Seven months on: Trading in T-bills, PIBs via bourse remains thin

New mechanism was expected to broaden investor base.

Photo Athar Khan/kazim Alam August 10, 2014

KARACHI: Trading of government securities through the Karachi Stock Exchange (KSE) has remained dull since its inception on January 31, official statistics show.

Launched amidst much fanfare by Finance Minister Ishaq Dar about seven months ago, secondary trading of government papers on the KSE’s Bonds Automated Trading System (BATS) platform has been extremely low.

According to the KSE’s government debt market trading data, the total traded value since January 31 amounts to only Rs330.3 million. Interestingly, this figure includes a single, one-off trade of Rs304.6 million carried out on February 18.

Government securities traded on the BATS platform include market treasury bills and Pakistan Investment Bonds (PIBs) while Sukuks and other government papers will become tradable at a later stage.

Under the new mechanism, all primary dealers are allowed to carry out proprietary trading of government securities through workstations given by the exchange for this purpose. They are also supposed to act as market-makers on the exchange for government securities.

Eleven primary dealers are selected by the State Bank of Pakistan (SBP) every year from banks, development finance institutions (DFIs), investment banks and listed brokerage houses. Their job is to participate in the trading of government papers in the primary market by bidding in the auctions of government securities besides acting as market-makers in the secondary market comprising retail/institutional clients and banks that are not primary dealers.

The objective of the initiative was to enable retail investors to invest in government papers using the settlement process of the Central Depository Company (CDC). Besides broadening the investor base of government securities domestically, the move was aimed at attracting international fixed-income funds to invest in local currency-denominated government securities.

Speaking to The Express Tribune, KSE Director Mohammed Sohail said the new mechanism falls short of assessing and meeting the needs of its users. For example, he says, the new mechanism is running parallel to the country’s long-established money market, which has resulted in sluggish trading of government papers on the bourse.

“Why would anyone try the new system if the old, trusted mechanism is meeting trading needs in the same way?” said Sohail, who also serves as CEO of Topline Securities. Traditionally, secondary market transactions have taken place among financial institutions through the Bloomberg Bulletin Board facility on a ‘counterparty risk basis,’ also known as over-the-counter (OTC) transactions.

Sohail suggests that the two systems should either be merged or their domains be properly defined and separated in order to ensure higher volumes on the stock exchange-based trading system.

Another problem in the new system is its high lot size requirement. Market-makers have to ensure two-way prices in the secondary market for the marketable lot size for treasury bills in multiples of Rs100 million. “The KSE has recently wrote a letter to the SBP, demanding that the lot size should be reduced to Rs100,000 in order to facilitate small investors and increase trading volumes,” Sohail said.

Published in The Express Tribune, August 11th, 2014.

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