Devolvement on Primary Dealers (PDs) in primary auction is set to be withdrawn shortly to ensure market-driven yields on government securities, officials said.
The policy will be included in the fresh PD guideline, which is being updated by the Bangladesh Bank (BB), aiming to bring dynamism in the country's fixed-income market.
"Devolvement is one kind of manipulation for fixing yields on the government securities (G-Sec)," a senior official at the central bank told the FE, adding that the yields on the G-Sec should be determined based on the demand and supply of the securities.
The devolvement has already been suspended for PD banks as well as the BB for the last one year, according to the official.
Under the existing PD guideline, if the notified amount in an auction is unsubscribed or the auction committee decides to accept an amount less than the notified amount, the remaining amount will be devolved to the PDs according to their underwriting obligations on a pro-rata basis.
The maximum amount that can be devolved on a PD will be equal to its underwriting obligation less the amount of its successful bids in that auction.
All devolvement on PDs will be at the cut-off yield of that auction.
The devolvement issue was discussed at a tripartite meeting held at the central bank on October 7 with Director of Debt Management Department Istequemal Hussain in the chair.
Representatives from the PD banks and ministry of finance were present at the meeting to review the overall market situation.
Meanwhile, the International Monetary Fund (IMF) has recommended stopping assured liquidity support (ALS) for the PDs in the form of repo, saying that similar liquidity supports -- ALS and repo -- should not be allowed at the same time, according to the BB official.
However, the existing rules have allowed the PDs to avail ALS from the central bank where only marketable government securities (treasury bills and bonds) will be eligible for the ALS.
"We're reviewing the ALS issue and trying to find out an alternative," the official said, without elaborating.
Talking to the FE, another BB official said the central bank will invite leading commercial banks to give membership of the PD after updating the guideline.
"We'll re-evaluate the performances of all the PD banks after the end of each fiscal year," the central banker said, adding that the list of PD banks will be updated every year based on their performances.
Besides, the central bank plans to appoint the Standalone Primary Dealers (SPDs) from private entities other than banks and non-banking financial institutions (NBFIs).
The SPDs will deal with the government securities exclusively, according to the official.
The central bank earlier selected 24 PDs to manage the government-approved securities in the secondary market.
A PD will be eligible for liquidity support from the BB for its operations, collateralised by treasury bills and government securities from its own positions, through the repo mechanism or such other arrangements as the BB may prescribe from time to time.
A PD will be entitled to an underwriting commission on the issues of dated government securities underwritten by it at rates prescribed by the government from time to time.
The PDs will subscribe and underwrite primary issues and make secondary trading deals with two-way price quotations.
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