Leading traders and dealers are of the view that the Securities and Exchange Commission of Pakistan (SECP) has taken strong notice of 'wash deals' following the task force report, but has overlooked that badla should be replaced after alternative financing system is in place.
The strengthening and implementation is needed to make the market free from risk and crises. "But it is not possible in isolation. A trustworthy and friendly environment is required to protect the small investors' interest and boost their confidence over the proceedings of the share market," said an investor.
The report has named several brokers and stock players, shown weakness of Karachi Stock Exchange and ad hoc behaviour of SECP. "SECP would issue notices to stockbrokers on their 'wash deals' and 'dohbi transactions', as the task force said, but who will 'regulate the regulator'," he said.
"The SECP had considered, or designed myriads of fire fighting initiatives and piecemeal proposals, but lack of action by Exchanges in implementing measures to address these issues did not prompt it to ensure enforcement in a timely fashion prior to the developments in the market".
The Task Force further says: "It seems that the SECP assumed that just the issuance of directives and the drafting of the rules was enough. It took comfort from the handful of meetings it held with key players, without ensuring that the alternative system was in place by the time COT was withdrawn."
Further evidence of SECP's piecemeal and ad hoc approach to reforms is provided by: a) the effort launched only recently to draft a Futures Act and review market regulations, although the futures market had become operational in 2001, and (b) the permission that it had granted the LSE to introduce cash-based settlement for futures contracts only to allow the KSE a few months later to install a scrip delivery system for futures contracts.
Many participants thought that the KSE management had been too lax with risk management standards and were particularly critical of meeting at the client level. When confronted, the Exchange management maintained in its defence that it was constrained by a conflicted board. However, the task force believes that KSE management could have done more to highlight deficiencies to its board, and the SECP should have been more proactive and demanding of the board, to ensure timely implementation of reforms.
A detailed report prepared by the task force, headed by Justice Saleem Akhtar has pointed out weaknesses of the stock market management, inadequate surveillance by the regulating authority and weak implementation of policy reforms.
The task force had 30 days to hold interviews across the country which surely is a very short period to assess the problems, review data, follow up investigations of some transactions, pursue matters that came before it, reach conclusions and then write a report.
The report recommended creation of a 'free float' index, elimination of circuit breakers and replacement with market halts based on a free float index, design of the future contract, phase-out of carryover trade known as Badla trading, capital adequacy of brokers and implementation of cap of the mutual fund and investment bank activity in arbitrage and COT business.
In institutional recommendations, the task force stressed the need for independence of management of the exchanges from brokers through de-mutualisation of the exchanges. It said that for achievement of this objective the government might have to become directly involved to prevent the process from being blocked by the existing vested interests.
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