The panic-induced selling caused the index to nosedive over 2,200 points in early trading. Upon imposition of market halt, all equity and equity-based derivative markets got suspended. During the duration of the market halt, the National Clearing Company (NCCPL) initiated the process for collecting mark-to-market losses from market participants, which was successfully completed, and brokers were able to continue trading once the market halt was lifted after 45 minutes.
The seamless manner in which the process was concluded in such a stress situation exhibited the strength of the risk management system in containing systemic risk.
It also provided investors a cooling-off period to absorb the news and understand prevalent market conditions, senior officials explained. Officials said that it had helped in recovery of the market by enabling investors to take informed decisions, which were evident by the fact that after reopening, the KSE-100 Index recovered almost 1,000 points by end of trading day.
If the SECP had not introduced this concept of market halts, which is in line with international best practices, the market would have continued to decline till circuit breakers in all scrips were triggered with no opportunity for market to absorb the news. Most emerging and developed markets have implemented this feature in which trading in a market is suspended for a specific duration in case of extreme price movements, the officials said.
Similarly, to curtail settlement risk in the deliverable futures market the SECP has recently approved amendments in the NCCPL Regulations, whereby a close-out mechanism has been introduced, which provides the manner in which positions of a defaulting market participants shall be closed-out.
Further, the concentration margin regime has been rationalized, wherein market-wide margins shall only be collected from market participants, if broker-wide or UIN-wide thresholds have been reached.
During the past few months, the SECP has undertaken reforms and initiatives at an unprecedented pace. The timely measures by the SECP resulted in most remarkable turnarounds by a stock exchange. The SECP revamped the regulatory framework to remove non-practical and burdensome requirements, and ease out operational-level requirements to create a facilitative environment for the market intermediaries and investors.
To end the strict margining regime, which have been affecting working capital management and liquidity, the SECP removed the additional VAR-based margins, which were imposed in 2017, and also abolished additional haircuts on securities deposited as collateral with the NCCPL.
Further, security deposit requirements in the deliverable futures segment was also reduced significantly. In addition, the mechanism for imposition of liquidity margins was revisited, whereby margins were only imposed on large positions, while also taking into account the credit rating of clearing members.
Another major initiative was on the product development front, where the regulations for market making and Exchange Traded Funds (ETFs) were revamped to remove bottlenecks and facilitate introduction of this product.
The ETF is one of the most popular modes of investment in capital market across the globe however; Pakistan's capital markets have been missing this lucrative product.
Officials said that another major initiative of the SECP towards the development of capital markets in line with international practices was the widening of circuit breakers and introduction of market halts.
Circuit breakers are considered to curb price discovery, effect of curbing price discovery, making exit difficult for investors, and are an inefficient mode of managing price volatility. The prevailing circuit breakers at the PSX were also considered by market participants as narrow and a hindrance to efficient price discovery and growth of market, in line with international best practices.
The SECP has approved changes in regulations of the PSX and the NCCPL to enable gradual widening of circuit breakers by 0.5 percent on a fortnightly basis, until the same, reach the level of 7.5 percent from the existing five percent.
Market halts are also introduced initially at the variation of four percent in the KSE-30 Index. The new regime is to be effective from the third week of January 2020.
This was a long-awaited reform, which has generated positive feedback and appreciation from the market participants. Paving way for the development of Sharia-compliant segment in Pakistan, the SECP introduce Murabaha Share Financing product.
The lack of a Sharia-complaint leverage product in the market served as hindrance towards attracting a large pool of potential investors. Sharia-compliant banking has proven to be successful in Pakistan, indicating a tremendous potential in other segments as well.
Another key reform by the SECP was approving the PSX regulations for introduction of minimum brokerage commission, which was again a long outstanding matter.
The implementation of much-awaited reform is expected to bring transparency and discipline in the market. As a part of reform measures, the Margin Financing product was also revamped whereby bottlenecks and hurdles were removed.
Further, the limit of investment in Sahulat account was also increased from Rs 50,000 to Rs 800,000 thereby facilitating outreach to small investors and allowing opening of accounts is a much simplified manner.
Many other reform measures have also been taken by the SECP, which include simplification in the listing requirements, removal of practical difficulties in meeting the KYC requirements of CKO, increase in the securities eligible for collateral, inclusion of more financial institutions as clearing members, improved disclosure requirements, removal of requirement to place quarterly financial statements on website by brokers etc, the senior officials added.