‘SECP plays proactive role in capital market development’

KARACHI: Pakistan’s capital market is at a crucial juncture. After the demutualisation of the stock exchanges in August 2012, there has been a structural change in the working of the capital market institutions with separation of the regulatory and commercial functions of each of the three stock exchanges, ie, Islamabad, Karachi and Lahore, said Nadeem Naqvi, Managing Director of the Karachi Stock Exchange.
The Securities and Exchange Commission of Pakistan has taken a strong lead, not only in strengthening the regulatory framework that protects investors interest, but also in launching initiatives to broaden the reach of the capital market investment products to savers across the nation.
In this regard, while expediting regulatory approvals for listing of new companies, launching of new products such as REITS (Real Estate Investment Trusts) and Government Debt Securities secondary market trading, the SECP has taken a lead in pushing forward with the launch of Small & Medium Enterprise (SME) segments, he said.
They approved SME regulations for the Islamabad Stock Exchange in 2014 and have recently approved SME regulations for the Karachi Stock Exchange. A draft regulatory frame work for Private Equity has also been put out for public comment.
Naqvi said once implemented, these initiatives can lead to a quantum increase in opportunity for small and medium businesses business, which account for 90 percent employment generation in the country, to obtain funding for growth.
Concurrently, the SECP, in February 2015 has set up an Investor Awareness Generation Committee to create Capital Market Hubs in small cities such as Abbotabad and Sialkot to start with. All the three stock exchanges, Central Depository Company of Pakistan (CDC), National Clearing Company of Pakistan (NCCPL) and major asset management companies are actively involved in this project the chairman of which is the CEO of central depository company, he said.
Some constituencies of the capital market have recently expressed concern regarding lack of support for the smaller stock exchanges that comprise less than 10 percent of trading activity and value in the overall capital market equation in Pakistan.
One lament has been lack of liquidity in Islamabad and Lahore stock exchanges with suggestions that there should a single order book (trading platform) nationally and a single investor protection fund for all investors, the KSE managing director said.
While laudable objectives, these have to viewed in a holistic context with a realistic assessment of intuitional capacity, financial soundness, risk management capability and commercial viability.
Taking a closer look at the low liquidity issue in Islamabad and Lahore, the starting point in any analysis has to be financial and institutional capability of respective exchanges and brokerage houses. If financial, marketing and operational capability have the needed economic scale, then liquidity can be generated with product innovation & targeted marketing, he said.
Naqvi said as far as narrow investor base in concerned, the problem is not limited to smaller exchanges. It is a national capital market issue. And the issue is one of policy.
At present, there is an uneven playing field which is a major impediment to the growth and development of the capital market in Pakistan. This relates to the national savings schemes (NSS) where not only guaranteed returns are higher than government bonds but there is relatively lower level of formalities to open an account versus the stringent KYC regime capital market participants/institutions operate under.
Furthermore, he said, allowing institutions to invest in NSS diverts savings away from the capital market and is a drag on its capacity to serve the long term funding needs of industry and commerce. It is here that our focus ought to be rather than simply lamenting about distribution of liquidity within the capital market eco-system.
The SECP has taken a serious initiative to address the liquidity issue in the smaller exchanges. Several months ago the SECP formed a high level task force to explore ways in which greater liquidity could be generated at the smaller exchanges without compromising on risk management and broaden investor interest.
This task force, named ‘Inter Exchange Trading Committee’ has in it the managing directors and chief executives of all the three exchanges, CDC, NCCPL and representatives of the SECP. After multiple meetings and lengthy deliberations, the final report and recommendations are being completed. Several innovative suggestions by the Lahore Stock Exchange have been discussed in great depth, including adoption of a new order routing protocol with “internalization of execution” first in Lahore Stock Exchange before routing to designated liquidity providers (i.e. Karachi based brokers), related pre-trade margin regime and role of the NCCPL in Broker-to-Broker Trade Auto-Affirmation so that clearing and settlement is efficiently handled within a national risk management regime. The concept of primary brokers and sub-brokers was also explored and potentially useful ideas generated in this regard, he said.
In view of the above, it is incorrect to say that smaller exchanges are being ignored. The SECP is actually putting the larger exchange (KSE) under far greater and more stringent scrutiny simply because of larger transaction values generated there. This is to be expected and is appropriate in terms of looking after public interest, he added.