To say that Pakistan does not have a vibrant debt market would perhaps be an overstatement. A more appropriate expression would be that it’s ‘practically non-existent’.
The reasons why this view has gained currency over the years are many; market prices of debt instruments are often different from broker rates, there are valuation issues, and the listing of corporate debt takes a lot of time – often six months, according to some market participants – amongst other issues.
In addition, according to Nasim Beg, Chief Executive of Arif Habib Investments Limited, banks as trustees of TFCs “have failed to take timely action” in several cases of default. Beg also blames banks to have formed a “restricted-club” that doesn’t want to trade debt papers through the KSE’s recently launched Bond Automated Trading System (BATS).
Thankfully, however, the Securities and Exchange Commission of Pakistan is now trying to tackle these issues head on, amongst others, in its attempt to develop an efficient debt market.
Beginning next month, SECP sources say, the off-market trading of listed debt papers will be prohibited, with BATS becoming mandatory for all listed instruments. Even key trading details of the unlisted ones will have to be reported so that the pricing issue is, at the least, alleviated.
The SECP is also allowing the previously unlisted TFCs – which are about half of the total TFCs issued currently -- to get listed. Reportedly some have already come forward; some are shy, while others are facing reservations on the part of the bourses.
Sources say that BATS is also being tweaked to allow negotiable trades between two disclosed parties; though the identities of the transacting parties will not be disclosed to the market. Previously, only conventional order type transactions were allowed – as is done on KATS -- with the details of the transacting parties left undisclosed.
Studies are also being conducted to create a separate pricing institution. It would reportedly be a commercial entity regulated by the SECP, dealing in fixed income pricing services, and providing reliable valuations for different kinds of debt instruments on a daily basis, amongst other offerings.
The entity, which is likely to be crafted along the lines of the Bond Pricing Agency Malaysia and Thai Bond Market Association, will help assess the right price of ill-traded or ill-liquid instruments and will take away the pricing function form the Mutual Fund Association of Pakistan.
However, unlike other developments that are seen within weeks and months, this particular step, if viable, is likely to take some time before it’s formally rolled out.
Aside from ironing out pricing issues, the SECP has also been busy reducing the processing time of TFC issuance.
Official sources say that document duplication between the bourses and the regulator have been removed, whereas the SECP has also relaxed listing requirements for OTC counters, provided the papers are being offered only to Qualified Institutional Buyers.
In other steps to develop the debt market, the SECP has prepared a draft regulatory framework for debenture trustees which will be out in a month for public consultation.
Others, such as that for issuing Sukuk and commercial papers, which is being prepared in consultation with the central bank, will be issued later down the year for the purpose of stakeholder consultation.
Now, since the SECP is at it, here is another step that needs to be taken: strengthening the debt rating system in the country. “The independence of rating agencies has been questionable; they have not proven to be on their toes,” says Beg, though adding that this trait is visible across the globe as well.
But since the size of Pakistan’s market probably does not justify the need to have a separate debt-specific rating agency, perhaps the SECP should consider upgrading the rating agencies’ framework.
Lastly, but most importantly, institutions should be disallowed to invest in the National Savings Schemes – a policy that is acting as a major impediment to potential growth in corporate debt market. Hopefully, the finance ministry will resolve this matter soon, so that SECP’s efforts can bring better results.