The State Bank of Pakistan has issued new rules to make ''Primary Dealer system'' more broad-based and meaningful. These new rules will void the earlier Rules circulated vide EDMD circular No 8 dated July 5, 2003. The salient features of the Criteria, Obligations and Privileges of the Primary Dealers and other details under new Rules are:
The applicant for the status of Primary Dealer (PD) must be a bank/DFI/investment bank/listed brokerage house. As a measure of financial stability, the institution applying for Primary Dealership must have a minimum equity (net of provisions and capitalised losses if any) of Rs 500 million.
As an indication of strong managerial/trading capabilities, PD''s treasury operations have to be fully computerised. All PDs must also be equipped with standard treasury equipment including Dealing Terminals, Phone Recording Systems, Broker''s Hotlines, Telex/Swift, Fax machines, 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 scrutinising the application for PDs, the State Bank of Pakistan may inspect, on spot, the above infrastructure of the applicant.
PDs would actively contribute in keeping the market liquid by their commitment to both primary and 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 throughout the day with active trading in all marketable government securities.
While considering the application for PD, applicant''s level of participation in the secondary market for the last one year would become a criterion to be selected as PD.
The status of a Primary Dealer will be decided 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 fulfil 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 months 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.
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.
Appointment or termination of a Primary Dealer would be at the sole discretion of the State Bank of Pakistan.
Primary Dealers 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 passthrough bids.
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.
PDs would be allowed to carry a short position in securities managing it through reports 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.
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.
PDs would deposit the funds with the S.B.P. B.S.C. (Bank) against their accepted bids on settlement date. Since PDs would be the main source of market information for the regulators, State Bank of Pakistan will regularly consult them in periodical meetings.
Primary Dealers 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 percent of pre-announced auction target, will be accepted by State Bank of Pakistan from investors other than banks/DFIs/NBFIs through PDs.
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.
Each PD shall be required to ensure compliance of minimum underwriting target of 3.5 percent 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.
Each PD shall be eligible to claim underwriting commission, to the extent of his underwriting amount as 3.5 percent 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.
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.
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 behaviour of market participants. The frequent non-compliance for underwriting requirements by PD may affect renewal of its primary dealership for next term.
It would be compulsory for all PDs to quote their prices to other PDs, if the transaction volume is up to Rs 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.
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.
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.
At any given day end, a PD''s holding in a particular issue will not exceed 30 percent of the total issue amount and 15 percent for non-PD bank.
The PD will not be allowed to short-sell a particular issue more than 5 percent 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.
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.
Each PD shall be required to maintain separate book in respect of govt securities involving transaction through Primary Dealership. In case of listed brokerage houses, they shall maintain a firewall between their brokerage and PD business.
Each PD should be required to ensure compliance of minimum underwriting target of 3.5 percent in case of long term paper over one year (July-June).
Each Primary Dealer should short-sell a minimum of 1.0 percent of auction target of long term paper during a year.
Each Primary Dealer should bring a minimum of 5.0 percent of NCB target of long term paper during a year. However, for non-competitive bidding, instead of the fixed ceiling of Rs 10.0 million, the ceiling will now be linked with auction target, ie 0.25 percent of auction target or Rs 25.0 million, whichever is higher.
Each Primary Dealer''s turnover in secondary market should be minimum of 5.0 percent of overall market turnover (for PIBs and MTBs separately). In case of PIB, out of the minimum turnover of 5 percent, at least 1 percent (of total turnover) should be with non-banks.
Further, to ensure that each PD is performing its obligation as price maker on both sides, ie, buying and selling of MTBs and PIBs, out of the above minimum turnover, PDs should ensure a minimum of 25:75 on either side.
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.
All PDs shall submit their sealed bids to the State Bank of Pakistan by 10:00 am. In turn, SBP would announce the results positively by 3:00 pm on the same date.
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