KARACHI: The Karachi Stock Exchange (KSE) has soft-launched the trading of government debt securities on its bond automated trading system (BATS) on Friday.
The Government Debt Securities Market (GDS Market) of the KSE will allow secondary market trading of government securities in the stock exchange. The soft launch will test the IT platform and post execution settlement processes so that the formal official launch by the finance minister in a few weeks’ times remains smooth and without hitches.
The trade executed and settled on Friday had five participants, including Bank Alfalah, JS Global, KASB Securities, Arif Habib Securities and AKD Securities. Trading was tested for 30 minutes, under which a trading of Rs3.5 million was witnessed.
Nadeem Naqvi, managing director of KSE, speaking on the occasion, said that this was a major milestone in the development of capital market in Pakistan. He said that the average saver and investors could now invest directly in government securities, such as Treasury Bills, Pakistan Investment Bonds and Islamic Sukuk Ijara Securities through their broker. This would encourage greater savings in the country as the return on government securities was typically higher than bank deposits of similar maturities, while the secondary market would provide liquidity, enabling easy entry and exit for investors.
In terms of investment risk, he highlighted that if government securities were held till maturity they provided guaranteed return with no risk of capital loss. Thus, investors would create investment portfolios having a combination of government securities and shares whereby downside risk could be reduced by the former, while enabling the capture of upside return from the latter.
The MD KSE explained that all efforts had been made to make the investment process relatively easy for retail investors. If an investor wants to invest in government securities, all he/she has to do is first open a brokerage account (with a stock broker) and an IPS account with CDC. Once the accounts are operational, the investor would need to deposit funds in CDC’s designated bank account one day before trade (purchase) and instruct the designated broker to purchase the type and rupee amount of T-bills, PIB’s or Sukuks. The designated broker, on the trade date, would execute the transaction after confirmation that funds are available at CDC. After execution of the trade, CDC would transfer the respective government securities to investors’ IPS account held at the CDC.
The broker, in the meanwhile, would also provide the investor with confirmation of the transaction. At no stage in the transaction, would the investors’ money or securities be in custody of the broker and these would be directly settled at the CDC. This method removes the intermediation risk for the investor.
Nadeem Naqvi said that the State Bank of Pakistan had now allowed primary dealer banks to participate in KSE’s GDS market and act as market makers if they so wish. This will enable these banks to make two-way quotes (bid and offer) to buy and sell government securities so that investors could both enter and exit the GDS market easily. In fact, the presence of market makers is essential to create liquidity in this market. Besides, the banks, which have SBP permission to participate in GDS market, brokers and other financial institutions could also act as market makers if they fulfill the exchanges’ criteria and requirement on applying for permission to become market maker.
The MD KSE emphasised the burden of making GDS market a success and useful for investors now falls on the stock brokerage industry. Brokers have the largest distribution network with people and institutions that invest in the capital market.
It is now up to the brokers to leverage their network of relationships and provide their investing clients a choice of a new, safe and liquid asset class to invest their savings. As far as the role of the exchanges is concerned, Naqvi stated that a comprehensive investor awareness generation programme was already underway by Karachi, Lahore and Islamabad stock exchanges. Now, the exchanges would weave the government security investing aspect into this programme and expand the reach and frequency of the programme so that the largest number of savers is made aware of this new facility for investment.