UNDERSTANDING SBP 'S MARKET TREASURY BILLS
Syed Ali Kashif, MBA Class of 1996, after graduating from IBA joined banking sector, where he worked his way up from management trainee officer, to the position of Head of Export Refinance at one of the top-of-the-line Bank. His areas of interest in Banking are Treasury & Funds Management, Investment Banking, Corporate Banking, SME Banking, Project Financing, SBP Export Refinance and Islamic Banking.
What Is a Market Treasury Bill?
A Market Treasury Bill (MTB) is a short-term Government of Pakistan debt obligation backed by the legal cover of Public Debt Act 1944 with a maturity of 3-months, 6-months & 12-months . Market Treasury bills are usually sold in multiples of Pak Rupees 5,000. However, the maximum limit of Pak Rupees of 500 million in non-competitive bids is allocated. MTB's are issued at discount. MTB's are issued in scrip-less (No Physical form). These securities are widely regarded as low-risk and secure investments.
Regular auctions of MTBs are held on fortnightly basis. A quarterly schedule is published by SBP at the beginning of each quarter. For MTB's, the Income Tax is deducted as per existing law. There is no compulsory deduction of Zakat at source. The ultimate custodian of these securities is the SBP, but banks maintain these securities in the Investor Portfolio of Securities (IPS) Accounts on behalf of their customers.
Procedure of Investment in Market Treasury Bill
Opening and maintaining Investors Portfolio of Securities (IPS) Accounts is the basic prerequisite of Investing in MTB's. The Primary dealer/Scheduled Banks maintain the investment amount of MTB's in Investors Portfolio of Securities (IPS) Account on behalf of their customer. The customer of Primary dealer / Scheduled Banks who invests in MTB's is the legal owner of the balance of Investors Portfolio of Securities (IPS) Account in terms of instructions of the State Bank of Pakistan.
MTB's transactions can be undertaken by the Investors Portfolio of Securities (IPS) Account, accountholders of Primary dealers / Scheduled Banks who also opens and maintains rupee denominated PLS or Current accounts with them. The State Bank of Pakistan designates the Primary dealer/Scheduled Banks for each year at the beginning of the year, and they are required to offer these Investors Portfolio of Securities (IPS) Accounts to their customers.
Investors of MTB's are directed to maintain liaison with their respective branches where they are maintaining their Investors Portfolio of Securities (IPS) Account or the treasury department of their scheduled banks/primary dealer to update themselves with the latest developments of the investments covenants and terms of MTB's transactions. The concerned Primary dealer/Scheduled Bank is obliged to provide activity statement on quarterly basis to the Investors Portfolio of Securities (IPS) Account holder, elaborating the details of transactions in his Investors Portfolio of Securities (IPS) Account. Each Primary dealer/Scheduled Bank has its separate schedule of charges , by means of which it debits its Investors Portfolio of Securities (IPS) Account holders with the Bank charges.
Once the Investors Portfolio of Securities (IPS) Account is opened, the investor of MTB's can instruct its Scheduled Bank / Primary dealer to purchase MTB's from the primary market from the pre-announced auction of SBP in the "non-competitive bidding process" or from the Secondary markets. Bidders range from individual investors to hedge funds, banks, and primary dealers.
Pricing for Market Treasury Bill
The non-competitive bidding process allows investor to take part in the primary auction of the MTB through Primary Dealers / Scheduled Bank. The quantum size of non-competitive bids for one investor is linked with auction target i.e. 0.25% of the pre-announced auction target or PKR 25 million, whichever is higher subject to a maximum of PKR 500 million. The non-competitive bids are sent to SBP separately from the normal bids before commencement of primary auction time with the name and number of investors without quoting price.
The bids of any investor can be rejected if the investor submits more than one bid for a single tenor. These bids are accepted at weighted average yield in each tenor as decided in the primary auction. In case of over subscription, non-competitive bids are accepted in order of lowest to highest amount or on pro-rata basis. The investors can also buy the MTBs through the secondary market by instructing its bank to buy the MTB through the secondary market.
Redemption of Market Treasury Bill
MTBs are only redeemable at maturity. MTB's are issued at a discount from the par value—or the face value—of the bill, meaning the purchase price is less than the face value of the bill. For example, a $1,000 bill might cost the investor $950 to buy the product. When the bill matures, the investor is paid the face value—par value—of the bill they bought. If the face value amount is greater than the purchase price, the difference is the interest earned for the investor. MTB's do not pay regular interest payments as with a coupon bond, but a MTB's does include interest, reflected in the amount it pays when it matures. MTB's are amortised based on number of days remaining to maturity. If you are calculating todays MTB's amortised value, you will use the number of days remaining from today till maturity to get amortised value of MTB's you are holding at today's date.
However, any investor can sell MTBs in secondary market through its bank. If an investor holds the MTB's till maturity, the PKR value equivalent to face value of the MTB's will be credited to the account of the investor through its bank on the maturity of MTB's. Investment by Non-Resident Investors: Like the local investors, foreign investors can invest in the MTBs by opening an IPS account. Foreign investors are also required to open a Special Convertible Rupee Account (SCRA) with any Authorized Dealer in Pakistan. The SCRA is opened by foreigners in Pakistani Rupee. The amounts are credited to these accounts after conversion of foreign currency into Pakistani Rupee, for the purpose of investment in Government Securities. Balance's in these accounts can be sent any time outside the country after conversion into foreign currency.