The Covid-19 pandemic has been spiralling around the globe crashing the economies, did not spare the Pakistan Stock Exchange (PSX), which in totality dipped 62 percent during the pandemic.
This crisis was worse than the 2008 financial crisis, when KSE-100 index plunged by 55 percent in four months and 2005-crash whereby it dropped by about 25 percent in eight trading days.
From the first reported case of Covid-19 in the country on February 26, 2020 the KSE-100 index hit the lowest at 27,200 on March 25, 2020 falling around 62 percent from the high of 43,218 points on January 13, 2020. Despite the crisis is worse than the 2005 and 2008 crisis, there was a clam and confidence in market but no one accused anyone for market manipulations and unfair trading.
The stock market brokers and participants award the credit to the regulator, Securities and Exchange Commission of Pakistan (SECP), who from the very initial days of the virus in Pakistan, has been issuing advisories to frontline regulators to take safety precautions, comply with WHO guidelines and local government instructions. The SECP ensured business continuity arrangements at PSX, Central Depository Company (CDC) and National Clearing Company of Pakistan Limited (NCCPL) for uninterrupted market operations and grant remote access to market participants. At the time the KSE-100 Index was still trading at 39,200 points.
Following the global trend, KSE-100 Index fell sharply to 30,416 points by March 18, 2020. The SECP took a timely action, supported by moves by other regulators, and implemented the uptick rule for blank selling in Deliverable Futures Market (DFM) in 36 stocks to curtail excessive selling and negative market sentiment.
Earlier in January, the regulator increased the circuit breakers and introduced index based market halts. The timing of these changes proved to be a blessing in disguise as they aided in managing market risk and provided exit opportunity to investors during the sharp fall. The SECP continued with this regime and only extended the duration of market halt for accommodating brokers during lockdown. Several brokers are of the view that this is one of the reasons market volumes have remained high despite extreme volatility, which has gained endorsement from foreign investors.
With expectations of lockdown by the Sindh government, sources at PSX informed that the SECP throughout the weekend of March 22, 2020 conducted late night consultations with the frontline regulators to ensure that market remains open. Brokers privy to internal industry level discussions have conveyed that there was immense pressure on the regulator from various quarters including several brokers to close the market indefinitely.
However, mock sessions of the trading system were held on March 23, 2020 and brokers were granted remote access to work from home. The SECP also had itself, PSX, CDC and NCCPL identified as essential services by the Sindh government for ensuring access of critical staff to the market. While the market opened on March 24, 2020 with participation from all brokers, regional markets in Philippines, Sri Lanka and Bangladesh succumbed to pressure and closed operations.
This was followed by a swift stream of several operational relaxations given by the SECP to ensure continuity of business by brokerage houses, including enhancing duration of market halts.
Expectations of brokers defaulting on their obligations in DFM due to sharp market decline are generally high during the rollover week. To enhance liquidity, the SECP relaxed base minimum capital requirement and allowed utilisation of margin finance shares to brokers.
Sources at NCCPL informed that even in months prior to Covid-19, the SECP had been undertaking aggressive initiatives to enhance market liquidity, ease of doing business and strengthening risk management which have been extremely helpful during this crisis. Some of these included permitting NCCPL to distribute mark to market profits to brokers and rationalising the margining regime to further enhance liquidity.
Additionally, maximum period of borrowing by mutual funds for redemption purposes was also extended to 360 days which increased liquidity and reduced the selling pressure by mutual funds. This facilitated in the smooth rollover of DFM transactions without a single broker default, and supported the recent stability in the market.
The manner in which the risk management system has persevered in the last month is commendable. Brokers have been appreciative of the regulator which did not succumb to pressure and take ad hoc measures that could have had long term repercussions for the market.
In past crises, a lot of turmoil and turbulence was witnessed in the market. However, this time even with the significant market decline, market has continued to function smoothly without any hiccups which exhibit robustness of the system.
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