An exclusive interview with Chairman SECP


Updated May 21, 2005



The shock waves of the stock market crash are still giving sleepless nights to the investors after the recent jolt to the high flying KSE-100 index, which caved in from soaring 10,000 points to creep below 7000 points.

The apparent reasons for the crash, which has become the talking point from a house wife to a big business houses, are attributed to the amendments in stock exchange regulations including phasing out of badla financing and amendments in future trade rules, some of the market players were, however, of the view that there was more than what it meets the eye in the capital market.

In a bid to find out the real factors behind the whole scenario PAGE has tried to find out answers of the various queries and inquisitiveness which continues to perturb the mind of the investors in the context of recent crash.

Dr Tariq Hasan, Chairman Securities and Exchange Commission of Pakistan (SECP) while explaining the causes of the crash in the stock market and how the SECP, with all its vigilance and monitoring set-up, could not foresee it? says: "I would say that the market experienced abnormal volatility during the period of January-March 2005. There could be several causes for irritant market behavior such as over leverage positions by certain operators in ready and future market, privatization news and over weightage of certain shares in index and certain brokers which blocked exit of panic sellers. However, the market remained open throughout the period in spite of increase of 65% during the period January 1 to March 15, 2005 and decline of 30% during the period March 16 to 31, 2005. There was no systemic failure in the market and the integrity of the system remained intact in spite of wild fluctuations in prices of certain shares. This was possible only due to vigilant market monitoring by the SECP and the reforms introduced by it during the past few years which worked well".

Replying to a question whether he was satisfied with the role played by the SECP as a regulatory authority to control or contain the crash and save the small investors, Dr. Tariq Hasan said "I am fully satisfied with the role of SECP and the reforms introduced by it. The risk management system in place at the exchanges worked well. All trades were well settled and marked to market losses were collected in accordance with the relevant regulations. There were no defaults. Their system remained intact. In order to provide immediate relief to investors, the Commission has established a special on-line investor complaint cell on its official website. The Commission is committed to take all reasonable measures to ensure that complaint is responded within a single day".

How you will defend yourself against the general criticism of the performance of the SECP as voiced in the national press such as: (i) The SECP has failed to prevent the stock market crash. The SECP was sitting smugly and watching the stock market blooming artificially. (ii) Why the SECP did not raise the red flag when a heavy-weight like OGDC was under intense market rumors and going up and down, without any reason.

"We have a free press and I would not comment on their role. Investment in stocks is a risky investment. Our market is characterized by abnormal volatility, concentration in a few scrips and Badla (Carry Over Trades) factor. In spite of all these, the market integrity remained intact. In stock markets share prices keep going up and down. SECP is the apex regulator of the capital market and does not interfere with the movement of the market, irrespective of its rise and fall. This is a normal feature of any market and is solely determined by market forces. SECP regulates the market and not the market sentiments."



Answering to a question that though it is not the SECP's duty to fix share prices, but at the same time, it was their responsibility to have acted in time. They should have investigated much earlier and identified who was behind the possible manipulation. But the SECP just closed its eyes and let it happen.

The SECP Chairman conceded "I agree that it is the responsibility of the SECP to take enforcement action against cases of possible market abuse such as market manipulation or insider trading. SECP has the power to take action against market abuses. However, white collar crimes like manipulation or insider trading are complex and take considerable time and effort to detect. Let me also add that in recent months SECP has taken action against quite a few cases of market abuse.

To a question that the SECP moved to amend exposure rules and putting bar to open group accounts in the CDC from 31st of this month is the actual factor responsible for the constant equity fall. And the new risk management regulations put forth by the SECP which were not well received by the brokerage community triggered the market's collapse?

The Chairman said the decision to abolish Group Account was taken on January 6, 2005 and market sentiments remained bullish from January 1, 2005 till March 15, 2005. Similarly, the SECP directive dated March 4, 2005, for further strengthening risk management had hardly any bearing on the bullish trend and the market continued to move upward till March 15, 2005.

When asked to give remarks that the SECP insisting to phase out badla with margin financing without ensuring that margin financing facilities from commercial banks are available which led to the crisis in the stock market, Dr Tariq said: "I don't think that phasing out of COT led to the fall of the market. The decline in the market was due to excessive leverage position in the ready and future market in few shares and other factors.

When this scribe invited his attention towards the current situation where market seems to have stabilized during the current week. What steps SECP intended to initiate to avoid recurrence of such crisis and to ensure sustainable growth and development of stock market?

The Chairman came out with the remarks" "No body can claim that a similar crisis cannot occur again. What is important is effective risk management. SECP has recently taken certain steps for further strengthening risk management. Also the second generation reforms such as demutualization of exchanges, the replacement of COT by margin financing and closure of Group Account will go a long way towards the development of a fair, transparent and efficient market.

Has the task force constituted by the SECP to investigate into the crisis of last month crash in the stock market completed its task? When its final report is expected?

The Chairman said: "The task force is presently working on the report and the question may be directed to the Chairman of the Task Force who is the relevant authority in the matter.