A. The management of the stock exchanges must be given
operational independence. Hiring and removal of the Chief Executive of the
Exchange should be with the approval of SECP.
i) the management of the Exchange be required to
submit to SECP a compliance report on quarterly basis on the implementation of
decisions taken by the respective Board and the directives issued by the
ii) The role of outside directors need to be made
meaningful. They should be required to submit a quarterly report to SEC.
iii) The present system of selecting directors from
amongst the nominees of professional bodies by the Stock Exchanges needs to be
reviewed. The selection of outside directors be made by SECP.
iv) The SEC should carry out risk management and
system audit of sample stock brokers of the Exchanges annually.
v) The net capital balance requirement of stock
brokers should be raised substantially and a cap be placed on their capacity to
trade in relation to their net capital.
vi) A surveillance department with online data
transmission facilities with all the three stock exchanges needs to be
established at SEC. This will enable the SEC to quickly spot abnormalities and
take corrective actions, if any.
The above three ugly incidents followed by the strong
recommendations of the Inquiry Committee headed by an independent professional,
the Commission expedited implementation of its reform package. The Commission
felt that if the desired reform which had already been adopted by almost all
emerging capital markets, if delayed any further, stock market of Pakistan will
not only loose it competitiveness vis-i-vis other markets in the region, local
investors may also shy away because of risk considerations.
Soon after the crisis, the Commission took up the question of
strengthening risk management with the managements of all three stock exchanges
and the following decisions were taken:
• The present exemption in exposure upto Rs. 50 million
available to brokers will cease to be effective from 1st October 2000 and
brokers will be required to deposit 5% on exposure up to Rs. 50 million.
• The requirement of net capital balance for members has
been increased from Rs. 0.25 million to Rs. 2.50 million for exchanges having
trading volume of more than 7.5 billion shares in 3 calendar years and to Rs.
0.75 million for exchanges having trading volume of lower than 7.5 billion
shares per annum. Members shall be required to file net capital balance
certificates with the respective stock exchanges every quarter and with the
Commission every year duly certified by a practicing Chartered Accountant.
• The definition of net capital is being redefined to make
it more realistic.
• Capital adequacy of brokers has been prescribed for
the first time. Stock exchange members will only be allowed to trade upto 25
times their net capital balance.
• The existing of 5 days trading cycle with settlement on
the 10th day puts the clearing house of the exchange at high Ask. In order to
minimize this risk, stock exchanges have been asked to switch over to the
internationally accepted T+3 settlement system. The exchanges are also in the
process of setting up the National Clearing and Settlement System. The
introduction of T+3 Continuous Net Settlement (CNS) facility would reduce risk
• The exchanges have also been asked to develop regulations
for short selling with facilities for lending and borrowing of securities.
The laxities and lapses in the stock markets however, cannot
be effectively checked and controlled until their management is controlled by an
independent and competent professional who has no vested interest in the trading
and free from influence of brokers and stock manipulators. This is an internally
accepted practice which is yet to be established in Pakistan. Besides being
strongly recommended by the Inquiry Committee, the Asian Development Bank which
is financing the capital market reforms plan has also demanded that the
Commission should strengthen its role as a regulatory authority in the selection
of the Chief Executive Officer of the stock market and Board of Directors.
The Commission has accordingly initiated action to ensure
that chief executive officer of all the three stock exchanges are appointed from
outside profession with approval of the Commission as well as the Board should
also include outside directors. This is going to be most vital step to make the
regulatory system more effective and make the capital market more safe and
transparent. Naturally the Commission is facing resistance from certain quarters
but the Commission seems to be determined to carry out its responsibility.