Over the past two decades, the Pakistani Capital Markets have developed aggressively in the areas of high-tech infrastructure, efficient mechanisms, proficient processes and smooth day-to-day operations, handling any increase in trading volumes swiftly. The clearing and settlement of securities in the Capital Market now take place in a paperless environment in book entry form. These developments have become possible through the establishment of Central Depository and National Clearing Systems.
The implementation of these systems have not only eliminated the physical handling of paper-based securities but has also led to the end of laborious, time consuming and inefficient processes involved in trading and settlement. The lengthy and time consuming processes that took days and weeks earlier are now done in minutes on click of a button. Hence, the surge in trading volumes that happened in mid 2000s was managed efficiently and conveniently.
The investors are directly benefited through the above mentioned reforms that resulted in the protection and growth of capital market. Computerised processes have also replaced manual and tedious paperwork, transforming the market mechanisms towards greater efficiency and transparency. Another advantage comes from a substantial reduction in time and capital investments as the investors are able to maintain their securities portfolio on a single platform.
The establishment of the depository and settlement mechanisms in the country not only resulted in much desired market efficiency but also played a major role in investor protection. At the same time, it requires mentioning here that risks in the capital market still persist due to lack of investor awareness regarding maintenance of their securities portfolio in this electronic environment. Minimising Risks through Reforms CDC being the custodian of the securities has taken various measures in ensuring transparency of transactions performed in its system and played a key role in protecting public investments.
Provisions in Law: Central Depository Company of Pakistan Limited was formed under Central Depositories Act 1997 which was passed on June 10, 1997. Subsequently, Central Depository Company of Pakistan Limited Regulations were developed and approved by the Securities and Exchange Commission of Pakistan.
In the current depository structure, all securities are registered in the name of Central Depository Company of Pakistan Limited in the capacity of a nominee, the account holders are considered to be the beneficial owners of securities on the basis of their holdings in CDS accounts.
The opening, maintenance and operations of Sub-Accounts in CDS are governed by the Central Depositories Act and CDCPL Regulations that ensures utmost security and authority of the account holder:
---- Section 12 of CDCPL Regulations provides protection against pledge of securities from clients Sub-Account without approval.
---- Section 24 prevents Participants from transferring securities owned by clients without permission.
---- Section 21 makes Participant liable to maintain confidentiality of its client's information.
---- As per the Regulations, Participants are required to send account balance statements within 10 days after the end of each quarter and upon request.
---- CDC has also prohibited the deposit of street name shares in the Central Depository System (CDS).
Direct Account with CDC: After the dematerialization of security certificates, investors no longer have physical possession of securities. They now have two options to maintain their securities portfolio, one is through a Sub-Account with a Depository Participant (mainly Broker) and another is an Investor Account with CDC. To provide complete control to investors, CDC introduced Investor Account Services in 1999 to provide direct control to Investors of their electronic securities by enabling them to directly open and maintain accounts in the CDS. Investors now can maintain custody of securities in IAS account and move securities to brokers for settlement by instructing CDC.
Protecting Sub Account Holders Interest: In order to safeguard the interest of sub account holders and to set minimum level of service to the Investors, a standard account opening form for Sub Account was introduced which has not only standardise the different practices prevailing in the market for handling of client securities but also helped Participants to maintain their client accounts as per the rules and regulations.
The Central Depositories Act, 1997 restricts the Participants from handling book entry securities without the authority of their client (Sub-Account holder). In the SAOF, a set of built-in authorities for handing of the Securities of Sub-Account holders have been introduced. However, it is important to note that this built-in authority enables the Participants to execute only defined transactions. For any other transaction, Participants are required to obtain a specific authority in writing from clients on each occasion.
Automated Settlement based on UIN:
Recently, through the implementation of the Automated Transfer of Securities mechanism, the National Clearing Company and CDC have transformed the process of securities movement. The securities are now directly transferred to the target depository custody account based on the Unique Identification.
Number (UIN) of the investors. As a result of this project, the settlement of the vast majority of securities transactions executed on the three stock exchanges in the country is now being performed directly from the respective accounts of investors, without the need for any manual input of transaction. This ensures complete transparency and straight-through-processing in the market. This development has redesigned the securities settlement processes bringing greater efficiency, reduced workload and lesser risks of unauthorised movement of securities. Previously, securities were moved by the Depository Participants to the respective client's account.
Moreover, to confine unauthorised and illicit transactions in CDS, CDC introduced the input of reason code for the transfer of securities. Now it is required for investors to identify the nature of the transaction (other than market trade) and provide documents (where required) before requesting for the transfer of securities to the broker and CDC. This mechanism has greatly helped to discourage the attempt of unlawful movement of securities through the system.
PERSISTING RISK FACTORS Despite several measures taken by the depository to minimise risks in the system and boost confidence, the risk of unauthorised transactions still persists.
For more than a decade now, key market institutions and the regulator (SECP) have been advocating the most important investment agenda to the investors - being aware of their investment portfolio and the transactions taking place in their account.
The lack of awareness has led to some very unfortunate incidents in the recent past where huge losses were incurred by the investing public. To aware investors about the level of control they have on their investment portfolio, several awareness sessions, information seminars and trainings have been conducted on a regular basis by CDC. Informational material has been developed and distributed, and direct interaction with investors has been ensured on a regular basis over the past many years for the sole purpose of creating awareness in investors about keeping a stringent check on their account activities.
These awareness programs were specifically designed to educate Sub-Account and Investor Account Holders about general market awareness, the structure, role and services of all market institutions, and about investors own role and responsibility in protecting their account and investment portfolio.
Apart from these awareness programs, CDC conducted a series of investment road shows in 9 local cities of Pakistan with participation from the Stock Exchanges and SECP. The purpose of these road shows was to educate current and potential investors about the workings of the Capital Market and create awareness about the benefits and risks associated with it. The audiences were also provided with an insight on how to keep one's interest safe and minimise risks by taking the correct decisions through proper guidance.
Recently, Physical Account Balance Statements have also been sent by CDC to its sub account holders on their mailing addresses- as a onetime exercise. The purpose of physical Account Balance Statements was to aware investors about transactions taking place in their account for their information and reconciliation of records.
With the specific objective of safekeeping of the investment portfolio, the depository also took some concrete steps over the years to provide up-to-date account information to investors on real-time basis. CDC launched a free-of-cost customer centric information portal called CDC access comprising of five channels/services:
CDC access IVR is a round-the-clock Interactive Voice Response system supported by state-of-the-art call centre, a toll free number 0800-23275 and dedicated customer support staff.
--- CDC access Web enables access to account information through www.cdcaccess.com.pk
--- CDC access SMS provides real-time transaction alerts through SMS
--- eStatement provides both Sub-Account Holders and Investor Account Holders their Account Balance Statements on their registered email address, while
--- eAlert provides alerts about important transactions in email Inbox.
Keeping CDC access services free-of-cost was perhaps the most encouraging step to convince investors to subscribe to the facility so they can easily keep a check on the safety of their investments. In conclusion, the current infrastructure and established processes and mechanisms of the Pakistani Capital Market provide enough strong grounds to ensure that all market functions run smoothly. But ultimately, it is the investor's responsibility to ensure that they have an involvement on a day-to-day basis with their investment portfolio, taking all key decisions themselves and raising their voices or an objection when a decision takes place without their consent. Alertness and informed decision making are becoming more of a pre-requisite in the capital market investment business. In a nutshell, an informed investor means a secured investment.
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