Secondary market: Trading in T-bills, PIBs via bourse to begin in January

Government securities to bring in international fixed-income funds .

KARACHI:

Regulatory approvals and operational procedures, including the appointment of market-makers, will be in place by the end of January to enable the commencement of trading in government securities through the Karachi Stock Exchange (KSE).

KSE Managing Director Nadeem Naqvi met Finance Minister Ishaq Dar last week, to discuss the implementation of secondary market trading of government securities on the stock exchange through the KSE’s Bonds Automated Trading System (BATS) platform.

In an exclusive interview with The Express Tribune on Tuesday, Naqvi said that government securities that will be traded on the KSE include market treasury bills, Pakistan Investment Bonds (PIBs) and, at a later stage, Sukuks and other government papers.



“The government’s objective is to enable retail investors to invest in government securities using the settlement process of the Central Depository Company (CDC),” Naqvi said, adding that the development will broaden the investor base of government securities.

He noted that another objective of allowing the trading of government securities on the bourse is to attract international fixed-income funds to invest in Pakistan’s local currency government securities.

Currently, the government issues PIBs and holds auctions for market treasury bills in which only selected banks and financial institutions take part as ‘authorised primary dealers’. For the fiscal year 2013-14, the State Bank of Pakistan (SBP) has appointed 11 banks/financial institutions as primary dealers of government securities.

Under the current mechanism, secondary market transactions take place among these institutions through the Bloomberg Bulletin Board facility on a counterparty risk basis, also known as over-the-counter (OTC) transactions.

According to KASB Securities research analyst Farrukh Khan, a change in the intermediation process offers a significant scope for government securities, as their ownership is currently concentrated in the banking sector.

“Scheduled banks currently own 84% of treasury bills, 53% of PIBs and 91% of Ijara Sukkuks. The rest of the ownership is divided between corporate entities, insurance companies and mutual funds,” Khan said.

Retail investors have little direct ownership of government bonds and bills, as most of their savings are parked in either bank accounts or invested in the National Savings Schemes (NSS), he added.

“Despite distribution challenges, total money invested in the NSS is Rs2.5 trillion, which is 35% of the total banking sector deposit size. This highlights the enormous potential of this product (T-bills and PIBs),” Khan noted.

While most analysts seem to be in favour of trading government securities on the stock exchange, many have opposed this idea in the past, stating that the number of equity investors in the country is already limited.

“Making retail investment in government securities easy will only deprive the stock market of liquidity. Only a small number of people invest in the stock market, they are now being pushed by the government to invest in government papers,” said a stock market analyst while requesting anonymity.

However, Naqvi said the segment of investors who are likely to invest in government securities usually have little interest in equities. He said that the availability of government securities will help diversify and balance the investment portfolio of those investors who are currently investing in equities, as it will reduce their overall portfolio volatility. “This is, therefore, a beneficial development,” Naqvi said.

Published in The Express Tribune, December 25^th, 2013.

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