The Securities and Exchange Commission of Pakistan (SECP) has asked the Karachi Stock Exchange (KSE) to submit comprehensive proposals on the improvements required in the risk management framework for the futures market as sudden deviation will give rise to uncertainty in the market. The SECP on Friday night sent a reply to the KSE proposals whereby the board of directors have asked the stock market regulator to review the recommendations of the Development and Technology Committee meeting held on April 25, in the context of certain risk management measures, which would be implemented from May 2005 contract.
The board of directors in a letter to Securities Commissioner Shahid Ghaffar said, "In the absence of clear-cut rules on cash settlement from July 2005 contract in futures market, there is a likelihood of confusion and uncertainty which may adversely affect the sentiments of the market."
The board felt that during the meeting the SECP officials on the issue raised concerns on various risk measures which include: With a view to remove unnecessary restrictions, the board felt that prescription of any percentage of the free-float would be too restrictive and be removed.
Moreover, since the exposure slabs have been raised from 20 percent to 30 percent, ie, an overall increase of 50 percent, calling for 100 percent cash margins when the cost funds is going up day-by-day, would put severe liquidity crunch for the members, thereby affecting their ability to carry on business.
The board has constituted a committee comprising Muhammad Siddique Dalal, Abid Ali Habib, Dawood Jan Muhammad, Shehzad Chamdia and Moin M. Fudda to set an appointment with the SECP in order to discuss the issues.
In a three-page reply the SECP said that it is disturbing to note that the settled issues that have been discussed and decided upon are re-opened for discussion by the KSE. Furthermore, the KSE''s request for the re-examination of the already decided issues coincides with the first day of the opening of the May contract, thereby denying a fair chance for the implementation of the newly and unanimously agreed measures.
It would have been more appropriate for the KSE board to express its concerns/reservations on the implementation of such measures in a timely manner and it should have provided reasonable justification for the same.
"You are aware, the stock market is slightly sensitive and, therefore, any sudden deviations or departures from decisions taken by the board of directors of the KSE, which have been circulated to the members and the market at large that too without providing any justification or detailed analysis, give rise to uncertainty in the market.
"You will appreciate that certain improvements in the risk management system for the futures market were introduced in view of the recent market situation and the lessons learnt from the experience with March 2005 futures contract.
"The commission discussed these measures with the stock exchanges and various market participants on several occasions, which are considered to be critical for the preservation of market integrity and investors confidence.
"Furthermore, it has been noted that no reasoning/rational for reviewing these risk management has been provided by the board of directors of the KSE in their letter.
"However, in the absence of any proper facts/data relating to the March futures contract, any further discussion in this matter would not yield any meaningful results. Therefore, the reasons led to the difficulties/complications experienced in case of March 2005 futures contract should be analysed and based on these findings, the steps which need to be taken in order to prevent such a situation from arising in the future should be identified.
"In light of the above, the exchange is requested to submit comprehensive proposals on the improvements required in the risk management framework for the futures market for the consideration of the commission before any further deliberation on the issue.
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