How does SBP regulate Government Securities

Less than 20% of the securities market in Pakistan is traded on a monthly basis of the outstanding worth of the securities. In the initial nine months of 2018, the mean monthly transaction volume in According to SBP, the total amount of government securities held by all financial institutions in the secondary market was PKR 2,154 billion. In this article, we will explore the many ways in which SBP regulates government securities funds and alternative frameworks that may help the SBP.

Background

As of June 2018, the entire debt of the Pakistani government was PKR 12,688 billion, comprising Treasury Bills, PIBs, and Ijarah Sukuks. To exacerbate this problem, out of the fifty instruments that are available for trading, an average of approximately 40% of trades each month are made in one or two of those instruments.The function of SBP in managing national debt SBP manages the national public debt on behalf of the Government of Pakistan.

Marketable government securities (MTBs, PIBs, and GIS) auctions and the management of specific public debt data fall under the purview of SBP. Additionally, SBP oversees government securities primary dealers.

SBP seeks to increase price discovery and investor diversification in order to boost liquidity in the debt market for government securities. It also seeks to increase bank intermediation efficiency in order to divert end-investor savings toward debt instruments.

What are public debt markets and why are they important?

Public debt markets are places where the government can sell debt products to both domestic and foreign investors in order to raise money. These consist of MTBs, PIBs, GIS, National Savings Instruments, Eurobonds, International Sukuk, and so on in Pakistan. Better price discovery and more investor interest are made possible by an efficient market for government assets as it lowers the government’s cost of borrowing.

Marketable Government Securities

MTBs: Often referred to as “T-bills,” MTBs are highly liquid, short-term government securities with maturities of three, six, and twelve months. MTB auctions are held every two weeks on Wednesdays. Pre-announced auction calendars are used to announce the dates of the auction and settlement as well as the goal and maturity amounts.

PIB: Issued in tenors of three, five, ten, and twenty years, PIBs are medium-to-long term government securities. Pre-announced auction calendars serve as the basis for the PIB auctions. The target amount, maturity amount, and auction and settlement dates are all specified in the calendar.

GIS (FRR & VRR): Issued in 3-year tenors, GIS are Islamic debt securities that comply with Shariah. GIS can be distributed based on Fixed-rate or variable-rate rentals.

Issuance of marketable government securities

SBP uses a pre-announced auction calendar to conduct multiple-priced auctions of marketable government securities on behalf of GOP. The GOP sets the auction schedule, which SBP then distributes to the market. Whereas PIB auctions are held only when necessary, MTB auctions take place every two weeks.

Wednesdays are the dates of the auctions, and T+1, or the following Thursday, is when the settlement is completed. Government securities auctions may be attended by Primary Dealers (PDs) of government securities. The auction calendar lists the dates of the auction and settlement, as well as the auction target and maturing amounts.

For the next three months, the calendar will be released each month on a rolling basis on Bloomberg, Reuters, and the SBP website. The cut-off yields and accepted amounts for the auction are determined by the GOP and released to the market by SBP on the day of the auction.

Alternative Pricing Framework

One problem in the Pakistani bond market is pricing. The fact that the government is the largest borrower in the local market alone leads to structural problems. For example, the interest rate on government loans is somewhat higher.

Under the floating rate system, the government has been borrowing from banks for the past four months at a rate that is 50–70 basis points higher than what private banks lend to one another. Because of this, corporate bonds are either too costly for the issuer or too risky for the investor and hence, it has a detrimental impact on corporate bond markets.

Furthermore, government borrowing is made needlessly costly by prize bonds and the issue of certificates and bonds under national saving schemes, which have interest rates significantly higher than those of similar bank deposits or even treasury bills. Furthermore, because of Pakistan’s developing economy and ongoing interest rate fluctuations, fixed coupon bonds without put or call options are not marketable.

Even though changing the way government assets are priced won’t benefit the bond market right away until the aforementioned problems are fixed, doing so will undoubtedly increase investor confidence and encourage bond holders to trade more frequently.

List of PDs/PPDs/SPDs for FY 2023-24:

Sr.#	Name
Primary Dealer
1	Bank Al-Falah Limited
2	National Bank of Pakistan
3	Habib Bank Limited
4	Habib Metropolitan Bank Limited
5	United Bank Limited
6	The Bank of Punjab
7	MCB Bank Limited
8	Pak Oman Investment Company Limited
9	JS Bank Limited
10	Citi Bank – Pakistan
Special Purpose Primary Dealer
1	Central Depository Company Limited
2	National Clearing Company Of Pakistan