Role of National Bank Limited as a Primary Dealer

Prepared for:
Mrs. Syeda Mahrufa Bashar
Course Instructor: F 403 Financial Markets and Institutions
Assistant Professor

Prepared by:
Group: 06
Tarique Mahmud Pasha, ZR-25
Torikul Islam Raihan, ZR-26
Rehanul Islam, ZR-27
Saleh Ahmed, ZR-46
Shabab Mashuk, ZR-47
BBA 20th, Section-A

Institute of Business Administration, University of Dhaka

Date of Submission: March 20, 2015

Introduction
Development of the secondary market for debt instruments, particularly Government Securities is
essential in order to transform the market operations in to a more stable and supportive one towards the
monetary policy of Bangladesh Bank. There are a total of 12 Primary Dealer banks currently operating in
Bangladesh and they are sanctioned 60 percent of the treasury bills and the rest 40 percent are sanctioned
to the rest of the banks. Of the 60 percent sanctioned bills to the PDs 30 percent are sanctioned equally
to the 12 banks and rest 30 percent is distributed according to the proportion of demand and deposits
made by the banks.
At the end of December 2009, Bangladesh Bank included National Bank Limited as a primary dealer.

Guidelines for Primary Dealers in Bangladesh

The government of People s republic of Bangladesh, with the intention of activating a secondary market
in Treasury Bills and other Government securities, the following guidelines for the enlistment and
operations of the Primary Dealers.

Objectives:

To enhance the liquidity in the market and encourage the voluntary holding of government securities
by wide range of investors.

To develop the underwriting capabilities and market making for the government securities for the
market participants.

To facilitate efficient open market operation and monetary policy management to help the government
manage the economy well.

Regulations for the operation as a Primary Dealer (PD):

(Details of the eligibility, roles and responsibilities of PD is given in appended parts)

A PD shall not act as interbank or inter dealer broker.

A PD shall maintain separate accounts for its own position and customer transaction with separate
Subsidiary General Ledger (SGL) account in the name of each customer.

A PD shall quote the price that is made by the customer incase the PD is involved in the bids for primary
issue of bids on behalf of the customer and purchases shall be transferred immediately to the customers
SGL.

Transfers arising from secondary trading deals must be booked through the SGL accounts in the PDs
own books and also in the PDs SGL in the Bangladesh Bank.

Prices would be quoted by a PD in terms of face value units of 100 taka.

The secondary trading deals of a PD would be on spot value basis, considered as T+2 working days.

A PD shall not short-sell any particular issue and shall not carry a short position in any secondary
dealings.

A PD shall furnish to the Bangladesh Bank daily returns on dealing prices, positions and transaction of
its own account and of its customers account.

The BB shall reserve the right to inspect all the books and records of all transactions and dealings of a
PD.

A PD shall immediate notify the BB of any complaint against it by customer or any action initiated by
any other bodies including the SEC, the Registrar of Joint Stock companies and the Stock Exchange.

Advantages:
1. Primary Dealers earn underwriting commission on dealing in the Government Bonds and Bills.
This rate is .085% on Bond and .035% on Bill.
2. Primary Dealers have a power over Non-Primary Dealer Banks in the sense that when NonPrimary Dealer Banks want to bid for Government Bonds and Bills, they have to bid through
Primary Dealers, and as a result the Primary Dealers earn the underwriting commission.
3. Government is a bit more lenient towards the Primary Dealers. Now this may seem biased at the
first look, but Government does this in consideration of all the problems Primary Dealers face in
the market.
4. Primary dealers have significant influence over other banks, Financial Institutions, Pension
Funds, and Mutual Funds due to holding huge amount of government securities.
5. Bangladesh Bank provides Assured Liquidity Support (ALS) to the Primary Dealers. Assured
Liquidity Support (ALS) is a special Refinancing Support from the Bangladesh Bank to the Primary
Dealers. This support is provided for 60 days from the issuance date of the Bill/Bond.
Bangladesh Bank provides 85% and 95% of the face value of Bill and Bond respectively as
Assured Liquidity Support (ALS) at 7.25% Repo Rate, and the Reverse Repo rate is 5.25%

6. Primary Dealers can take advantage of Market fall situation when the current interest rate is
lower than the coupon rate in previously issued Government Bonds and Bills.

Disadvantages:
1. Investors are not as much inclined to buy bonds because mostly they get a higher return on FDIs.
It just would not be worth the risk to go after bonds given the clear numerical disadvantage. This
disadvantage though could have been minimalized if the bond returns were made tax exempt, but
no such decision from the government has yet been given.

2. Shonchoy potro (Savings Certificate) in Bangladesh currently yields at 13.5% interest whereas
people investing in bonds would yield only about 9% interest. As a result it is seemingly
impossible to attract the general mass to invest in bonds and it has been seen that only insurance
companies and mutual fund companies bother to invest in bonds and treasury bills.

3. National Bank Limited and some other Primary Dealer (PD) banks have proposed a tax rebate on
bonds, allowing investors to look at bond investment as a lucrative opportunity somewhat. If
there was a tax rebate the low interest rate on bonds would not seem so bad compared the other
interest rate figures of FDIs and Savings Certificates. So far nothing has been done about this
and demand for bonds is lower than ever for the general population.

4. Liquidity is one of the main area that any bank concentrates towards, and it is a serious
disadvantage for Primary Dealer (PD) banks that they have to attend the auctions set up by
Bangladesh Bank, even when they are very low on their cash reserves. If they fail to attend the
auction for any reason, they will have to face consequences. On the other hand non-PD banks are
also invited to the auction held every Sunday and Tuesday of the week, and they have the liberty
to not be a part of the auction if they feel that their cash reserves and SLR are not going that well
and it would be better to not get involved in the auction that time around a liberty and an
advantage PD banks would love to have.

5. Insurance companies and mutual fund companies are reluctant to invest in bonds as they find it
much more lucrative to be investing in other assets such as land. Most of them do invest a little
bit in bonds but it is so less compared to the huge sum of bonds in the money market of

Bangladesh that it is negligible. The big players in the insurance industry of Bangladesh
Popular, Delta Life Insurance, etc. does invest comparatively huge sum of money in bonds
(about 2000 crores) but it is still not enough to fill the void of stationary bonds that remain in the
bank which is usually a couple of thousand crores itself.

Suggestions:
1. Pension Fund, Mutual Funds should be regulated to have minimum 30% of their portfolio in
Government Bonds and Bills.
2. As the Savings paper holds a higher interest rate, it is difficult to sell Government Bonds and
Bills. So those who are buying Government Bonds and Bills should be given a tax rebate.
3. Government should set up new process to facilitate the quick selling and Buying of Bonds and
Bills in the secondary market to increaser the number and confidence of the Secondary buyers.
4. Bangladesh Bank can refinance the banks in case of sudden CRR shortage of Primary Dealers
against excess capacity.

Appendix
Acronyms:
CRR= Cash Reserve Ratio

Definitions:
Reverse Repo rate:
At this rate Primary Dealers lend the excess money to Bangladesh Bank
Repo Rate:
At this rate Bangladesh Bank lend the excess money to Primary Dealers

Eligibility for Primary Dealership:

The Bangladesh Bank (BB), shall select PDs from the scheduled banks and licensed financial institutions
who have current account with the Bangladesh Bank, for the fulfillment of the Cash Reserve Requirement.
In selecting the PD and allotting them with specified minimum subscription and underwriting, the
Bangladesh Bank should consider the following:

Physical infrastructure in terms of the number and coverage of office or branches for securities dealings,
the extent of the use of computer and other information technology in the settlement, record keeping
and other day to day analysis. In addition to this, the Bangladesh Bank also looks into the skills and
efficiency of the man power in participating in the primary issue and secondary trading, and for advising
and educating the investing public about the government securities.

Internal control system for fair conduct of business, settlement of transaction, maintenance of accounts
for securities transaction and risk management capabilities.

The level of involvement in the past with the primary issue and secondary trading of Treasury bills and
other government securities both on its own account and on the account of its customers.

Solvency and overall standard of the applicants compliance with the prudential and regulations of
Bangladesh Bank and other regulatory agencies.

Roles and Responsibilities of a PD:

A PD must participate in all primary auctions and the issue of Treasury bills and other tradable securities
actively, with the bidding commitment for the specified minimum percentage of primary issue of treasury
bills and underwriting of a minimum specified percentage of the primary issues of the dated government
securities over a year. This minimum bidding and underwriting percentage will be allotted by the
Bangladesh Bank in such a way so that it off-takes the entire volume of the intended issue.
The PD will be required to maintain a success ratio (successful bids: allotted targets) of 40% or higher in
the bids over the year. A PD must subscribe any share if allotted by the Bangladesh Bank at the auctioned
price even if it has maintained the required success ratio, as long as it is within the minimum bidding and
underwriting commitment.
A PD shall obtain a sizeable portfolio of Treasury bills and other government securities which is in excess
of its own SLR, and this must be done in its first year of operation as a PD.A PD must engage in secondary
trading and quote two way prices to the firms and make itself open to trading on each business day. An
annual turnover of at least 10 times of the average of month-end stocks of Treasury bills and government
securities over the year shall be maintained.