Securities and Exchange Commission of Pakistan (SECP) Chairman Raziur Rehman Khan has said that the Commission will not roll back the on-going reforms in the stock exchanges to maintain a transparent buying and selling atmosphere.
Talking to reporters on Friday, he said that the interim forensic report on the March-crash has been finalised and would be presented to the National Assembly standing committee on finance. The forensic investigators were provided the Task Force report on the stock market crisis with the mandate to conduct free and fair investigation to unearth crime/violations committed by the stockbrokers, if any.
He said that it would be very difficult to manipulate the market in the presence of the Unique Identification Code (UIC) allocated to the stock exchanges investors.
The client code helps in identifying the actual traders and the investors. Through this mechanism, the Commission would know who is trading and through whom investment has been made in the market.
Similarly, other measures, like market surveillance techniques, would play an important role in eliminating manipulation. The SECP wants to eliminate systemic risk from the market.
To further curtail systemic risk, it is essential to disallow the practice of netting in ready and futures markets for the purpose of calculating capital adequacy.
He said that the new risk management measures are very important for stability of the stock exchanges. But these measures were not timely implemented at the stock exchanges. The reform process would continue in the stock exchanges taking all stakeholders on board.
Dispelling the impression that SECP has not regularly convened meetings with the exchanges, Razi said that the Commission had held twice-month meetings with the KSE, LSE and ISE on each and every issue. Only in September 2006, SECP and KSE held five meetings on risk management measures, CFS procedure relating to CDC blocked accounts, KESC queries on revised risk management regime, implementation issues and SECP and KSE held a meeting on the CDC blocked accounts. Similarly, SECP convened three meetings with the KSE management in August 2006.
"We have discussed each issue at the level of board of directors of exchanges as well as members. I do not understand that why such impression is being created", he said.
SECP Chairman said that its objective is to introduce a unified trading system (UTS) for all stock exchanges. Presently, LSE and ISE have agreed to implement the UTS. He was of the view that all exchanges should have similar rules and regulations for smooth working of the exchanges.
The SECP has asked the federal government to encourage listing of privatised entities and new public and private sectors companies for enhancing the market capitalisation. He said that KSE has appointed a foreign bank as advisor for valuation of de-mutualisation process.
He said that the overall position limits be imposed over a certain level of stock trading. In order to check undue concentration by brokers and/or their clients in a particular stock future contract and to prevent cornering/manipulation scrip-wise position limit have been imposed in the market.
Market wise position limit for proposed futures deliverable contracts and cash settled future contracts would be 40 percent of free-float of each scrip for KSE and 10 percent of free-float for LSE and 5 percent for ISE and position limit for ready market contracts would be 100 percent of free-float.
Member-wise position limit for proposed futures deliverable contracts and cash settled future contracts would be 3 percent of free-float of the scrip for KSE member, and one percent of free-float of the scrip for each LSE and ISE member.
Client-wide position limit (applicable from February 1, 2007) for proposed futures deliverable contracts and cash settled future contracts would be one percent of free-float of the scrip for each KSE member client, and 0.5 percent of free-float of the scrip for each LSE & ISE member client.
Explaining new risk management measures, SECP Chairman said that presently a slab-based system is used to determine the margin rate applicable to the exposure of a broker. However, this system does not take into account the individual volatility and liquidity of shares as margin rates only increase when exposures slab changes.
The Value At Risk (VAR) is a state of the art risk management system and takes into account the risk associated with each share based on historical data. VAR is based on mathematical statistical techniques and is supported with tailor-made software applications. The VAR margin will be based on NCEL Risk Meter calculation using three methods including variance/vovariance; historical/filtered historical simulations and exponentially weighted moving averages (EWMA).
He said that in order to provide level playing field for LSE and ISE, it has been decided that 'centralised CFS Mk II' will be developed at the National Clearing Company of Pakistan (NCCPL). This arrangement would benefit investors as well as financiers who would not need to acquire AF status of each stock exchange to extend financing and hence financiers would lend money to broker financees at any stock exchange in a geographically neutral manner. The National Clearing Company is presently working on the assignment, he said.
However, till such time as the procedures/modalities of CFS MK II are finalised the Commission has extended the date of CFS review till December 31, 2006.
He said that the 'In-house badla' has been the bane of a transparent and orderly market and this has been abolished. This non-transparent method of financing weak holders, wherein the scrips are financed, is more risky and prone to market manipulation besides having excessive rates of financing. Margin financing is being promoted, rather than curtailed, as in-house badla is no longer possible and market participants would be forced to go the margin financing route.
He also explained the Special Margin. The Special margin (old COT II) has been reinstated not only in CFS market but for the futures market as well. COT II was abolished arbitrarily by KSE in June 2005. This is an important instrument for the market to correct itself from unidirectional movements.
A special margin shall be payable only where the transaction price of a scrip in the CFS or Future Deliverable Markets, is different from 26 weeks moving average price of that scrip in that market. In case the difference between transaction price and the 26 weeks moving average price of that scrip in the CFS or Future Deliverable Market is within 10 percet, special margin shall not be payable.
The collection of these margins shall be in a phased manner as follows: Fifty percent of the Special Margin shall be applicable for a period of 4 months commencing from November 6, 2006; 75 percent of the Special Margin shall be applicable for a period of 4 months commencing from March 6, 2007. Thereafter, 100 percent of the Special Margin shall be applicable from July 6, 2007.
He said that KSE-30 Free Float Index has also been introduced to provide a more realistic benchmark to the market. Under the free-float methodology it becomes increasingly difficult to include close-held companies in the index while at the same time preventing their undue influence on the index movement. Free-float index gives a much better market representation than indices constructed on the basis of total market capitalisation of the companies.
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