- Committee suggests development of strategic capital market development plan and procedure for improved coordination between SECP and SBP
The arbitrary use of force majeure powers, abrupt and ad hoc policy shifts and autocracy at the Securities and Exchange Commission of Pakistan (SECP), and lack of coordination between the commission and the central bank led to the 2008 crisis in the stock market, says the committee report constituted to investigate the crisis.
SECP Chairman Zafar Hijazi while briefing the media about the main points of report said that it had pointed out many weaknesses in the regulatory regime and steps were being taken to rectify the system to avoid another crisis in future.
The report criticises the SECP for not functioning as a collegiate body during the 2008 crisis and emphasized its functioning. It also recommended development of a strategic capital market development plan and procedure for improved coordination between the SECP and State Bank of Pakistan.
The Karachi Stock Market lost Rs 2 trillion in market capitalization with the imposition of floor mechanism for 110 days. The market capitalization was Rs 4.7 trillion when floor mechanism was imposed by the KSE management in August 2008 and declined to Rs 2.7 trillion by December 15 when it was finally removed.
The committee expressed its concern over the arbitrary use of force majeure powers and abrupt and ad hoc policy shifts, including changes to risk management by the stock exchanges. It recommended to the SECP to devise transparent policy clearly spelling out circumstances in which the regulator can intervene in the market under the emergency powers now conferred upon it under the 2015 Securities Act.
It also provides a set of recommendations which could help prevent recurrence of such a crisis. It has suggested reforms across the SECP, stock exchanges, Central Depository Company (CDC) and National Clearing Company of Pakistan (NCCPL).
The committee was constituted in 2012 under Shamim Ahmad Khan to analyse the crisis, but it became inactive due to Shamim’s resignation. However, the incumbent SECP chairman reactivated the committee and approved revised terms of references (ToRs) in January 2015.
“I have reactivated the committee to learn lesson from our mistakes. We are bringing demutualization and strategic investor in the market and transparency will be ensured. Many of the weaknesses pointed out by the committee have been addressed by the implementation of new Securities Act.”
The committee was constituted to identify the causes of crisis. As per revised terms of reference (TORs), the committee was mandated to study the factors leading to the 2008 crisis, rationale for imposing of the floor by the exchanges under their risk management system (RMS) regulations and review the impact of imposition of the floor on the market. The committee was also asked to give policy recommendations based on the experience of the 2008 crisis.
When asked whether the culprits will be taken to task, Hijazi said the report was still under consideration by the policy board of the commission and final action on the report will be taken by the government. The report mentions the arbitrary role of brokers and SECP authorities in the escalation of the crisis.
The committee submitted its report to the SECP on June 5 which the SECP presented to the policy board in its meeting on August 10. The report analyses the causes, events, impact and outcome of the 2008 market crisis primarily with a ‘lessons learned’ objective. The Board decided to deliberate on in its next meeting.
The committee recommended to revamp the existing broker regime and suggested stringent criteria for CDC participants whereby only select institutions fulfilling required criteria are allowed custody of clients’ securities. The committee suggested that the NCCPL should function as a statutory body and to be converted into a central counterparty (CCP) with adequately funded Settlement Guarantee Fund (SGF). Additionally, the committee observed conflict of interest on the boards’ of stock exchanges, NCCPL and CDC due to presence of broker directors.
The SECP chairman said that since recommendation of the committee pertaining to 2008, about 90 percent of these have already been implemented. The remaining are on part of the SECP’s reform agenda and are in the implementation stage.
He informed that the committee’s feedback regarding the SECP’s working had been addressed as the SECP was functioning as a fully collegiate body and all important matters were deliberated at the commission level. For improved coordination, the SECP entered into an MOU with the State Bank in March 2009 and dialogue is being maintained through coordination committee and taskforce meetings.
With the promulgation of new securities act, the stock exchanges’ powers in terms of force majeure have been vested with the SECP. The SECP is devising broad policy parameters in which it can intervene under the emergency powers. To address the need for developing a long-term strategy and plan for development of stock market, the SECP has drafted a capital market development plan which will be rolled out once the consultation process with the stakeholders is completed.
