BANKS LICENSED TO TRADE IN DERIVATIVES IN PAKISTAN AND BRIEF HISTORY OF DERIVATIVE MARKET IN PAKISTAN

2. BANKS LICENSED TO TRADE IN DERIVATES IN
PAKISTAN AND BREIF HISTORY OF DERIVATIVE
MARKET IN PAKISTAN
BANKS LICENSED TO TRADE IN DERIVATES IN PAKISTAN
The financial Derivatives Business laws are developed in exercise of the ability derived by banking
company of Pakistan under Banking corporations Ordinance , 1962 and exchange laws Act ,1947 to
permit, regulate, and supervise monetary establishments moving into spinoff transactions.
Banking company of Pakistan (SBP) is that the super ordinate authority for all banks and DFIs
contribution in spinoff Business. Monetary establishments involvement in spinoff business shall
acquire the approval of the banking company of Pakistan and be subject to the superintendence and
scrutiny of the banking company of Pakistan.
“Financial Institutions” as spoken in these laws means that regular industrial Banks, Development
Finance establishments (DFIs), Non-Banking Finance corporations (NBFC), similarly as branches of
foreign banks, that are settled in Pakistan (here in after spoken as “Foreign Bank Branch”).
“Derivative” as spoken within the laws means that a kind of monetary contract the worth of that is
decided by relevancy one or a lot of underlying assets or indices. The main classes of such contracts
embrace forwards, futures, swaps and choices. Spinoff additionally includes structured monetary
product that have one or a lot of characteristics of forwards, futures, swaps and options.

3. HISTORY
Derivatives are advanced monetary instruments that are employed by retail and institutional investors for
risk management. They derive their worth from the ‘underlying’ source, like monetary assets,
commodities, currencies, or interest rates.
In Pakistan, derivatives supported financial assets trade on the Pakistan exchange (PSX), whereas
commodity-based derivatives trade on the Pakistan Mercantile Exchange (PMEX).
While the commerce of money settled and deliverable equity futures on the PSX started in 2001, the
PMEX became operational in 2007.
Despite the exceptional performance of the Pakistani securities market in recent years, investors’ interest
in exchange-traded derivatives is marginal, resulting in humble turnovers. In fact, Pakistan’s derivative
markets rank rock bottom within the region in terms of volumes listed.
In distinction, the Indian derivatives market, the National exchange, has become the foremost active
market within the region in recent years. The Chinese derivatives markets have taken a lead in product
innovation and have introduced derivatives with non-traditional underlying commodities.
Several provide and demand aspect challenges impede the development of derivatives markets in
Pakistan.
The International Accounting Standard (IAS) 391 defines a derivative as a financial instrument with three
characteristics. First, it derives its value from a specified interest rate, security price, commodity price,
foreign exchange rate, index of prices or rates, and a credit rating, credit index, or similar variable
commonly referred to as ‘underlying’. Second, it requires zero or marginal investment relative to other
types of contracts that are also affected by changes in market conditions in the same manner. Lastly, it is
settled at a future date.
Derivatives trade on organized exchanges as well as in Over-the-Counter (OTC) markets and can be
classified into four categories, namely forwards, futures, options, and swaps.
Derivatives and their characteristics

4. Forwards Futures Options Swaps
Trading
Platform
OTC Organized
Exchanges
Organized
Exchanges/OTC
OTC1
OTC1
Underlying Financial/
Commodity
Financial/
Commodity
Financial/
Commodity
Interest rates/
Currency
Structure Customized Standardized Standardized or
Customized
Customized
Regulation Unregulated 2
Highly regulated Highly regulated
or Unregulated
Unregulated 2
Cash flows No periodic cash
flows
Marked to
Market Margin
requirement
Marked to
Market Margin
requirement 3
Periodic sash
flow based on
notional principal
Performance
Guarantee
Guaranteed by
creditworthiness
of the parties
involved
Margins Clearing
House
Margins
Clearing House
or Guaranteed by
creditworthiness
of the parties
involved
Guaranteed by
creditworthiness
of the parties
involved
Settlement Physical / Cash
Settlement
Physical / Cash
Settlement
Physical or Cash
Settlement
Cash statement 2
Default risk High
Counter party
Low Exchange
guaranteed
High or Low
Counter party or
Exchange
guaranteed
High Counter
party
Users Institutions Retail Investors /
Institutions
Retail Investors
and/or
Institutions
Institutions
Liquidity Low High High Low
Transaction
costs
High Low Low High
USERS OF DERIVATIVES

5. Users Exchange Based Over- the -Counter
Retail Investors Equity-linked derivatives
(Exchange Traded Funds,
Equity-based Options)
N/A
Institutional/Wholesale/
Professional Investors
Fixed Income Derivatives
Equity-linked Derivatives
Commodity Derivatives
Fixed Income Derivatives
Equity-linked Derivatives
Commodity Derivatives
Foreign Exchange Derivatives
Credit Derivatives