Two International banks surrender their primary dealer license in FY24

KARACHI: The State Bank of Pakistan (SBP) has announced the appointment of Primary Dealers (PDs) and Special Purpose Primary Dealers for the Fiscal Year 2023-24. 

Upon evaluation of all applicants under the criteria laid down in the rules, 10 institutions have been selected for roles as PDs and two were selected for SPDs.

10 selected PD include 9 banks and 1 development financial institution. These are: Bank Al-Falah Limited, Habib Bank Limited, MCB Bank Limited, National Bank of Pakistan, Habib Metropolitan Bank Limited, JS Bank Limited, Pak Oman Investment Company Limited, United Bank Limited, The Bank of Punjab and Citi Bank N.A-Pakistan Operations 

2 selected special-purpose primary dealers include the Central Depository Company of Pakistan and the National Clearing Company of Pakistan 

These dealers will be participating in the investment of Government Securities including Medium Term Bills (MTBs) and Pakistan Investment Bonds (PIBs) for the next year 2023-24.

Why has the number of primary dealers decreased?

The recent selection of primary dealers marks the lowest number ever appointed in the last eleven years. Conversely, the highest number of PDs appointed was in the fiscal year 2021-22. 

In the fiscal year 2021-22, the SBP received a notable influx of applications for the status of primary dealer with 13 applications for primary dealer status and 2 applications for special purpose primary dealer status. All of these applications were successfully approved.

In the subsequent fiscal year of 2022-23, among the 13 primary dealers from the previous year, Faysal Bank and Allied Bank decided to withdraw from their primary dealer status. However, Habib Metropolitan Bank joined as a primary dealer for the first time. Faysal Bank’s decision to drop its primary dealer status was influenced by its transition towards Islamic banking, which prevented them from underwriting conventional debt. Profit reached out to Allied Bank to inquire about its decision, but no response was received. Consequently, the number of primary dealers reduced to 12, accompanied by 2 special purpose primary dealers.

In the recent appointment of primary dealers and special purpose primary dealers for the fiscal year 2023-24, two additional banks have chosen to opt out of their primary dealer status, resulting in a total of 10 primary dealer appointments. These banks are Standard Chartered Bank and the Industrial and Commercial Bank of China (ICBC), both of which are international banks.

According to an industry source, the primary reason for these two international banks surrendering their licenses is the requirement for primary dealers to underwrite 5% of each auction. This implies that primary dealers must commit to purchasing 5% of the bonds offered in every government bond auction. However, due to country risk, these two banks are restricted from assuming even this level of exposure to the Government of Pakistan. Furthermore, the industry source informed Profit that another international bank might also surrender its license in the near future.

What is the role of these dealers?

All the dealers, primary and special purpose primary dealers, are required to participate in primary auctions of government securities (PIBs and MTBs). These dealers actively take part in the primary market by submitting bids in the auctions conducted by the State Bank of Pakistan (SBP) periodically. They also distribute government securities to non-primary dealer banks and other retail or institutional clients. 

These dealers play an important role in developing the government securities market by increasing liquidity, turnover, and broadening the investor base. They achieve this by raising awareness among investors and undertaking meaningful initiatives. For this purpose, the PDs, PPDs and SPDs are supposed to continuously upgrade their infrastructure in terms of both physical equipment and skilled manpower.

Furthermore, these banks and financial institutions provide efficient custody services for their customers’ government securities holdings, as well as handle the collection and payment of profits and maturity proceeds. Additionally, primary dealers and special purpose primary dealers also act as market makers in the secondary market by providing two-way prices for government securities.