An exclusive interview with Muhammad Lukman – CEO, National Clearing Company of Pakistan Limited
Muhammad Lukman is currently a Chief Executive Officer of National Clearing Company of Pakistan Limited (NCCPL). He is also a fellow member of the Institute of Chartered Accountants of Pakistan (ICAP), Institute of Cost & Management Accountants of Pakistan and a Certified Director from ICAP. He became part of NCCPL in 2004, joining the company as Chief Operating Officer and then subsequently moved on to the position of Chief Executive Officer in July 2006. His professional career started with A.F. Ferguson & Co., (a member firm of the PwC global network). He has also worked as a member of the Financial Impact Team in Coca Cola F&N Singapore. He has the privilege of representing NCCPL on various committees formed by Capital Markets, Mutual Funds Association of Pakistan and the Securities and Exchange Commission of Pakistan (SECP). He is also a member of the joint evaluation committee of ICAP and ICMAP and has been a keynote speaker at various forums conducted by these professional bodies.
PAGE: WHAT ROLE DOES NCCPL PLAY IN THE FUNCTIONING OF CAPITAL MARKET IN PAKISTAN?
MUHAMMAD LUKMAN: National Clearing Company of Pakistan Limited (NCCPL) is an integral part of Pakistan’s capital market where final settlements are made at the end of each trading day. Trading takes place at Pakistan Stock Exchange (PSX), clearing and settlement at NCCP and Central Depository Company of Pakistan Limited is the custodian. Entering into a paperless system warranted an efficient and transparent trading and clearing mechanism. NCCPL along with PX and CDC is playing a key role in enhancing daily trading volume by prompt settlement.
PAGE: HOW DOES NCCPL MANAGE DIFFERENT TYPES OF RISKS ASSOCIATED WITH TRADING OF SHARES?
MUHAMMAD LUKMAN: After the promulgation of Securities Act, 2015 NCCPL has assumed the role of a Central Counterparty ‘CCP’ and took over the entire risk management of capital market trades that includes risk management of all BCMs. Accordingly, risk management functions, previously performed by PSX for BCMs have now been transferred to the NCCPL.
The Company has been performing the risk management for trades/transactions of Ready and Futures Market executed by its Non-Broker Clearing Members (NBCMs) through Financial Institutions Risk Management System (FIRMS). NCCPL also performs risk management functions for trades which are recorded in Debt and Leveraged Markets by all Clearing Members (CMs).
NCCPL has been acting as CCP) from May 2016 whereby it interposes itself between transacting counter-parties – a seller vis-à-vis the original buyer and a buyer vis-à-vis the original seller – to guarantee execution of the transactions by acting as CCP.
RISK MANAGEMENT COMPONENT:
Following Risk Management Components are managed by NCCPL:
– Exposure Margins & MTM Losses Management
– Client Level Margining Regime
– Monitoring & Maintenance of Capital Adequacy Requirement
– Monitoring of Position Limits
– Collateral Management
RISK MANAGEMENT PROCEDURES:
– Value-at-Risk (VaR) based margins are determined for each security based on liquidity and volatility.
– Marked-to-Market (MTM) is determined by taking difference of trade price and closing price.
– Margin Eligible Securities are defined as per criteria and haircuts are applied on each security.
– Concentration Margins and Liquidity Margins are also applied on the open positions
SETTLEMENT GUARANTEE FUND:
Establishment of a stable and well-funded Settlement Guarantee Fund (SGF) is considered essential to step forward for NCCPL role as CCP. The SGF comprise of the following:
– Contribution to the SGF by NCCPL
– Contribution to the SGF by the Stock Exchange
– Contribution to the SGF by the Clearing Members
– Accretion in the SGF due to income arising from investments of the SGF.
PAGE: YOUR VIEWS ON CHINESE INVESTMENT IN PAKISTAN STOCK EXCHANGE:
MUHAMMAD LUKMAN: These are great times for Pakistan’s stock markets. The Chinese investment in PSX will provide the new impetus to the capital market. As part of the China Pakistan Economic Corridor (CPEC), the strategic investment of Chinese consortium is an important step in nurturing economic development in the region.
This deal endorses renewed confidence that Pakistan has managed to establish with the international community historically. Not to mention, the deal comes as a confidence-booster for Foreign Direct Investment (FDI) as it clearly is a testament to other countries showing their motivation to invest and cement long-standing ties with Pakistan.
I believe this strategic partnership will also result in institutional shareholding, focus on market outreach and would also forge a path for new product development, technology transfer as well as access to the latest trading platforms along with relevant software. This would also help PSX in securing unprecedented access to regional and international markets.
The Chinese consortium comprises of some of the world-largest exchanges with a strong track record of managerial experience, which would certainly guide Pakistan Stock Exchange towards the desired leadership, vision, management and direction.
PAGE: WHERE DO YOU SEE PSX MOVING IN NEXT COUPLE OF YEARS?
MUHAMMAD LUKMAN: The next couple of years will be highly important for PSX, which is poised to make Initial Public Offerings (IPOs) to the tune of over one billion US dollars. As CPEC gains momentum significant investment in the large-scale manufacturing sector as well as other allied sectors of the economy are expected. This would, in turn certainly give a boost to the capital market. Positive macroeconomic indicators and the Government of Pakistan’s privatization strategy would also play a key role in providing additional liquidity to the capital market.
Pakistani listed companies have been included in the emerging markets of Morgan Stanley Capital International (MSCI). This is an achievement we are extremely proud of. Pakistan is currently one of the best performing market across Asia as well as the world. More foreign investors, especially from Europe and America are looking towards emerging markets. After gaining entry in MSCI, world investors will also show their willingness to work with our capital market resulting in increased foreign investment which would prove to be extremely beneficial for the national exchequer.
Moreover, local institutional investors are also focusing companies listed at PSX, which is a reflection of their confidence in Pakistan and its real economy. The momentum is likely to continue and Pakistan is all set to attract fresh investment from local individual investors, along with foreign investors.
PAGE: HOW WOULD YOU COMPARE PAKISTAN WITH INDIAN AND CHINESE MARKETS?
MUHAMMAD LUKMAN: One the face value Pakistan market may look smaller as compared to India and China. However, it enjoys enormous potential. There is a need to offer the ‘right incentives’. While the number of listed companies at PSX are small while Indian and Chinese exchanges are not only bigger but also offer a diversified suite of products. Replicating these at PSX does not has any problem but certainly demands commitment from the government. Currently, investor confidence is brimming in the country’s equity markets as major investment in infrastructure, coupled with significant government spending and positive economic indicators, are making Pakistani markets an attractive destination for earning a good return on their investment.
PAGE: WHAT IS YOUR MESSAGE FOR INVESTORS?
MUHAMMAD LUKMAN: Making investment is mandatory for every individual for meeting the future needs. However, the investment must be made keeping in view the risk appetite, not by following herd mentally. It is often said that equities market is driven by greed and fear but it is certainly not a gambling den. The earning potential of listed companies is driven by government policies. Therefore, if local investors are shy no country should expect any foreign investment.