You all must remember Shaukat Tarin’s koonda episode, when the ex-finance minister during a live program with Dunya TV’s anchor Kamran Khan, threatened Primary Dealers (PDs) [banks] regarding their high bids in the government bond auctions, by saying that if PDs [banks] do not start behaving, he will deploy tools that will ruin them (in ka koonda ho jaye ga). Guess what, PDs didn’t budge.

Why didn’t they budge? Are they so protected under the SBP umbrella that a sitting Finance Minister cannot mend their ways? It all boils down to the lack of players in the government securities market trading arena. And who do you think is responsible for bringing new players to the arena? Primary Dealers, duh. This brings the efficiency and efficacy of the market-making function of PDs into question. Clearly, the current market-making arrangements and regulations carved by the SBP have not yielded the desired results. But why?

Profit explains.

How do government securities operate?

State Bank of Pakistan (SBP) acts as an agent of the Government of Pakistan for managing domestic public debt. SBP is responsible for distribution of marketable government securities (Market Treasury Bills, Public Investment Bonds & Government Ijarah Sukuk) through a network of ten primary dealers (all of which are commercial banks – except one DFI) and two Special Purpose Primary Dealers (National Clearing Company of Pakistan Limited (NCCPL) & Central Depository Company of Pakistan (CDC)). Primary dealers are selected from among financial institutions including Banks, DFIs, Investment Banks, Listed Brokerage Houses as per the criteria laid out by the SBP based on minimum capital requirements, secondary market participation, technical requirements, fulfillment of market making obligations, among others.

The PDs enjoy significant perks and privileges after attaining their PD status such as exclusive participation in the Government Securities auctions, claim to underwriting commission, entertaining pass-through bids, among others. In exchange for this, there are some obligations on the PDs which should be fulfilled in order to compensate for the perks and privileges they enjoy. These obligations include the essential market making function which include quoting two-way prices of government securities, increasing participation of non-PDs & retail segment, and displaying Prices of Government Securities across multiple platforms. Performance assessment of PDs is based on compliance with the secondary market turnover, market-making responsibilities, use of Electronic Bond Trading system, among other criterions.

If all these........

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