KARACHI, July 5: The State Bank of Pakistan has issued fresh rules paving the way for brokerage houses and investment banks to become its primary dealers (PDs). As the name suggests primary dealers are the institutions that are authorized to trade the government securities on its behalf.

At present only the commercial banks — six in number — act as primary dealers. The new rules make room for listed brokerage houses and investment banks also to become primary dealers.

The SBP has asked the institutions desiring to become PDs for the fiscal 2003-04 to send applications to its Exchange and Debt Management Department by July 12, 2003.

Under the new rules the applicant must be a bank or investment bank or DFI or listed brokerage house and it must have a minimum equity of Rs500 million.

Following are some other criteria laid down by the SBP for primary dealers:

* PDs would actively contribute in keeping the market liquid by their commitment to both the 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.

* In case a PD is found involved in activities not worthy of its status the State Bank will serve it with a show-cause notice. In case the explanation offered by the PD is found unsatisfactory his dealership shall be terminated with a 30-day notice period.

* Only PDs would be eligible to participate in the auctions of government securities. The requirement of other banks/institutional investors would be covered from these PDs or from other secondary market players. However, PDs will sell government securities to other banks and financial institutions after auction at market prices.

* PDs would be allowed to carry a short position in securities managing it through repos up to a maximum of four consecutive weeks for bonds and one week for T-bills.

* An important responsibility of the PD will be to underwrite the auctions of long-term paper offered by the SBP. 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 plus minus 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 and compliance to this shall not be restricted on each auction basis. Non-compliance for underwriting requirement by PD may affect renewal of its primary dealership for next year.

* It would be compulsory for all the PDs to quote their prices to other PDs if the transaction volume is up to Rs100 million 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.

* To stir up activity in the government 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 government paper trading.

* At any given day, a PD’s holding in a particular issue will not exceed 30 per cent of the total issue amount and 15 per cent for non-PD.

* The PD will not be allowed to short-sell a particular issue more than 5 per cent of the total issue amount.