March 2005 stock market crisis: Task Force members stay away from National Assembly body meeting

The National Assembly Standing Committee on Finance and Revenue held a meeting here on Friday on the issue of March 2005 stock market crisis. The meeting was attended by Chairman SECP Razi-ur-Rahman Khan and other senior officials, the representative of the Finance Division, acting Managing Director of Karachi Stock Exchange and the former Chairman SECP, Dr Tariq Hassan.
According to a statement of SECP, the members of the Task Force constituted by SECP under the chairmanship of former Justice Saleem Akhtar were also invited by the Committee but none of them attended the meeting. During the meeting, the Committee members again raised the issue of the data held by KSE relating to the relevant period.
The KSE representatives clarified that as per the data retention practice prevalent at the relevant time, while all the data of executed trades was stored by the IT Division of KSE, the data regarding bid and offer was purged from the system on daily basis due to hardware limitations.
Dr Tariq Hassan, however, contended that the bid and offer data was available when he was Chairman SECP and he was not aware of what happened to it thereafter. This assertion of Dr Hassan was corrected by Chairman SECP who referred to relevant paragraph from the Report of the Task Force which was released during Dr Hassan's tenure. The Report stated: "The Taskforce was dismayed at the lack of readily available market transaction data; the KSE does not maintain a data warehouse of all actions such as the audit trail of all bids and offers.
The KSE was overwriting the daily tape of these actions on a 30-day rolling basis. By the time the Taskforce requested such data most had been overwritten."
Chairman SECP further quoted from the letter of August 12, 2005 written by the then MD KSE to SECP wherein he had informed SECP that bid and offer data was purged by KSE on a daily basis due to hardware limitation.
However, on the specific direction of SECP, only the data relating to orders for March 15, 2005 was saved and provided to SECP. This position was confirmed by the acting MD KSE present in the meeting. When the Committee members asked for Dr Tariq Hassan's response to the above position, he agreed to provide the bid and offer data to the Committee through his own sources.
Dr Hassan also submitted a written statement to the Committee and requested that it should be placed on official record. Chairman SECP informed the Committee that majority of the recommendations of the Task Force had been implemented.
These include the introduction of Universal Identification Number (UIN); mandatory client codes; pre-trade margin verification, elimination of group/benami accounts; introduction of position limits; segregation of client assets; appointment of non-broker Chairman of the Board of the Exchange; introduction of a free-float index and limits on the total exposure in the futures market.
Chairman SECP further clarified that the demutualisation process is in progress and is expected to be completed by December 31, 2007. On the issue of identification and penal action if any, against the alleged perpetrators of the March 2005 crisis, Chairman SECP clarified that the findings of the Task Force in this respect were not conclusive.
The Task Force had recommended that further investigation be conducted by SECP by engaging a forensic expert. Based on the above, Diligence LLC of USA, who were identified during Dr Tariq Hassan tenure, were engaged to conduct a forensic investigation with a very wide Terms of Reference and authority to collect relevant information from any and all persons.
Diligence LLC in its report concluded that there was insufficient evidence to support the allegation of scheme of market manipulation by the brokers vis-à-vis wash trades, or withdrawal of funding.
Diligence found no credible evidence that the withdrawal of COT was the reason for fall of market prices. However, Diligence recommended that SECP should investigate the issue of potential violation of regulation 3(b) of the Regulations Governing Futures Contracts. On this basis, SECP sought clarification from all the 88 brokers identified by Diligence.
The initial examination of the records provided by 19 of the said 88 brokers revealed that they had not exceeded the prescribed threshold of Rs 50 million under regulation 3(b). The remaining 69 brokers were issued Show Cause Notices and were given an opportunity to submit written responses and also avail personal hearings in the matter.
Based on the evidence which came up during this process, it was found that the brokers had not indulged in short selling and accordingly no punitive action was taken against them. Chairman SECP clarified that these cases were duly disposed of in accordance with law and were not, in any way, withdrawn by SECP, as has been incorrectly reported.