection criteria. However, performance of existing PDs will be measured against performance benchmarks defined in these rules.
3. After an applicant is found fit by SBP, a letter would be issued for its appointment as PD for a period of one year. However, SBP may also grant an applicant provisional, conditional status of PD subject to periodic review.
4. The market would be intimated about Primary Dealer(s) appointment for next financial year through a circular prior to their formal functioning as a PD.
5. At any time during financial year, if a PD is found involved in activities not worthy of PD s status or its performance has been found below minimum benchmark levels, SBP may serve it with a show cause notice. In case, explanation offered by PD is found unsatisfactory, primary dealership could be terminated with a 30 days notice period.
6. Appointment or termination of a PD would be sole discretion of SBP.
C. Role of Primary Dealers:
PDs are required to: Actively participate in primary market by bidding in auctions of Government securities as conducted by SBP from time to time. Distribute Government securities to non-PD banks and other retail, institutional clients. Play active role in secondary market development to enhance liquidity and turnover, and to widen investor base of Government securities by creating awareness among investors. Act as a market maker in Government securities by quoting two-way prices in market. Continuously upgrade its infrastructure in terms of both physical equipment and skilled manpower for efficient participation in primary auctions and secondary market trading. Provide efficient custody services to its customers (Investors Portfolio of Securities Accounts) for Government securities holding, collection and, payment of profits & maturity proceeds.
D. Primary Dealer s Privileges
1. Only designated PDs would be eligible to participate in auctions of Government Securities. The requirement of other banks and institutional, retail investors would be covered from these PDs or from other secondary market players. PDs will be allowed to entertain Pass-through bids, but such volumes will not be counted towards secondary market performance evaluation of respective PD. However, PDs have to submit detail of accepted pass-through bids to SBP after every auction of Government securities.
2. SBP would announce auction date and tenor wise auction target of GoP’s long term paper 14 days prior to auction date. PDs would be allowed to carry out When issued trading in that paper during interim period of auction announcement and auction time. PD will not be allowed to short sell a particular issue more than 5% of total target amount, during When issued period. Short selling will be allowed only up to time of auction and will be available only if auction is accepted. In case a PD is unable to square its short position, PD will be required to cover short position from market. However, dependent on liquidity position of particular issue SBP, at its discretion, would help using various options depending upon the situation. SBP decision in this regard shall be binding.
3. Only 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 MTBs. However, they would be required to mark-to-market their short positions on daily basis.
4. PDs will be allowed to submit Non-competitive Bids NCBs for both MTBs and PIBs. Non-competitive bids will be accepted as 15% of pre-announced auction target by SBP for investors other than banks (both scheduled and specialized), DFIs, Investment Banks through PDs. However, for non-competitive bidding, ceiling for one investor will be linked with pre-auction target i.e. 0.25% of auction target or PKR 25.0 million, whichever is higher, subject to a maximum of PKR 250 million. In case of breach of this limit through submission of multiple bids in one tenor, all such bids would be treated as void.
5. PDs will have access to SBP Overnight Repo, Reverse-Repo Facility as per rules governing operations of interest rate corridor.
6. Each PD shall be eligible to claim underwriting commission, to extent of minimum underwriting target (as explained in rule E-3) or 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 settlement date however, commission will be paid annually.
7. Underwriting commission shall be paid to PD at rate of paisa 5 per Rs. 100 irrespective of maturities in long term government securities sold in auctions.
8. PDs shall also be eligible to claim commission on NCBs @ 10 paisa per Rs. 100 applicable only on accepted NCBs of Individuals, Employee, Provident & Pension Funds, Corporate except AMCs, Mutual Funds, Insurance, Modaraba, Leasing companies, in MTB & PIB auctions. The claim for commission shall be lodged by PD after settlement date however, commission will be paid annually.
9. Top three performing PDs (based on their performance against benchmarks defined in these rules) will be announced by SBP at end of each year (July-June).
10. Since PDs would be main source of market information for regulators, SBP Pakistan may consult them in periodical meetings as and when required. It will be mandatory for PDs to provide information, feedback, data to SBP on any particular issue to best of their knowledge.
E. Primary Dealers Quoting and other Obligations
1. PDs must actively participate in all auctions of tradable Government securities. SBP would announce pre-auction target amount in short-term as well as in long-term government securities.
2. A important responsibility of PD will be to underwrite auctions of Long-term paper offered by SBP. To avoid any out of market quotes bid price for long-term paper would be confined to a range of + 50 basis points from respective tenor prices appearing on Reuters PKRV page on last working day prior to bidding.
3. Each PD shall be required to ensure compliance of minimum underwriting target of 3.5% to be applied on Pre-auction target or the issued amount, whichever is lower, for respective tenors of PIBs (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. If a PD fails to meet its underwriting commitment in respect of long term paper, fully or partially during prescribed period it shall be liable to pay fee of 25 paisa for Rs. 100 of face value for quantum of delinquency. It shall be determined immediately after settlement date of last auction of respective fiscal year. 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.
5. It would be compulsory for all PDs to quote two-way prices to other PDs, Non-PDs, and institutional investors etc. as per instructions contained in rule E-6, subject to availability of limit.
6. In secondary market, all PDs may quote in terms of yield rather than price. In case of PIBs, maximum bid, offer spread will be 15bps for on run issues up to 10 years tenor bonds. In case MTBs, maximum bid, offer spread for on run issues will be 25bps. PDs have to ensure two-ways prices in secondary market within above defined maximum bid, offer spreads for marketable lot-size for both MTBs and PIBs. The marketable lot-size for MTBs will be in range of PKR 100.0mln – 300.0mln (multiples of PKR 100.0mln). The marketable lot-size for PIBs will be in range of PKR 50.0mln – PKR 200.0mln (multiples of PKR 50.0mln). On-the-run issues defined for above obligation would represent last two issues in the market. These instructions will also be applicable on PDs for quoting two-way prices on Electronic Bond Trading System (EBND) for MTBs/PIBs.
7. PDs will be responsible for displaying prices of Government securities on Reuters, Bloomberg/EBND and in branches. Quoting obligations must be strictly adhered to.
8. At any given day, a PD’s holding in a particular issue with days to maturity greater than 1-year will not exceed 30.0% of total issued amount or PKR 1.5billion, whichever is higher in each tenor. However for Non-PDs limit will be 15.0% or PKR 1.5 billion, whichever is higher, in each tenor. The PDs issue-wise holding limit of 30.0% will run-down to 15.0% of the issued amount on expiry of 90 days from last auction date of that particular issue. This revised limit would apply only on issues sold during FY’08 and onward. Compliance to above instructions on current holding as on date of this circular by PDs, be effectively met by 30Sep2012.
9. PDs shall segregate Government securities of its customers from its own securities. In case of listed brokerage house, they shall maintain a firewall between their brokerage and PD business.
F. Performance Criteria
1. Each PD should be required to ensure compliance of minimum underwriting target of 3.5% to be applied on Pre-auction target or issued amount, whichever is lower, for respective tenors of PIBs (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 PD should bring a minimum of 5.0% of the NCB target of MTBs and PIBs during a fiscal year.
4. Each Primary Dealer s turnover in secondary market should be minimum 5.0% of overall market turnover (for PIBs and MTBs separately during the year). Out of minimum turnover of 5%, at least 1% (for PIBs and MTBs separately) of total turnover should be with non-banks. For the purpose of this rule non-bank means other than Schedule Banks and Primary Dealers.
5. 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 above minimum turnover; PDs should ensure a minimum of 25:75 on either side.
6. Each PD will ensure that at least 50% of its trading with other PDs should be through Electronic Bond Trading System (EBND). This would not include transactions inputted via voice trade reporting mode (VTR).
7. Non-compliance of performance criteria by PD may affect its selection as PD for next year.
