Aamir Khan Chairman Securities and Exchange Commission of Pakistan (SECP) has urged Pakistan Stock Exchange Limited (PSEL) for conducting drills to ensure remote operations of trading, clearing, settlement and custody services for effective functioning of the risk management system.
The Securities and Exchange Commission of Pakistan's (SECP) team lead by the Chairman SECP and Commissioner(SM) held a detailed meeting with the CEOs of Pakistan Stock Exchange, National Clearing Company and Central Depository Company (SROs) to review and discuss the stock market situation, risk management and business continuity.
The index-based market halts were triggered for the third time during last week. This cooling-off period gave an opportunity to investors to align their trading strategy and collection of margins by the Clearing Company. The participants of the meeting affirmed that risk management system was functioning efficiently and margins were being collected timely. The market operations were running smoothly as a whole. The SROs further apprised that their business continuity plans and disaster recovery setup was in place based on SECP's earlier instructions. The Chairman SECP emphasized on conducting drills to ensure remote operations of trading, clearing, settlement and custody services while allowing remote access of market participants to such systems in case onsite operations or physical access was impacted. He also suggested adoption of further preventive measures against spread of coronavirus.
The SECP advised SROs to remain vigilant, continue to provide uninterrupted access to market participants and ensure effective risk management while maintaining actively engagement with their boards of directors and committees for close coordination.
During past few months, SECP has under taken reforms and initiatives at an unprecedented pace. The timely measures by SECP resulted in most remarkable turnarounds by a stock exchange. SECP revamped the regulatory framework to remove non-practical and burdensome requirements, ease out operational level requirements to create a facilitative environment for the market intermediaries and investors.
Firstly, to end the strict margining regime which have been affecting working capital management and liquidity, SECP removed the additional VAR based margins which were imposed in 2017 and also abolished additional haircuts on securities deposited as collateral with NCCPL.
Secondly, the security deposit requirements in the deliverable futures segment was also reduced significantly. In addition, the mechanism for imposition of liquidity margins was revisited whereby margins were only imposed on large positions while also taking into account the credit rating of clearing members.
Another major initiative was on the product development front where the regulations for market making and Exchange Traded Funds (ETFs) were revamped to remove bottlenecks and facilitate introduction of this product. ETF is one of the most popular mode of investment in capital market across the globe, however, Pakistan's capital markets have been missing this lucrative product.
Another major initiative of SECP towards the development of capital markets in line with international practices is the widening of circuit breakers and introduction of market halts. Circuit Breakers are considered to curb price discovery, effect of curbing price discovery, making exit difficult for investors and are an inefficient mode of managing price volatility. The prevailing circuit breakers at PSX were also considered by market participants as narrow and hindrance to efficient price discovery and growth of market in line with international best practices.
SECP has approved changes in regulations of PSX and NCCPL to enable gradual widening of circuit breakers by 0.5% on fortnightly basis, until the same reach the level of 7.5% from the existing level of 5%. Market halts are also introduced initially at the variation of 4% in the KSE-30 Index. The new regime is to be effective from the third week of January 2020. This was a long awaited reform which has generated positive feedback and appreciation from the market participants.
Paving way for development of Shariah-compliant segment in Pakistan, SECP introduce Morabaha Share Financing product. The lack of a Shariah-complaint leverage product in the market served as hindrance towards attracting a large pool of potential investors. Shariah-compliant banking has proven to be successful in Pakistan, indicating a tremendous potential in other segments as well.
Another key reform by SECP was approving the PSX regulations for introduction of minimum brokerage commission which was again a long outstanding matter. The implementation of much awaited reform is expected to bring transparency and discipline in the market.
As a part of reform measures, the Margin Financing product was also revamped whereby bottlenecks and hurdles were removed. Further, the limit of investment in Sahulat account was also increased from Rs 500,00 to Rs 800,000 thereby facilitating outreach to small investors and allowing opening of accounts is a much simplified manner.
Many other reform measures have also been taken by SECP which include simplification in the listing requirements, removal of practical difficulties in meeting the KYC requirements of CKO, increase in the securities eligible for collateral, inclusion of more financial institutions as clearing members, improved disclosure requirements, removal of requirement to place quarterly financial statements on website by brokers etc.
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