‘A market lacking a culture of compliance’

A lot has been published in various media about the events surrounding my resignation as CEO of the Pakistan Stock Exchange Limited. It is now time I offer my version of events, one that better fits the facts.

First, let’s dispel the notion that I might have managed a Canadian company – Archer Wealth Management – while holding the position of PSX CEO, or that I withheld information from my employer. My ownership of Archer was fully disclosed to PSX and the Securities and Exchange Commission of Pakistan, both before and after I joined PSX.

After joining PSX, I sold a majority of Archer, which then nominated a CEO and hired a portfolio manager to replace me (which, incidentally indicates my level of commitment to PSX), while I remained Chairman. The idea that Archer could develop any type of business outside Quebec is also a pure fabrication by my detractors: it legally cannot. Furthermore, my involvement in Archer was a well-known fact, which I openly discussed during my tenure at PSX and which always remained on the Archer website as well as my public LinkedIn profile. So much for withholding information! Why then was I pushed out the door? Very simply because the arrival of a foreigner at the helm of the stock exchange – one who is very familiar with best international practices – constitutes an existential threat to the “legacy brokers” who have long held a stranglehold on this market. Indeed, their attacks started as soon as my candidacy emerged, months before I actually joined.

They had a powerful ally at SECP who forced the removal of independent directors from the PSX Board of Directors in April 2018. These legacy brokers and their henchmen then gained effective control of the PSX Board, installed their subservient Chairman and put their nominees on all Board Committees as well as NCCPL and CDC Boards. As a result, the demutualisation of PSX has effectively been rolled back, with a single broker now calling the shots from his living room.

Legacy brokers also found natural allies in a disgruntled ex-employee – who was terminated for gross incompetence soon after I joined and who was the subject of persistent rumors of data leakage while at PSX – and the subservient frontline regulator they protect.

Unsurprisingly, the last bastion of resistance – the excellent SECP Policy Board nominated by Asad Umar and headed by the best securities regulator Pakistan ever had – is also under siege from the same people using similar tactics: a well-orchestrated slur campaign and spurious legal attacks.

It is under the “stewardship” of these legacy brokers that PSX became what it is today: possibly the most under-developed emerging market in the world, measured by the number of domestic investors (the second worse exchange in the region is 6 times more developed, while Bangladesh is 17 times more developed on a per capita basis!). As a result, Pakistan is starved of the capital needed to drive private sector growth, develop export markets and finance infrastructure projects.

Why the middle-class – who should be a driving force of this market – is conspicuously absent has been the subject of many of my public addresses, as well as recommendations and white papers my team and I have submitted to SECP. Taken together, these recommendations amount to a micro-structural reform program for the stock market, in line with best international practices; which is precisely what the legacy brokers do not want! Despite the constant push back and unrelenting attacks of legacy brokers, we made significant progress on several fronts since early 2018, thanks to the outstanding team of dedicated professionals now in place at PSX.

The reform of the Centralised Customer Protection Fund recently approved by the Policy Board will provide investors with far better protection – even if it does not put an end to the legacy brokers’ shenanigans. Thanks to NIFT, online account opening is now ready to be rolled out. Two leading AMCs are working on launching ETFs, once SECP approves new rules developed by PSX, based on best international practices. A new market maker program will also bring much needed liquidity to the market.

In one crucial area, however, legacy brokers have succeeded in stalling the reform program: a new state-of-the-art trading and market surveillance system has been delayed since the fall of 2018, using all sorts of procedural and legal tactics.

It seems the old leaky KATS trading system – which has no market surveillance capability – serves their purpose just fine.

Pakistan cannot afford to leave its capital market at the hands of people who see PSX as their private playground and who only look after their own self-interests, at the expense of the country and its citizens. Instead of being feted in Islamabad, these people must be taken to task.

The government of Pakistan must come out strongly in support of the Policy Board and solve the chronic problems plaguing SECP. I also question whether the self-regulatory model – where brokers in effect manage the frontline regulatory function – is appropriate, in a market lacking a culture of compliance. Many markets have moved away from this model – including the UK, where it originated.

On the other hand, the mainstream, progressive brokers, big and small, who wish to develop a vibrant capital market, and the Chinese consortium that was the cornerstone of the demutualisation strategy, must step up. Together, and with the support of domestic and foreign institutional shareholders, they hold the key to PSX governance issues. As for me, it is with great sadness that I prematurely left this extraordinary country.