By S.IRFAN TAHIR, Shoaib Capital (Pvt) Ltd.
Nov 16 - 22, 1996

In the past much has been about the promising growth of fixed income securities in Pakistan. With the advent of deregulation in 1991 the State Bank of Pakistan introduced a variety of short to long term instruments. Federal investment bonds were introduced, having 3,5,10 year durations yielding 13%, 14% & 15% (p.a) respectively. Hopes of safe real returns were pegged instantly. But that for now, is an altogether separate debatable issue. Hot favourite among the fixed income portfolio was T.Bill, short for treasury bill. Since then, T.bills started to enjoy active trading in both primary and secondary market, reason being the short tenure and high liquid nature. Then back in June 1996, during the fragile growth of this secondary market, the State Bank of Pakistan, for some unknown reasons suddenly withdrew the T-bill from the market and replaced it with another similar security, now known as STFB (short term federal bond).

Before we discuss the odds of STFB, gaining momentum in the secondary market, a brief look at the historic background of treasury bills would be more appropriate. As mentioned earlier T-Bills only survived to trade for less than five years. No problem whatsoever was ever encountered by investors in either subscription or outright sale of the said security. The strategic implementation too was purely based on U.S.A model.

T-Bills were issued in the form of tender in the primary market. A cut-off point determines the last accepted bid 'at discount' by the SBP as per bank need. The bills would then be allocated to the successful bidders. Trading in secondary market would be conducted on maturity value depending on remaining days and the redemption value would be fixed at Rs. 100(PAR). Thus, it never posed any difficulty in calculating the exact value of the security at any stage during its life span.

Then appeared the STFB. The very name itself questions the financial expertise and reflects the apathy of the issuing authorities. Technically speaking the word 'BOND' narrates for fixed income security with a maturity of 'one' year or 'over'. As is not the case with the STFB. The mysterious and hasty launch of the STFB gave rise to serious concerns among the investment circles. Major being the failure of SBP to present a reliable, straightforward price mechanism for outright transactions.

In the primary market SBP would receive bids for the sale of STFB from banks and DFIs as well as the members of stock exchange. Bidders are required to indicate the total amount of STFBs they would be willing to purchase and also indicate the desired profit in terms of yield for their respective lots. Each unit is issued at Rs 100(PAR). The bidder would be sanctioned the security and at the end of the tenure he could collect the principal and profit. The SBP refers to their original bid records when handing out the profits. Quite obviously the bank issues the security at par but does not indicate any exact redemption value.

So how is one expected to trade these issues in the secondary market?

Financial institutions are finding it frustratingly cumbersome to trade these securities in the secondary market. Investors when indulging in an outright trade of fixed income securities give out a transference letter 'SGLA' certificate (subsidiary general ledger account) of their accounts containing the details of the trade. State Bank maintains these books on behalf of individual institution and is obliged to transfer the security whenever a SGLA is submitted in favour of the beneficiary. Contrary to this uniform practice, the outright buying and selling of STFB could end up with several SGLAs for just one single deal due to the difference in prices.

To this end, lot of suggestions and solutions were contributed to the finance ministry by the investment community. The hitch now is not the lack of alternate measures of overcoming this problem but the implementation itself. Since its inception, not a single outright trade has yet been witnessed in this market, signalling a dead end to STFB trading in secondary market. Time is ripe, for the policy-makers to gauge the implications of this replacement. Of course you need not to be an economic wizard to forewarn the fact that primary markets alone cannot thrive without a secondary one. Not only that, the investor's confidence should also be considered a top priority of our economic managers. This will enable us to take a small step towards realizing the as yet elusive objective of broadening the investor base.

As long as these issues remain unaddressed, the fate of STFBs and expansion of debt instruments in the Pakistani market hangs in the balance. Clearly, some logical explanation and remedial measure is needed to bring the secondary market trading back on its healthy track.