Activities, Benefits and Challenges of a Primary

Dealer in Bangladesh

Activities, Benefits and Challenges of a Primary Dealer in Bangladesh

Submitted to:
Syeda Mahrufa Bashar
Assistant Professor, IBA
F 602: Financial Institutions and Markets

Submitted by:
Group 5
Ifaz Khorshed Hassan
(Roll: 55)
Asif Alam Chowdhury
(Roll: 18)
Atiqur Rahman
(Roll: 24)
Golam Saroare Shakil
(Roll: 8)

Institute of Business Administration

University of Dhaka
April 29, 2014

Introduction

A pre-approved bank, dealer or other financial institution that is able to make business deals with
the central bank of a country, such as underwriting new government debt is known as the
primary dealer. Consequently, it becomes a market maker of government securities
(Investopedia, 2014). In Bangladesh, a primary dealer (PD) is either a scheduled bank or a
licensed financial institution maintaining current accounts with Bangladesh Bank for the
fulfillment of Cash Reserve Requirement (CRR). Typically, primary dealers invest in Treasury
bills and bonds to accomplish the subsequent objectives:

Maintain the Statutory Liquidity Reserve (SLR)

Maintain adequate liquidity

Earn yields

Properly utilize huge idle cash in banks

Safeguard their investments.

The Bangladesh Government, in 2003, introduced the idea of enlisting primary dealers in
Bangladesh thereby shifting to market based system of auctions of Government Treasury bills. It
allowed primary dealers (PDs) to subscribe and underwrite primary issues. Besides, PDs have
roles in market making for secondary trading deals with firms through two-way price quotes.
However, the plan was truly implemented in 2007 discontinuing the creation of ad hoc Treasury
bills.
National Credit and Commerce Bank Limited has been enlisted as a primary dealer from the
introduction of this market based system. Even though primary dealer is a coveted identity all
over the world but PDs in Bangladesh is not entirely happy to take on this responsibility. The
situation is such that Bangladesh Bank issued licenses to nine new commercial banks in 2013 on
condition that they would act as primary dealers (New Age, 2013). This therefore has increased
the number of primary dealers to 24.

Primary dealers are:

Sonali Bank

National Bank

Janata Bank

Uttara Bank

Agrani Bank

Southeast Bank

Jamuna Bank

Mutual Trust Bank

NCC Bank

AB Bank

Prime Bank

Mercantile Bank

NBFIs:

Lanka Bangla Finance,

Industrial Promotion and Development Corporation (IPDC),

International Leasing and Financial Services Limited.

The new banks are: NRB Commercial Bank, South Bangla Agriculture and Commerce Bank,
Midland Bank, Farmers Bank and Meghna Bank. Another recently published article announced
the enlistment of three more commercial banks: NRB Bank, NRB Global Bank and Modhumati
Bank (New Age, 2014). But this newly announced list is yet to be updated on Bangladesh Bank
website and therefore its participation remains an ambiguity.

Activities of a Primary Dealer

Bangladesh Bank (BB) has laid down certain roles and responsibilities of a primary dealer. They
are as follows:
-

A Primary Dealer (PD) has to participate regularly and actively in all primary auctions
and issues of Treasury bills and tradeable securities.

It must place a bidding commitment of minimum specified percentage of the primary

issues of Treasury bills and underwriting commitment for a minimum specified
percentage of primary issues of dated Government securities over a year.

PDs are required to maintain success ratios (successful bids: allotted targets) of 40
percent or higher in bids over a year.

A PD has to, if asked by BB, subscribe in any issue over and above the successful bid but
within its minimum bidding or underwriting commitment, at the weighted average yield
of accepted bid for auctioned issues and at par in case of fixed par issues.

A PD, within its first year of operation, has to acquire a sizeable portfolio of Treasury
bills and Government securities substantially in excess of its own SLR.

PDs need to engage in secondary trading, quoting firm two-way prices and keep its
trading window open throughout each business day.

Privileges of a Primary Dealer

A primary dealer has the credential of a sub-depository of Treasury Bills and

Government Securities, for custodial services to its customers.

Between bids at the same yield/price for an issue in primary auction, the bid of a PD will
rank higher in priority for acceptance than those of other bidders.

A primary dealer is also eligible for liquidity support from the BB for its operations,
collateralized by Treasury Bills and Government Securities from its own positions,
through repo mechanism or such other arrangements as the BB may prescribe from time
to time.

A primary dealer is also entitled to underwriting commission on the issues of dated

government securities underwritten by it at Government prescribed rates.

Challenges of a Primary Dealer

Instead of being an added benefit, the role of being a primary dealer has turned out to be a hassle
in disguise. The main challenge is to create a operating secondary market for trading of
government securities. Nonexistence of a functioning secondary market has lead to grievances
among primary dealers that Bangladesh Bank is yet to take steps regarding this issue. The
concerned official of NCC Bank repeatedly emphasized on the fact that lack of an active
secondary market has transformed the Treasury Bills into an illiquid asset. Lack of demand for
Government bonds and securities is the main reason behind such complains.
Lack of primary dealers is kind of a burden on the existing dealers because they share the huge
aggregate of government borrowing worth 120000 crore taka at present. The statutory liquidity

requirement of banks is 13 percent and life insurance companies is 30 percent respectively. With
all this combined, the demand is around 60000 crore taka and the rest is forced on the primary
dealers with no further requirements. The investors in treasury bills and bonds are mostly
commercial banks and life insurance companies.
The distorted interest rate determining structure for financial institutions is a hindrance in
creating an aligned market. Various types of FIs have dissimilar interest quotes with banks being
the lowest and microfinance institutions the highest.
According to latest 09/01/2014 Bangladesh Bank data, the banking sector has excess liquidity
worth 89,337.25 crore taka. However, 88.5 percent of excess liquidity is accounted for by
Government securities. This has lead to a misconception of idle cash in banks.
In order to eliminate these issues, government should ensure mandatory participation of diverse
financial institutions in the securities market in order to create demand a vibrant market. Primary
dealers invest in T bills and bonds due to regulatory bindings. The central bank must regulate
other institutions that each entity has to hold on to a minimum specified amount of government
securities. The central bank of India and Sri Lanka have established a central pool of all funds
like Provident fund, Pensions fund, Superannuation Fund, Gratuity etc. to invest in government
securities.
If Bangladesh follows the path set by its neighbors, the existing problems in the financial
markets can be overcome. The crucial objective for the moment is to set up a vibrant secondary
market for government securities to ensure liquidity of these assets. (Saha, 2014)

Bibliography
Bangladesh Bank. (2013). Financial Markets. Dhaka: Bangladesh Bank.
Bangladesh Bank. (2014). Treasury bill/bond auctions. Retrieved April 07, 2014, from
Bangladesh Bank - Central Bank of Bangladesh:
http://www.bb.org.bd/monetaryactivity/treasury.php#
Investopedia. (2014). Primary Dealers. Retrieved April 26, 2014, from Investopedia:
http://www.investopedia.com/terms/t/treasurybill.asp
New Age. (2014, January 14). 3 more new banks to be PDs of govt securities from Feb 1.
Retrieved April 06, 2014, from New Age - The Outspoken Daily:
http://www.newagebd.com/detail.php?date=2014-01-14&nid=80289
New Age. (2013, December 2). Five New Banks become PDs of govt securities. Retrieved April
06, 2014, from New Age - The Outspoken Daily:
http://www.newagebd.com/detail.php?date=2013-12-02&nid=75151#.U0OF6aKw_NE