Investors on the Karachi Stock Exchange now have another trading system to look at. Fashionably called BATS or Bond Automated Trading System the system aims to streamline the trading of a large number of debt securities.
The demand and more importantly the need of a benchmark index for an otherwise informally traded debt securities grew stronger in the recent times - leading to the inauguration of BATS, which one hopes will pave the way for a more mature debt market in Pakistan.
But the million dollar question is how big the change is. Is it just a marginal adjustment in the modalities of things or a huge fundamental shift? It could be both - the latter if tangible efforts are made to enhance the size of the primary bond market, and the former if it just turns out to be a symbolic change without the vision of developing and expanding the size of primary bond market.
The absence of a proper range of debt instruments with wide range of maturities is causing many problems to the corporate bond issuers. To add to the woes, there is an evident dearth of proper yield curve and long-term bench mark interest rates, which needs to be dealt with on a priority basis to ensure that the bond market flourishes in the country.
There is also a dire need to simplify the overly complicated bond market regulations to compete with the conventional system of loans that are much easily accessible. The high issuance cost of bonds is doing no good to its development either and calls for concrete measures to gradually reduce the transaction costs of bond issuance.
Promoting this alternative financing source would also provide alternate financing to corporate businesses in addition to conventional banking sources. Moreover, it would also help corporate issuers, municipal and local authorities to raise long-term financing for infrastructural development projects.
Another potential benefit could be that of having the missing link i.e. transparency through price discovery of credit securities as primary market would get the cue from the secondary market mechanism. The increased secondary market size will also allow issuers to enjoy the benefit of paying lower liquidity premium on bond securities
In short, while the introduction of BATS is a good sign, the policymakers must revamp the highly undeveloped bond market (currently worth just 1 percent of GDP), which can be of huge benefit to both the industries and the financial markets. And while, it can act as the stepping stone for a sizeable derivative and mutual fund industry at one end, it can also help attract foreign portfolio investment in bonds as well.
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