Fixed Income Securities Market

2011

Fixed Income Securities Market 1. Introduction

The fixed Income market falls in between equity market and bank finance. Hence obviously, it suits to the class of investors/borrowers that are neither high risk lovers nor completely risk averse or relatively act under safe parameters within bank finances. Various financial market crises surfaced during the last decade of 20th century notably Mexican and Asian Crisis in 1997 which gave clear message that without developing domestic bond markets, an economy would remain under risk of capital outflows. To attract capital flows and support growth efforts, existence of domestic bond market is highly essential that provides opportunity to the investors to diversify the risk profile of their portfolio. Geographically, Pakistan falls in very important location with immense appetite to attract investment and it is therefore imperative to give fresh thoughts to develop its Capital market especially focusing on developing local Bond Market as its current size is very small and is not in conjunction with its requirements. Government Bond rating Standard & Poor's: B-/Stable/C Moody's rating: B3 Moody's outlook: STA (Source: Foreign Currency Government Bond Ratings; Data last updated Nov 2010)

2. HISTORY
Prior to 1990, Federal and Provincial Governments used to borrow on tap instruments with predetermined rates. The main thrust of Federal Government borrowing was through captive funding. Large statutory preemptions and borrowing from SBP at highly concessionary rates enabled the Government to finance its large fiscal deficits. In such an environment the only tool available to counteract was to makes successive increases in Statutory Liquidity Requirement (SLR) and Cash Reserve Requirement (CRR). There was very little scope for development of Government Securities Market in Pakistan that could provide benchmarks for private sector to play their role in development of Capital Market in the country. To cover non-banking segment,
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Prize Bonds were introduced in1960 followed by various NSS schemes. However 1990 onward, market based Government Securities came in to existence. With the introduction of long term paper in1992 (FIB), long term yield curve emerged that gave opportunity to the Corporate to come up with their instruments that became reality in 1995. Long-term instruments gained momentum after the introduction of Pakistan Investment Bonds (PIBs) in 2000, to stream line the auction of Government Securities and to develop secondary market for the Government paper. SBP introduced selective Primary Dealer System (PD) in 2000. In 2001 KIBOR/KIBID rates were introduced to provide inter-bank call money curve. With the development of Fixed Income Securities Market in Pakistan, SBP allowed Commercial banks to make available Derivative products to their clients. In this regard SBP issued guidelines on Forward Rate Agreements (FRA), Interest Rate Swaps (IRS) and Currency Options in 2005. Foundation of the corporate bond market was laid in 1995 with the first issue of Term Finance Certificates (TFC). Since then, issuance of listed TFCs has totaled approximately PKR 67 billion. The Corporate Bond market in Pakistan has been much more vibrant over the 2001-05 periods, adding approximately PKR 65 billion in issuance or 98% of total issuance to-date. Pace of development of Islamic Money and Sukuk market is a new phenomenon that gained importance with the induction of 6 full-fledged Islamic Banks and 16 conventional banks to conduct Islamic banking business in Pakistan; however the size of Sukuk Market is very small at the moment. To facilitate Corporates to raise short term funding i.e. up to 9 months, Commercial Papers have recently been allowed but the market has yet to take its roots.

3. Debt Capital Markets

Debt Capital Market is a market for trading debt securities where business enterprises (companies) and governments can raise long-term funds. This includes private placement as well as organized markets and exchanges. The debt capital market trades in such financial instruments which pays interest. There are bonds and several loans which act as the prime financial instrument of this market. Because of this interest factor, it is also known as fixed income market.

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Volume of Fixed Income Securities Market 3.1. Government Bond Market

Main features of government bond market in Pakistan are as under:

y y y y y y y

Bonds are issued in 3, 5, 10, 15, 20, and 30 years tenors. Bonds are issued through auction system in which only Primary Dealers (PDs) can participate. Issued at Par. Coupon payments are made semi annually. Bonds are issued in the form of un-certificated bonds and are maintained in SGLA maintained by the SBP. Bonds are SLR eligible securities and individuals, institutions and corporate bodies including banks can purchase, irrespective of their residential status. Bonds are tradable in secondary market.

Pakistan Investment Bonds (PIBs) as fixed rate government securities provide a benchmark for debt capital market. The government is committed to provide sufficient supply of long term papers in the market to develop the longer end of the government debt yield curve. The government is educating the investor base especially the institutional investors to manage their balance sheets in a more innovative way by diverting resources from working capital needs towards investment. PIBs together with the NSS (National Saving Schemes) instruments primarily hold a larger portion of local fixed-income market. They provide the government with long-term maturity debt. SBP held seven auctions in 2007-08, four in 2008-09, fourteen in 200910 and seven in 2010-11. Government amassed Rs. 64.7 billion through PIB auctions in 2009-10 and Rs. 83.4 billion in 2010-11. The government showed greater craving for borrowing through long term securities, and set the target of Rs 60 billion against a maturity of Rs 6.9 billion during 2010-11. Keeping in view the widening deficit gap of the government, from the demand side, market players offered Rs 134.4 billion and Rs 83.4 billion net of maturities was accepted as long term financing during 2010-11 as against Rs 51 billion net of maturities accepted in 2009-10 in the same corresponding period. Government generated resources from 10-years PIBs, and accepted 69 percent of the amount through this single maturity. This was followed by 3, 5-year PIBs with a share of 22.4 and 8 percent, respectively of the amount accepted in 2010-11. PIBs with 20 -year maturity accounted
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for a share of 0.6 percent and 10-year PIB has shown a huge increase as compared to previous fiscal year as its percentage share in 2009-10 was 60.9 percent and 3-years PIB has also witnessed an increase from 18 percent in 2009-10 to 22.4 percent in 2010-11. On the other side shares of 5 and 20years PIBs declined shares to 8 and 0.6 percent, respectively in 2011. The share of 10 year PIB is amount to Rs. 57.5 billion in the 2010-11 as compared to Rs.39.4 billion in previous fiscal year. Amount received by 3-years PIB is Rs.18.7 billion in 2011 as compared Rs. 11.7 billion in 2009-10. The share of 7, 15 and 30-year PIB has declined in the current financial year as shown in Table 6.7.

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Government and the central bank worked together to launch the GoP Ijara Sukuk in order to support efforts to diversify the borrowings mix to ensure financial stability. Islamic Banks have been aggressively mobilizing deposits, and play a significant role particularly after the introduction of the minimum deposit rate and easing of reserve ratios. To cope with the liquidity requirements of Shariah compliant banking institutions, the target or the auction of fourth GoP Ijara Sukuk is set at Rs 40 billion during Fiscal Year 2010-11 while it was 20.4 billion in revised budget in FY 2010. Increasing zeal for investment in these instruments was observed. Three auctions were held in July-March 2010-11 and targets for these were set at Rs.40, 40 and 45 billion, respectively. Total amount offered for the said bids was Rs.179.3 billion against target of Rs.125 billion while Rs.136.5 billion were accepted which reflects strong liquidity position of Islamic banks and their investment appetite for this asset class. The maturity of the Sukuk will be of one, two and three years. Table-16.11 depicts that SBP has increased the interest rates for 3, 5 and 10 years PIBs in 201011. For three years PIB interest rate is increased to 14.05 percent in March 2011 up from 12.66 in July 2010. Similarly interest rate for 5 and 10 years are 14.08 percent at the end of third quarter of the ongoing fiscal year as compared to 12.75 and 12.93 in July 2010.

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National Savings Schemes (NSS)

The Central Directorate of National Savings (CDNS) performs deposit bank functions by selling government securities through a network of 372 savings centers, spread all over the country. As of March 31, 2011 there were 3.8 million investors with different National Saving Schemes (NSS). During the fiscal year July-March 2010-11, net deposits with National Saving Schemes increased to Rs 1,822.4 billion. The unfunded category of domestic debt, comprised of NSS instruments, has recorded an expansion of 10.2 percent in this period. Bahbood Savings

Certificates attracted Rs 45.3 billion, followed by Special Saving Scheme and Regular Income Certificate. Defense saving certificate attracted net investment of Rs 6.6 billion against the target of retirement of 2.6 billion. The NSS contains a number of instruments with significant concentration on individual investment, NSS scheme are available with the maturity period of 3 years, 5 years, and ten years. It is also worth mentioning that segment of subsidized scheme i.e. Pensioner Benefit Account and Behbood Saving Certificate, contribute Rs. 58.8 billion in the total net investment of Rs. 168.7 billion till March 2011.

3.2. Corporate Debt Market

Main features of the corporate bond market in Pakistan are as under: 1. The corporate bond in Pakistan is in form of Term Finance Certificate (TFC). 2. TFCs are based on legislation enacted in 1984, which authorize issuance of redeemable capital securities. As a debt instrument TFC is slightly different fromthe corporate bond

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because it was specifically designed to comply with Shariah law. The key difference is that the TFC substitutes the words expected profit rates for interest rate. 3. TFC issuers include both NBFIs as well as public and private firms. 4. The coupon rates on the TFCs display a wide variety with different fixed coupons as well as floating coupons linked to various interest rates including the discount rates, PIB rates and the KIBOR. A well functioning corporate bond market provides an additional avenue to corporate sector for raising funds for meeting their financial requirements. During the period July-March 2010-11 one listed debt instrument was offered to the general public i.e. offering of Rs 4 billion Term Finance Certificate (TFC) by Engro Corporation Ltd. The TFC was offered only to retail investors and was fully subscribed. Out of the said Rs.4 billion, 74 percent were subscribed by the individuals, 20% by employees fund and balance by the others.

During the period a total of 07 debt securities issued through private placement. The break-up of these privately placed corporate debt issues are as follows.

As on December 31, 2010 a total of 142 corporate debt securities were issued with an outstanding amount of Rs 379.4 billion as follows.

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Measures for development Debt Markets

y Listing of government debt instruments at the stock exchanges would greatly enrich development of the debt market. y At present, the debt securities though listed at the stock exchanges are not actively traded as the Capital Value Tax (CVT) collection hinders the growth in the secondary market for debt securities which can be lowered. y Rationalize the cost of issue of corporate bonds, the rate of stamp duty applicable on issue and transfer of Term Finance Certificates and Commercial Papers may be reduced further. y In order to strengthen the regulatory framework and to develop the rating process in Pakistan, services of an international consultant were hired by the SECP to provide technical assistance with respect to the operations and regulations of Credit Rating Agencies. The consultants gave their recommendations, which are being implemented.

4. Market Infrastructure 4.1. Regulatory Framework

All securities generally classified as bonds are regulated by the SBP and the CLA. Bonds listed on the stock exchanges must also comply with their listing requirements. The SBP regulates the issuance of all government securities including Treasury bills (T-bills) and federal investment bonds (FIBs). The CLA is the apex regulatory body that administers all laws for the corporate sector and the securities market. It administers the Securities and Exchange Ordinance of 1969 and the Companies Ordinance of 1984. Until the 1995 Finance Bill (Annual Budget) abolished the Capital Issues (Continuance of Control) Act of 1947, as part of the economic deregulation
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measures, this statute was also administered by the CLA. The abolition of the Capital Issues Act transferred the regulation of public issues (both debt and equity) to the Companies Ordinance of 1984, which also provides the legal framework for the corporate sector. The Companies Ordinance of 1984 gives the name term finance certificates to what are essentially debt securities, whose important feature is that the return promised by the issuer to the investor is built into the repurchase price at maturity. The difference between the original price and the repurchase price is not referred to as a fixed return but as expected profit. The labels, particularly expected profit, are chosen to confer an Islamic character on the instrument, since interest in the form of a fixed return (riba) on capital is deemed un-Islamic by most religious scholars. Thus, while both the issuer and the potential investor share the perception that the return on a TFC, in purely legal terms, is a fixed return, there is no certainty of a fixed obligation on the part of the issuer. This appears to be an unavoidable and unrectifiable anomaly which casts doubt on the character of the TFC as a fixed-income security. Interestingly enough, the government itself promises a fixed and specified return to investors in its federal investment bonds.

4.2. Credit-Rating Agencies

There are two credit-rating agencies in Pakistan, the Pakistan Credit Rating Agency (PACRA) and DCR-VIS. PACRA was established in August 1994, and is a joint venture among IFC, Fitch IBCA, and the LSE. DCR-VIS was established in 1997 and is a joint venture between Duff & Phelps Credit Rating Co. and Vital Information Services (a local company). The companies are registered with the CLA under the Credit Rating Companies Rules of 1995 which were issued under Section 33 of the Securities and Exchange Ordinance of 1969. These rules require all credit-rating companies operating in the country to register with the CLA. To qualify for registration, a company must be affiliated with an internationally recognized rating agency, among other eligibility criteria. Registration remains in force for one year and may be renewed yearly. All NBFIs, whether or not they are mobilizing or intend to mobilize public deposits, are now required by the SBP to obtain ratings.

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5. Issuer 5.1. Government 5.2. Statutory corporations

This section covers the issuance of debt securities by corporations that were not incorporated under the Companies Ordinance of 1984 and are therefore not regulated by the CLA. The main entity that has relied on bond financing is the Water and Power Development Authority (WAPDA), the national power utility company, which has had a large and growing need for long-term funds. These needs used to be met from government budgetary allocations, supplemented with government guaranteed bank loans. But after the government stopped guaranteeing bond issues in 1994, WAPDA was forced to raise funds directly from the market. Since 1988, it has raised Rs 23.699 billion through a series of issues, as shown in Table 3.

The bonds were issued in Rs 5,000500,000 denominations with returns payable every six months, and are discountable after six months from the date of sale (except for the sixth issue). They are quoted on the Karachi and Lahore Stock Exchanges. The Civil Aviation Authority (CAA) is another public-sector organization that has relied on bond financing for its capital expenditures. It has issued one series, valued at Rs 900 million and
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with an annual return of 12.5 percent, in 1991. These government-guaranteed bonds were redeemable after five years.

5.3. Corporate Entities

The corporate bond market in Pakistan was established only in 1994, although corporate bonds, known as TFCs, have been around since 1985. TFCs are privately placed and hence illiquid, and are, in fact, term loans provided by banks and DFIs under a different name. The creation of a corporate bond market has given corporations access to the capital market and allowed them to diversify their sources of borrowing. They have thus been able to reduce their dependency on the banking system for funds at a time of lending restrictions: SBP prudential regulations have set single-customer lending limits for each bank and restricted public-sector organizations from borrowing from banks.

5.3.1. Trading and settlement:

TFCs are tradable on the stock exchanges as well as over the counter. Since the market players are normally financial institutions, more than 90 percent of trading takes place over the counter; the stock exchange is dominated by equity brokers. Over-the-counter settlement takes place on mutually agreed dates between buyer and seller, and can also be carried out on the same day. Trades on the stock exchanges are settled on T+1.

6. Bond Market Instruments

Instruments issued by the government and statutory corporations

MTBs
Market Treasury Bills are the short term securities for government borrowing. They have the following Characteristics; y Issued in three tenors of 3-month, 6-month and 12-months maturity y Zero Coupon bonds sold at a discount to their face values

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Purchased by individuals, institutions and corporate bodies including banks irrespective of their residential status. y Primary Dealer maintains a Subsidiary General Ledger Account (SGLA) with SBP for the settlement purpose. The outstanding amount of MTBs as of March 2007 is Rs. 1086.25 billion (43.25% of total Domestic Debt) y

Federal investment bonds (FIBs)

FIBs are issued in maturities of three years (with a coupon of 13 percent per year), five years (14 percent), and ten years (15 percent). The coupon is paid every six months. Coupon payments and redemption of principal are guaranteed by the government. Issues are made through closed-bid auctions held monthly by the SBP. Bids are placed through primary dealers at discount, at par, or at a premium to the face value of Rs 100. FIBs are freely traded in the secondary market and are treated as liquid assets for financial institutions.

PIBs- Pakistan Investment Bonds

Government of Pakistan issued long term paper (FIBs) in 1992, with this came into being the long term yield curve so the corporate enteritis to benchmark and issue their own long term securities. The auction of FIBs was stopped in 1998 due to less response by the public on the declining earnings on these instruments. At that time, there was no long term marketable government security that could meet the investment needs of institutional investors. The, government, in order to develop the longer end of its debt market for creating a benchmark yield curve and to enhance the corporate debt market, decided to launch Pakistan Investment Bonds in December 2000. These bonds have the following characteristics y y Issued in five tenors of 3, 5, 10, 15 and 20-years maturity. Primary Dealer maintains a Subsidiary General Ledger Account (SGLA) with SBP for the settlement purpose. y Purchased by individuals, institutions and corporate bodies including banks irrespective of their residential status. y SBP & Ministry of Finance announces the coupon rates and the target amounts after consulting each other. y Profit is Paid Semiannually

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The PIBs represent 63% of total permanent debt while 13.23% of the total domestic debt by March 2007.

Special US-dollar bonds

These are registered bonds denominated in US dollars and issued at par with maturities of five, seven, and ten years. They were introduced in 1998 to induce foreign-currency account (FCA) holders to convert their holdings into these bonds. Profits, at a rate that varies between LIBOR and LIBOR + 2 percent, are paid semiannually. Resident Pakistani FCA holders who purchase these bonds are paid their profits in rupees at the official exchange rate on the date of accrual of profits. Nonresident buyers are paid in US dollars. The face value may be cashed in at maturity in US dollars or rupees. Bonds and proceeds are exempted from wealth tax for six years, as well as from income tax and zakat.

Foreign-exchange bearer certificates (FEBCs)

First introduced in 1985, these rupee-denominated certificates are issued at par with a maturity of three years. FEBCs can be exchanged for cash from the issuing institution at any time after issue, but with a penalty in terms of interest payments. FEBCs may be purchased without limit by Pakistanis and foreigners, against payment in foreign exchange. The par value of the certificates is paid either in rupees or in foreign currency at the holders discretion, at the spot rate as of the day of purchase. The holder bears the entire foreign-exchange rate risk.

Water and Power Development Authority (WAPDA) bonds

There have been six issues of WAPDA bonds. The first four issues are guaranteed by the government, while the others are not. WAPDA bonds are issued in bearer and registered form in denominations of Rs 5,000, Rs 10,000, Rs 50,000, Rs 100,000, and Rs 500,000, with a semiannual coupon. Except for the third issue, the bonds are subject to withholding and income tax. WAPDA bonds are quoted on the Karachi and Lahore Stock Exchanges, and are accepted as prime collateral for obtaining bank advances. They are discountable six months after the date of sale.

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Defense savings certificates (DSCs).

DSCs are issued with a maturity of ten years. They have a guaranteed rate of return of 42.50 percent at maturity, on the average, based on an internal rate of return of 18.04 percent per year. The profit is entirely tax free. Zakat is payable only once, at the time the certificates are cashed in. If the principal is not withdrawn at maturity, it is automatically reinvested.

Special savings certificates (SSCs)

SSCs have a three-year maturity and are registered. Their yield is 16 percent per year for the first 2.5 years and 18 percent per year for the last coupon. The profit is tax-free for individuals and local authorities, but zakat is payable at the time the certificates are cashed in. DSCs and SSCs are the most popular of the national savings schemes and are operated by the Central Directorate of National Savings under the Ministry of Finance.

Instruments issued by the corporate and financial sectors Certificates of investment (COIs)
COIs are issued by DFIs, investment banks, leasing companies, and housing finance companies to raise deposits from the general public. Their tenor varies from three months to five years, and determines their rates, which also vary depending on market conditions, the credit of the borrowing institution, and deposit size. COIs cannot be recalled at the option of the issuer, and the investor is penalized for cashing them in early. There is no secondary market in COIs.

Term finance certificates (TFCs)

TFCs are corporate bonds normally with a tenor of three to five years. They can be listed or unlisted, and can be issued by listed or unlisted companies. Rating is mandatory for listing. The structure of the TFC is similar to that of a zero-coupon bond: the issuer and the investor agree on its sale and repurchase. The issuer must create a redemption reserve to repay the TFC and appoint a trustee for each issue. Individuals, associations, and pension/provident funds enjoy complete tax exemption on rated TFCs. All other institutions, including corporate entities, must pay tax on TFCs, based on their normal tax rates. Listed TFCs are exempt from capital gains tax.

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7. Auction Process for Government Securities

State bank of Pakistan acts as an agent for the government to raise the short term & long term funds from the market. State Bank sells the MTBs and PIBs to the 10 primary Dealers through price sealed bids auction. The 10 primary dealers are: I. II. III. IV. V. VI. VII. VIII. IX. X. ABN Amro Bank NV Citibank Habib Bank Limited JS Bank Limited MCB Bank Limited National Bank of Pakistan Pak Oman Investment Co. Prime Commercial Bank Standard Chartered Bank (Pakistan) Limited United Bank Limited

The auction of MTBs is done on a fixed schedule on fortnightly basis while the auction of PIBs is done under Jumbo issuance mechanism under which the previous issues are reopened in order to enhance their liquidity in the secondary market.

8. Investor Categories in Pakistan

1. Commercial Banks 2. NBFIs a. Investment Bank b. DFIs c. Leasing Companies 3. Instutuional Investors a. Insurance Companies 4. Mutual Funds 5. Employees provident funds (private) 6. Employees Old Age Benefit Institution (EOBI) 7. Federal Employees Benevolent and Group Insurance Fund (FEBGIF) 8. Corporations 9. Retail Investors

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9. Interest Rates 10. Benefits of Fixed Income Markets

Both theoretical and empirical literature has extensively debated the virtues of the development of the corporate bond market. Some view it is an alternate or a substitute to the banking system and a spare tyre as referred to by Alan Greenspan, while others have contested that bond markets cannot serve as substitutes to bank debt as the performance of bonds is often impacted when there is an overall decline in economic and banking sector confidence. Growth in debt markets is a positive development for the financial system and the economy at large. It helps to diversify the financial system, reducing excessive dependence on banks and vulnerabilities within the banking system, while providing funding to large corporations looking for long term financing options. Financial engineering of different types has facilitated the development of innovate debt products which have supplemented and complemented bank financing. A viable fixed-income market provides an alternative source of finance to firms that exclusively rely on the banking sector in emerging economies, like Pakistan. Indeed, the monopoly of the banking sector is an impediment to the fundamental principles of a market economy based on perfect competition; it leads to inefficiency and therefore to sub-optimal outcomes in the loan market; and jeopardizes the stability of the financial system. A well-developed fixed income market helps expose banks to competition which in turn helps improve their efficiency. Indeed, extraordinary banking spreads in Pakistan in recent years is an evidence of lack of competition and efficiency in Pakistans financial markets. The short tenor of bank loans, itself a consequence of the nature of banks deposits, leads to maturity mismatch issues in the banks asset and liability portfolios. Long-term funding needs hence are financed by a consistent roll-over of short-term loans, and in times of tight liquidity, borrowers often face credit crunch and difficulties in rolling over their maturing obligations. A developed fixed income market would help mitigate these difficulties and also facilitate better risk diversification as debt is spread across a large number of individuals as opposed to bank lending, and the corporate sector is able to raise longer term debt. With the development of the fixed-income market, banks can focus more on those enterprises of the economy that typically
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face credit constraints due to their small size, relatively new stage of development, or simply asymmetrical information.

11. Challenges and Strategies to Develop Well-Functioning Bond Market:

Basic pre requisites for developments are: a) Credible and Stable Government. b) Sound fiscal and monetary policies. c) Smooth Exchange Rate and Capital Account Policies. d) Effective legal, Tax and settlement system. e) Smooth and Secure settlement System f) Liberalized financial system with competing intermediaries. Factors Hindering Bond Market Development: y y y y y y y y y y y y y y y y Fiscal and Trade Deficits. Law and order problem. Cross border tension Bad Governance, lack of accountability on the part of bureaucracy, Public and Private Sector institutions. Ineffective Implementation of law and delay in adjudication. Lack of market expertise. Lack of awareness of new financial products. Lack of infrastructure and automation. Lack of stringent regulatory policies and their effective enforcement. Lack of self-policing system in the market. Lack of awareness of market ethical values. Political interference in the regulatory functions. Clear laws curtailing clear interpretations. Inconsistent supply and small size issues of Government Bonds. Corporate Bond Market being not cost effective due to stamp duties levied by the
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Provincial Governments on their transactions and certain fees to be paid on their issuances and time taking procedures for their approval.

y y

Non issuance of Sovereign Sukuk Transaction cost as Stamps duties on Commercial Paper making them non cost effective.

11.1. Past Efforts/ Recent Efforts

Since its inception in 1990, Bond Market in Pakistan has witnessed lot of initiatives. Some are as follows: y Sale of government securities auction based through introduction of 6-month market treasury bills in 1990. 3 and 12 months MTBs were introduced in 1997. y y y Government borrowing from SBP made market based. Liberalized current account restrictions Introduced OMO in place of direct controls to manage liquidity and interest rate in the money market y y Introduced 3-day repo as lender as last resort facility Federal Investment Bonds were introduced in 1992 to provide yield curve up to 10 years maturity y Extended depository arrangements by the SBP for government securities in form of Subsidiary General Ledger Account (SGLA) y Established Securities and Exchange Commission of Pakistan (SECP) as an autonomous body y y Introduced Selective Primary Dealer System in 2000 Introduced Pakistan Investment Bonds in 2000 in place of FIBs that were discontinued in 1998 y Introduced Jumbo Issue of PIBs and Non-competitive Bidding Option for active PIB trading in secondary market. y Established Central Depository Company to introduce scrip-less trading in

shares/Corporate Bonds. y Introduced PIBs of 15 and 20-year tenors in Jan 2004 that has now been extended up to 30 years.
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Recent initiatives that are yet to materialize include allowing bond strips against PIBs, listing of Government Securities on Stock Exchanges, calendar for Government Securities issuances.

11.2. Roadmap (Plan/Strategy) for the Development of Bond Market (Financial Sector):
There cannot be any doubt that financial system of Pakistan has a lot of potential, however, it is to be searched and put in place. Another angle, which needs to be brought into the system, is to integrate it with global financial system. The vision, which anybody can have in the market for the future financial system of Pakistan, can be briefed as under: y y y y It has to be market based The market should have its own policing system in addition to Regulatory framework. Development of new hedging products like derivates. Updating of accounting/auditing and reporting system in line with the international standards. y y y y Fully automated financial system. New Government Securities Act to replace out dated Public Debt Act 1944. Listing of Government Securities on Stock Exchange to widen investor base. Implementation of Real Time Gross Settlement System to mitigate systemic risk in fund settlement. y Bond Stripping to create liquidity in the bond market and to induct zero coupon yield curve. y y To foster growth of corporate Bond market in Pakistan by making it cost effective. To develop Trading/Risk Management/price dissemination mechanism for Corporate Bond Market. y Financial Institutions to have controls i.e. Clear Strategies of duties at all levels, Dual Controls, Rotation of assignment of duties, Internal auditing of all operations, Audit programs for external auditing, Operational reviews. y y y Development of newly inducted Islamic Finance Development of Investor base specifically Mutual Funds Development of Sub National Bond Market in Pakistan
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Development of Infrastructure/Mortgage Finance

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