The infrastructure of the capital market is of utmost importance while considering the impact of any major reform as it has other equally important constituents such as the clearing house.
The National Clearing Company of Pakistan Limited "NCCPL" is responsible for providing the clearing and settlement services for all trades and transactions that have been executed at PSX. Keeping in view NCCPL's key role, the SECP has taken various steps to enhance and align the role of the entity in line with the international best practices and standards. A few such measures have been enumerated below:
Considering the significance of the role of a clearing house, the SECP included comprehensive provisions in the Securities Act, 2015 covering all major aspects to ensure that a well-founded statutory framework is provided to the clearing house to operate.The SECP has further augmented the regulatory framework by promulgating the Clearing House (Licensing & Operations) Regulations, 2016 stipulating therein the eligibility criteria for licensing, roles and responsibilities of clearing house, shareholding structure, governance structure, audit and reporting requirements etc. These provisions will substantially add to the transparency and efficiency of the role performed by NCCPL as a clearing house.
The Act also mandatesthe NCCPL to assume the role of a Central Counter Party "CCP" whereby NCCPL interposes itself as a buyer to every seller and seller to every buyer to guarantee the settlement of eligible trades and transaction executed at the securities exchange.Globally, major clearing houses have assumed the role of a CCP which entails developing and implementing a reliable and effective risk management framework and maintaining adequate liquid financial resource to guarantee settlement of trades. For this purpose, NCCPL worked in close co-ordination with concerned capital market entities with full support of SECP, to undertake the said role. As a result complete risk management function has been entrusted to NCCPL with effect from May 02, 2016. Further, to ensure availability of adequate financial resources significant funds were transferred from the Clearing House Protection Fund maintained by PSX to Settlement Guarantee Fund maintained by NCCPL. The SECP ensured the completion of the transformation of the role by approving all appropriate amendments to NCCPL Regulations at the time of transfer of the risk management function to NCCPL.NCCPL is currently in process ofthoroughly reviewing and revamping the existing risk management model, where necessary, to align it with the requirements of international standards, that includes and focuses on independent, latest and reliable technology infrastructure for risk management, verified and tested margin requirements, conservative collateral regime, robust and technically relevant valuation mechanism for settlement guarantee fund and mechanism to independently perform stress test for all major elements on regular basis. It is envisaged that presence of NCCPL as a CCP will not only add to the confidence of the capital market investors but will also serve to attract foreign investors.
The SECP has always encouraged identification ofopportunities for improving the operational efficiency of the capital market and at the same time contributing towards the overall growth and development of the economy. For rationalising the taxation regime in the capital market, the SECP submitted a proposal to the Federal Board of Revenue (FBR) for revamping the Capital Gains Tax (CGT) regime. The proposal was approved by the Ministry of Finance and the FBR and amendments were carried out to the relevant laws. The revamping of CGT has addressed concerns of market players in terms of low trading volumes and is in line with the Government's objective of documenting all incomes and sectors of the economy. Under the revised CGT regime, NCCPL is acting as a withholding agent to deduct and deposit CGT from investors' transactions.
Investor protection has been the fundamental principle of SECP's reform agenda which is further promoted by the frontline regulators through their policies, systems and procedures. One such recent initiative was the introduction of the Email/SMS alert service through the NCCPL. The main objective of the service is to provide timely information to investors in case where a transaction in conducted through their account maintained with a broker. To ensure the effectiveness of the service, various measures have been undertaken that includes mandatory requirement for individuals to provide their own mobile phone number, mandatory requirement for local corporate, foreign individuals and foreign corporate investors to provide email addresses, provisions for verification of contact details from independent sources, restriction on brokers to provide theirown cell number or contact number of their employees and requirement to link one mobile number/email address, as the case may be, with one unique identification number.In order to ensure seamless transition, the existing investors have been allowed a time period of one year to update the details through their respective brokers.The commencement of this service is expected to facilitate the investors in timely getting trade related information from an independent source and will act as a deterrent for any unauthorised activity.
Other noteworthy measures to facilitate the investors in making an informed investment decision have also been taken. One such step is the development of a web portal named "Jama Punji" by the SECP that allows investors a direct access to information in relation to available investment options, verifying credential of a company, lodging complaints etc. In order to create awareness about the existence of the website, SECP has ensured that all the capital market entities have a visible link available on their respective websites. Further, the SECP has also made the frontline regulators liable to display various market related information and statistics on regular basis at their website for the information of investors and market participants.
NCCPL in recognition of these measures and to further facilitate the investors utilised its capability and market positioning to develop and implement a functionality termed as Unique Identification Number Information System "UIS". The functionality provides a direct access to an investor towards all the trade and CGT related information. Further, despite the utility of the service, it is being offered free of cost.
Improving overall compliance status of all the entities operating within the capital marketswith the regulatory requirements is another priority of the SECP, for which it has taken various prudent measures. One such measure includespromulgation of the Joint Inspection Regulations, 2015. Under these regulations, NCCPL, PSX and CDC were directed to jointly conduct audits of brokers selected on certain risk based criteria stipulated under the regulations. Further, the audits were conducted and concluded under supervision of the Oversight Committee comprising of the representatives from all three participating entities. The joint inspection is aimed at ensuring end to end compliance with respect to all major relevant applicable rules and regulations and to eliminate duplication of effort at broker level as they are subject to periodic audits from all three - CDC, PSX and NCCPL after promulgation of the Act. The Joint Inspection regime has been launched despite limited availability of resources and is successfully running under the supervision of the SECP. It is envisaged that over a period of time risk based joint inspection will replace the conventional periodic audits conducted by relevant entities. This will substantially reduce the financial as well as administrative burden at broker level and definitely improve the quality of audits.
It is evident that the Pakistani capital market regulators and infrastructure institutions have made visible progress in terms of improving the capital market regulation, efficiency and operations while launching new concepts for ease of doing business and investor protection. Under the SECP-announced Capital Market Development Plan, it expected that these institutions will continue to collaborate with the same zeal and conviction and strive for the growth and development of the capital market in the coming years.
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