Market crash 2008 pinned on SECP ex-chairman, KSE brokers

ISLAMABAD: The global meltdown was not the only reason behind the 2008 stock market crash, the ‘inaction’ of the Securities and Exchange Commission of Pakistan (SECP) and the then chairman ‘unilaterally’ handling the situation, placing floor on the share prices of listed securities led to the crisis.
These were the findings of the commission to investigate the market crash of 2008. The commission was formed in 2012, and had been dormant until January 2015.
Sharing the investigation on Tuesday, SECP Chairman Zafar Hijazi said, “Inaction by the commission and no use of collegiate wisdom by it and because of the commercial motives of brokers in Karachi Stock Exchange, the floor was placed.” In 2008, brokers were the managers of the KSE, “may be every broker was responsible”, Hijazi added. Also, there was almost no coordination between the SECP and the State Bank of Pakistan (SBP).
The findings of the report say, “The arbitrary use of force majeure powers, abrupt and ad hoc policy shifts, and autocracy at the SECP led to the 2008 crisis in the stock market.”
The then SECP chairman Razi-ur-Rehman Khan took the decision of flooring the share prices despite opposition from the boards of the Lahore and Islamabad Stock Exchanges; the Karachi Stock Exchange on the other hand, where the managing director at that time was Adnan Afridi, was supportive.
Pakistan decided to cap the capital market on August 27, 2008, placing floor on share prices till December 15, 2008. This long 110 days cap worsened the situation as per the committee findings.
The committee had remained almost dormant; however, Hijazi reactivated the committee and approved revised terms of references (ToRs) in January 2015.
As per the revised TORs, the committee was mandated to study the factors leading to the 2008 crisis, find rationale for imposing of the floor by the exchanges under their risk management system (RMS) regulations, and to 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.
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 it in its next meeting.
The findings of the report say that the SECP did not function as a ‘collegiate body’ as envisaged by the SECP Act, 1997 and reiterated by the Supreme Court. It pinpointed that the SECP chairman, who was also then commissioner Securities Market Division (SMD) unilaterally handled the entire situation without bringing it in the notice of the full bench of commissioners.
It also recommended development of a strategic capital market development plan by the SECP and procedure for improved coordination between the SECP and the SBP.
During 2008 crisis, neither did the SECP carry out independent analysis nor did it take any notice of the market situation itself. A striking feature of the entire crisis was the abrupt and ad hoc changes made in the policies including changes in risk management, which undermined credibility of the regulators.
The report also recommended early steps to revamp the broker regime with respect to classification of brokers, capital adequacy, code of conduct and fit and proper criteria. Weakness and deficiencies in the systems and process of central depository company [CDC] allowed unauthorised movement of the securities of the clients by brokers.
It suggested stringent criteria for CDC participants whereby only select institutions fulfilling required criteria are allowed custody of clients’ securities.
The committee suggested that the National Clearing Company of Pakistan Limited (NCCPL) should function as a statutory body and 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 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 a 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.
Chairman Hijazi said that since recommendations of the committee pertain to 2008, about 90 percent of these have already been implemented, while remaining are part of the SECP’s reform agenda and in the implementation stage.
SECP is functioning as a fully collegiate body, and all important matters are deliberated on at the Commission level. For improved coordination, Hijazi said, the SECP entered into an MOU with the State Bank in March 2009 and dialogue is being maintained through the coordination committee and taskforce meetings.
Moreover, with the promulgation of the new 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.
In order to address the need for developing a long-term strategy and plan for development of the 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.