The Securities and Exchange Commission of Pakistan (SECP) has directed the National Clearing Company of Pakistan Limited (NCCPL) to employ high-quality technical resource suited to its evolving functions and put in place a dedicated compliance team for continuous monitoring of its risk management functions.
According to an order released by the SECP Commissioner Securities Market Division (SMD) regarding NCCPL (Respondent) here on Tuesday, the Commissioner SECP is of the considered view that the non-compliances by the NCCPL were unintentional errors which in most cases have been rectified by the Respondent. The NCCPL has also submitted a detailed future plan to the Commissioner SECP for improving its risk management.
As per the SECP commissioner order, the primary reason for such errors appears to be lack of high quality human resources employed by the NCCPL. Since the Respondent is a major capital market institution, it must have in place necessary infrastructure for perpetuation of its position and the integrity of the securities market. Considering the expanding role of the Respondent with evolution in the capital market it is critical that it has high quality human resources who have adequate understanding of the capital market and are competent to perform their duties. Further, it is essential that the NCCPL has a dedicated compliance team which can perform daily and other periodical compliance of the Respondent's risk management functions.
In view of the foregoing and especially considering that the Respondent has admitted the errors and rectified the same, the Commissioner SECP has decided to conclude the proceedings. However, to ensure ongoing compliance and strengthening of the NCCPL, which is a major capital market institution, the Respondent is directed to ensure the following within a reasonable time:
Firstly, employ high quality technical resource suited to its evolving functions. Secondly, put in place a dedicated compliance team for continuous monitoring of its risk management functions. Thirdly, considering that the Respondent is already in the process of procuring SPAN, it must ensure that the transition from its existing risk management system is smooth, uninterrupted, does not compromise effective and continuous monitoring of risk and keeps investor protection as top priority; and keeping in view the Respondent's dedicated risk management and compliance functions, it must set aside adequate amount of revenue for the same and accordingly carry out changes in its tariff structure, the SECP order added.
The Commissioner SECP said that he has heard the arguments presented by CEO and Representatives of the Respondent during the hearing. Additionally, Commissioner has perused the available record, existing regulatory framework and written response filed by the Respondent. The primary allegation against the Respondent is that it was in non-compliance with the National Clearing Company of Pakistan Limited Regulations, 2015 ("NCCPL Regulations").
It is satisfactory to note that the Board of Directors of the Respondent has already principally approved procurement of SPAN, the Commissioner SECP said.
It is expected of the NCCPL, being an integral capital market infrastructure institution, will further build upon its standing as market facilitator with high levels of integrity and confidentiality. The Respondent must continuously strive towards introducing state-of-the-art automated business systems for its stakeholders, which will go a long way in strengthening investor confidence, the Commissioner SECP added.
Meanwhile, the NCCPL also submitted details of its future plans relating to strengthening and expansion of its risk management for inter alia introduction of new products which include the following:
(i) In order to enable launch of single stock options, the Respondent has developed a detailed risk management proposal for the same with the approval of its Risk Committee.
(ii) For introduction of Exchange Traded Funds, a proposal for its risk management has been prepared by the Respondent.
(iii) Considering the expected expansion in derivative products at PSX, there would be a need to meet the requirement to assess risk on cumulative basis (ie, options, cash settled futures, deliverable futures and other derivatives products). Therefore, the Respondent has planned to procure a comprehensive risk management system "SPAN". Board of Directors of the Respondent has principally approved procurement of SPAN.
(iv) Introduction of position limits based on the risk criteria would include broker's rating (determined by the Respondent) and risk profile as the key factor.
(v) Based on the periodic analysis of the historic trade and exposure date, introduction of different exposures risk threshold level and reporting breach in any of this set level to competent authority (ie, management, or board, and/or commission) for remedial action.
(vi) Development of in-house SGF valuation model would help NCCPL re-size the protection fund on monthly or quarterly basis. The contribution to the fund would also be linked to individual securities broker risk contribution measured over the assessment period.