ISLAMABAD, April 1: The three stock exchanges have failed to submit their reports to the Securities and Exchange Commission of Pakistan (SECP) regarding their proposed demutualization on Thursday. The Islamabad, Karachi and Lahore stock exchanges were required to submit their reports by March 31. However, in their meeting with the SECP here on Friday, the Lahore and Islamabad stock exchanges informed that they will submit their reports by April 6, while the Karachi Stock Exchange (KSE) agreed to submit its report on April 20.
During the meeting, the SECP and the boards of directors of the three stock exchanges discussed and reviewed the status of the implementation of various measures to strengthen the risk management at the stock exchanges, particularly in light of the recent market situation. The meeting was presided over by the chairman, SECP, Dr Tariq Hassan.
All risk management measures directed by the SECP vide their letter dated March 4, 2005 and further risk management measures proposed vide SECP’s letter dated March 30, 2005 were deliberated at length. The three stock exchanges unanimously agreed on following time-bound risk management measures.
It agreed to reduce distribution of retained profit from 30 per cent to 20 per cent. Exposure of a member, at any point in time, in single scrip, in a future contract shall not exceed 1 per cent of free float of each scrip or the number of contracts determined under a slab system, whichever is higher.
They agreed that netting of exposure in the ready and future market shall not be allowed for the purpose of Capital Adequacy. Pre-trade Verification system to be in place at the KSE and collection of market to market loses in futures market will be done twice in a day.
According to the measures, deposit against exposures exceeding Rs200 million in future market shall be collected in cash and the existing slab for margin collection for future market will be revised upward.
Total exposure of a member in future market shall not exceed 10 times of the net capital balance of the member. Future market will be cash-settled only and the methodology to calculate the closing price (striking price) of the future contract be devised based on international best practices.
Circuit breaker on both sides will be 5 per cent or Re1, which ever is higher. Associate membership facility should be extended to ready market whereby they will settle their trades directly with national clearing and deposit their margins directly to the exchange.
The measures also included one-third of margin against exposure and mark to market losses in ready market will be collected in cash. However, exchanges will consider paying returns to members on all cash margin.
Similarly, Unique/ Global Client identification will be implemented. Exchanges will ensure and monitor that client assets will be kept separate from Members’ assets.
Moreover, netting will only be allowed at individual client position in the same scrip and the margin will be collected on gross position. Introduction of concentration margin will also be initiated.
As per the measures, no amendment/withdrawal of orders will be allowed in the pre-open session and the exchanges will review entire risk management system. The three stock exchanges endorsed the idea of constitution of Task Force to review the recent crisis in the stock market.
It was unanimously agreed that there should be general accountability. The Board of Directors of the Exchange assured their full cooperation and support to the Task Force.
The Chairman SECP appreciated the excellent coordination and cooperation between the stock exchanges and the SECP during the recent market situation and commended the management of the exchanges for ensuring that the rules and regulations were strictly followed.
He also expressed his satisfaction that the risk management system has worked well and lauded the efforts of the management of the KSE for their efficiency in collecting market to market loses and deposit margins. He reiterated that investors’ complaints would be dealt with expeditiously.
