Group 12

Institute of Business Administration, University of Dhaka

April 30, 2014
Submitted to:
Syeda Mahrufa Bashar
Course Instructor: Financial Markets & Institutions
Submitted by:
Muhammad Saeedul Alam | BBA19 | ZR 081
Ehteshamul Arefin | BBA19 | ZR 102
Nazmus Saadat | BBA19 | ZR 115
Tanzilul Ahsan | BBA18 | ZR 042
Md.Jamil-Ur-Rahman | BBA18 | ZR 077


Benefits and Challenges of Primary Dealers
In Bangladesh

Primary Dealers:
Primary dealers are financial intermediaries that generally in exchange for specific privileges, agree to
perform specific obligations or functions in the operations of markets for government securities. Primary
dealers perform mainly the following functions:
1. Act as a channel between Government and investor in the primary market.
2. Perform as bookmakers and distributors of treasury securities.
3. Provides immediacy of liquidity to primary and secondary market.
4. Provides asset transformation and market making services.
5. Promotes continuous markets and efficient price discovery.
6. Acts as advisors to the government. (primary dealer in government securities:policy issues and
selected country experience, 2014)
Primary Dealership in Bangladesh:
The bond market in Bangladesh Had been very illiquid. Bangladesh Bank created PD in order to support
the bond market so that these Primary Dealer would act as market maker to ensure price stability and
interest rate stability. But in Bangladesh, the banks dont properly manage their treasury bonds as a
result the interest rate fluctuates between high rates at times and low rates at other times. As a result of
which Primary dealers can not function properly.
In Bangladesh, primary dealers deal with mainly bills and bonds. The bills are of maturity at 30 days,91
days, 182 days and 364 days and the bonds are with 2,5,10,15 and 20 years of maturity period. These
treasury securities are sold by following French auction method. Each primary dealer has to quote price
equivalent to or multiple of the minimum required facevalue (which is normally BDT 10,00,000). The
bids are now placed electronically; earlier it has to be placed through bids in sealed covers. The bids
mention the discount rates considering the face value as BDT 100. (Auction Notice, 2014)
Lanka Bangla Financing Limited as a Primary Dealer:
Lanka Bangla Financing Limited got its license as a primary dealer on November 23, 2009. It first
participated in the auction of government securities on December 1, 2009. It has separate treasury
operations unit which deals with treasury back office activities related to day-today treasury deals, call
money market operations, facilities taken from other banks and financial institutions, capital market
investments, and also primary dealership operations.
Benefits of Primary Dealership in Bangladesh:
Profits during fall in interest rate:
When interest rate falls then the value of the government treasury bonds increases making sale of these
bonds profitable for primary dealers. Among all the financial institutions, primary dealers have the
largest bond portfolio. So, if they forecast a falling interest rate in future periods and if that actually
happens then primary dealers can cover up the financial losses incurred from devolvement by the
capital gains obtained through selling treasury bonds at times of falling interest rate. In fact, the primary
dealers in Bangladesh quote their quantity and price and discount rate based on the forecast of whether
the interest rate would rise or fall. A period of continuous falling interest rate would benefit these
dealers heavily and this is currently happening in Bangladesh. The interest rate is falling and Lanka
Bangla security and other PDs have started to make money.
Generating fund by repo:
At times of financial crisis and increasing interest rates the primary dealers can generate fund by repo
(repurchase agreements) both from Bangladesh Bank and Inter Banks to hold Govt. securities under
Primary Dealership. This system provides the PDs with adequate funds to run other profitable
operations.
Rights in the primary market:
The PDs in Bangladesh mainly enjoys the following two rights in primary market.
Right to bid at auctions of Government securities
Exclusive right to submit bids on behalf of third parties at auctions.
Rights in the secondary market:
The PDs in Bangladesh mainly enjoys the following three rights in secondary market.
Access to Bank refinancing instruments such as repos under existing procedures in situations
where primary dealers by virtue of their market making functions must carry long or short
positions.
Access to timely sharing of information from the banks on market activity and developments.
Participate at monthly meetings with Bangladesh Bank to review developments in the domestic
market and discuss structural and operational issues relating to the market.
Prediction of market movements and interest rates:
As a dealer of government securities, Lanka Bangla and other PDs closely observe market movements
and change in interest rates. These PDs have access to the information which other non-PD banks and
brokerage houses dont have. Often PDs make use of these information to predict about the interest
rate more or less correctly and thereby holds short or long position accordingly. Correct predictions
keeps them a little bit ahead of the market and so, they can take benefit of this moneymaking
opportunities.

Challenges of Primary Dealership in Bangladesh:
Devolvement:
If all bonds are not subscribed then the rest are devolved among PDs. Actually in our country 2010-2011
financial crisis, when government decided to issue more and more treasury securities to cover up for
budget deficits then quite a big percentage of the securities were not subscribed by the primary dealers
and in such cases devolvement takes place. Devolvement is forced buy of treasury securities. The
primary dealers were forced to buy those securities even if they didnt want to. In order to avoid such
situations, recently, in 2013 the government has taken decision for 40% of the devolvement among non-
PD (i.e which are not primary dealers) banks. Moreover, some new banks are also given primary dealer
status to offload the pressure of devolvement.
Interest Rate Risk:
Government treasury securities have no default risk however they are exposed to associated interest
risks. For example, during the financial crunch period of 2010-2011 Lanka Bangla Finance didnt have
enough money and didnt want to buy further treasury bonds. But due to government instructions of
devolvement, it had to buy treasury stock. The interest rates were shooting up continuously during
those days making these bonds lower in value. Due to tight monetary policy, Bangladesh bank was quite
reluctant to extend adequate repo facility during the year 2012 also. As a result Lanka Bangla moved to
interbank repo facilities with relatively higher rate of interest which led them to incur significant amount
of interest loss.
Opportnity Cost:
As a primary dealer, Lanka Bangla Finance have to comply with all government instructions to
participate in a PD auction and buy the treasury securities (bills and bonds). But the problem is, due to
such operations Lanka Bangla Finance cant provide enough liquidity (i.e enough cash) to its other
profitable operations and at times of rising interest rates it has to borrow fund at higher rate to invest in
those other profitable operations because by default a primary dealer should engage its resources to
buy the treasury securities first and then the other operations would be prioritized.
Secondary Transactions in the Over the Counter (OTC) market:
One of the headaches in 2012 for Lanka Bangla as a PD was their holding position of Govt. securities i.e.
Tk.1,801.81 million as of January 1, 2012. Compared to our balance sheet size the holding was little bit
high and so they had to devote ourselves in secondary trading thorough out the year. They had been
able to sell Tk.1,964.21 million of Govt. securities (T-Bill & T-Bond) throughout the year 2012. Most of
the secondary transactions were taken place in OTC market with premium offered by counterparties as
the secondary market is totally imperfect. As a result they had to incur capital loss just to free the cash
flow. Similar is the case with other PDs. When they go to secondary market transactions and the market
being imperfect, these PDs often have to lose money.
Conclusion:
The secondary market in Bangladesh is still underdeveloped and imperfect; as a result of which the PDs
face more challenges in Bangladesh than the benefits they enjoy. This is one of the reasons why PDs like
Lanka Bangla Financing has set their main target as to offload the entire holdings of government
securities to counter party specially Bangladesh Bank through secondary trading by incurring no capital
loss. However, it is hoped that, with time the market will mature and the PDs will reap the benefits of
their waiting then.






References
Bangladesh Bank. (2014, 4 29). Auction Notice. Retrieved from http://www.bb.org.bd/:
http://www.bb.org.bd/monetaryactivity/auc_notice.php
International Monetary Fund (IMF). (2014, 4 29). primary dealer in government securities:policy issues
and selected country experience. Retrieved from http://www.imf.org/:
http://www.imf.org/external/pubs/ft/wp/2003/wp0345.pdf