The report on the stock market crash-2008 has revealed that the members of the stock exchanges that were affected by various decisions taken since June 23, 2008 were themselves part of the decision-making processes, and broker directors were in a position to get information well before the general public/investors. The report also said that the experience of management of the crisis raises serious concerns about the governance structure of the stock exchanges as serious conflicts of interest was visible in the decision making process.
The members of the stock exchanges who were affected by various decisions taken since June 23, 2008 were themselves part of the decision making process. There have been frequent instances of broker directors being privy to information well before the general public/investors. For instance, the imposition of floor on the prices was discussed as one of the options in the meeting of the KSE board held on August 05, 2008 but this option was not disseminated to the public, although the decision was actually implemented two weeks later. The decision to impose floor was practically taken by five brokers who had vested interest in the decision. One of the broker directors on the board who also happened to be Chairman of Defaulters'' Committee was most vociferous in advocating imposition of floor and fled the country after allegedly misappropriating clients'' assets. Although, the chairman and the MD opposed the option of imposition of floor, views of broker directors prevailed. It was only an SECP nominee director who emphatically and consistently cautioned the board against taking ad hoc decisions and imposition of floor. But his counsel was ignored.
It said that the composition of the boards'' of CDC and NCCPL also shows a conflict of interest as the affectees and beneficiaries of the decision are themselves the decision makers. One of the important factors responsible for the 2008 crisis was the leveraged product CFS MK-II which allowed speculative trading in the ready market. It fuelled excessive buying, ultimately leading to settlement problems.
There were frequent instances of ad hoc interventions in the market like change in circuit breakers, change in margin requirements and allowing CFS MK-II to the DFC. Need for streamlining and strengthening the broker regime came to surface as the market has excessively large number of under-capitalized brokers who besides trading can undertake settlement and custody functions. Capital requirements are not risk based.
Perusal of the minutes of the KSE and other documents clearly establishes that the decision of imposition of the floor was that of the brokers who lobbied for it and practically forced the board to take this decision. 103 brokers met to discuss the situation on August 27 and 100 out of these brokers urged for imposition of floor. The influence of brokers on the decision making raises questions about the independent functioning of the board. Although seeking advice from brokers as important stakeholders is understandable but interest of other stakeholders like investors, listed companies and unit holders was completely ignored.
It said that the crisis exposes serious weaknesses of apex regulator in dealing with a crisis situation. No professional analysis of the situation from April to August, 2008 done by the regulator is available. SECP would have been in a much better position to deal with the crisis if it had in place a mechanism of monitoring risks in the market and its analysis. There is no evidence that
the critical market situation and the imposition of floor was discussed by the full Commission. In case SECP had functioned as a collegiate body, it would have been possible for it to draw upon collective wisdom and experience of all the Commissioners. The crisis also exposed the independence of LSE and ISE. Although they expressed reservations about imposition of floor, they were unable to take independent stance. LSE board did discuss removal of floor unilaterally after the imposition but could not take a decision. The crisis has highlighted the issue of custody of shares of investors maintained in the sub-accounts by
brokers. Misuse of client''s assets by brokers is perhaps the most serious aspect of the crisis as it led to erosion of investor confidence in the stock market. This not only raises questions about CDS but more importantly, about the custodial functions of brokers, vested in them irrespective of their financial strength and fulfillment of any fit and proper criteria, it added.
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