Importance Of Bond Market Development In Pakistan

The Importance of Bond Market Development

Since the Asian crisis, considerable attention has been paid to the role of corporate bond markets in overall. Crises like the Asian one gave following lessons:

 Foreign exchange exposures can be devastating

 Foreign capital flows can be volatile

 The risk of liquidity and maturity mismatches can be very acute and is a source of systemic risk

These risks can be mitigated through the development of financial sector and this goes hand in hand with the need for substantial mobilization of local savings, with key role for the local debt market and local stock market

Emergence of fixed income markets is the recent feature predominantly spread onward 1970 period. It is a market falling in between equity market and bank finance. So it suits to that class of investors/borrowers who either are not considered high risk taking investors/borrowers or act under relatively safe parameters within bank finance.

Development of zero coupon instruments and later innovations have paved the way for development of a market which is quite complex as compared to bank and equity finance markets, however it provides new heights to the investors as well as issuers to match their requirements.

Development of local bond market provides:

 Diversification of financial sector into equity, debt and bank financing

 Effective allocation of capital competition in financial sector

 Supports infrastructure development, privatization, securitization, and the rise of new institutional investors requiring long term assets to match long term liabilities

 Reduces the currency, interest rate and funding exposures risks

 Allows more efficient allocation of savings by reducing banks role that also reduces the element of political interference

 Allows borrowers to use capital that is tailored to their assets and operations

 Provides retail and institutional investors with several high quality and liquid domestic saving vehicles

 Creates monetary policy instruments

 Provides most stable type of borrowing that a country or corporation can engage in.

Several studies have found that financial market development is correlated with economic development.

The Bond Market In Pakistan

Pakistan is far behind in this segment as compared to contemporary markets in emerging group of countries. Hence lots of efforts are required to be made to cover short falls and to move forward.

Pakistan’s Rs695 billion domestic bonds in issue today are only about 50% greater in value than the assets under management (AuM) by its insurance and mutual fund sectors combined and less than domestic pension AuM, according to estimates.

Snapshot- Status of Bond Market in Pakistan

 Sovereign, quasi-sovereign and private sector bonds are in place.

 MTB (Medium Term bonds) are of 3, 6 & 12 months

 Long term government securities i.e. PIBs are of 3,5,10,15 & 20 years

 Tenors in Corporate bonds i.e. TFCs are 3,5,7 and 10 years

 Tenors in commercial papers are up to 9 months.

 Auction calendar is available in Market Treasury Bills on monthly basis and in PIBs on quarterly basis.

 Govt. Bonds are of fixed nature while corporate bonds are fixed/ floating & collars

 Participation of non-residents in the primary market is facilitated by Special convertible account and secured depository arrangements

 Primary dealer system exists with 12 banks, 1 brokerage house and 1 DFI for distribution of Government Securities. Their performance is measured periodically on given performance criteria.

 Market making facilities are available through online dealing systems at the well equipped treasuries of Primary Dealers

 KIBOR/KIBID rates appear on Reuters daily at 11.30 AM to disseminate rates up to 3 year years to the market participants.

 Above 3 years rates are also available on Reuters provided by the Primary Dealers.

 OMOs are done as and when market conditions desire

 Captive source of Govt. Funding discontinued

 Govt. securities Outright/ Repo market is well developed.

 Securities settlement on Delivery versus Payment System

 Regional and global investors are encouraged to participate through Special Convertible Account facility

 All bonds are rated through local Rating agencies as well Standard and Poors and Moody's.

 Retail investors are encouraged to invest through non competitive bidding option

 For govt. securities SBP has issued all relevant instructions whereas in corporate bonds, SECP has a system in place. Both coordinate on these matters on quarterly basis.

 Securities Laws under Public Debt Act 1944 and Public Debt Rules 1946 exists whereas for Corporate Bonds SECP has full regulations in place.

 State Bank acts as depository for Government Securities, who has been declared eligible by New York based Global Custodian agency for making investment by American investors under section 17 of its SEC law.

 For Corporate Bonds Central Depository Company act as depository

 All Government/Corporate Bonds now exist in scripless form.

 Fiscal