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ISLAMABAD, Aug 4: The Stock Market Task Force in its report has urged the Security and Exchange Commission of Pakistan to undertake a number of follow-up actions. The report provides pointers to the SECP for completing detailed forensic investigations where required and prosecuting those responsible for violating any laws and regulations.
The task force was constituted by the Securities and Exchange Commission of Pakistan (SECP) in April in order to review the stock market situation of March 2005. According to a press release issued by the SECP here on Thursday, it was for the first time in the history of the SECP that not only did it constitute an external task force on its own but also presented itself for scrutiny.
The report has made several recommendations which are of an operational as well as policy and structural nature. Further, cases of insider trading, wash trades ad price manipulation by withdrawal of funds have been identified for the SECP to investigate further. In this regard, the SECP has already initiated actions in these cases.
After preliminary investigation, show-cause notices have been issued to individuals alleged to have been involved in insider trading and wash trades. Since the report identifies a large number of brokers, the SECP decided to start with the ones with the highest number of wash trades and will investigate each and every case.
At the same time, the SECP is deliberating upon changes in the existing system and regulations that will make it difficult for manipulators to engage in such market abuses. –APP
Sher Baz Khan adds: The move of some large brokers to bail out potential defaulters, conflicts of interest in the board of Karachi Stock Exchange (KSE), the negative role of circuit-breakers and the ability of brokers to undertake excessive day trading and ‘wash sale’ caused the stock market crash in March, thereby causing Rs12 to Rs15 billion losses to small investors, the report of the task force said.
It said the KSE management and some large brokers had designed bailout plans for potential defaulters. The plan started on March 24 and was possibly aimed at protecting their own interests.
Upon getting presentation from some of the member directors and market participants the managing director (MD, KSE) due to time constraint obtained concurrence of other members of the board on telephone and it was decided to extend the Carry Over Transaction (COT) session for one hour on Friday, March 25, and again on Saturday, March 26.
It says on March 26, the chairman, SECP, along with his commissioner (securities market) met the State Bank of Pakistan (SBP) governor. As an outcome of this meeting, the SBP, vide its DPB circular No 11 of 2005 dated March 26, withdrew the restriction of maximum exposure in COT, imposed on banks earlier.
Later on the same day, an informal meeting was held at the SECP’s Karachi office at around 11pm, which apart from chairman of SECP, and commissioner(SE), was attended by the MD KSE, deputy general manager (operations), and major brokers none of whom was a director of KSE.
“It was discussed and agreed in this meeting that considering the settlement quantum of March Futures Contract, the banks of the exchange should be contacted to extend margin financing to those members who were in need of bridge financing as they had substantial deposits with the exchange against their exposure in March Futures Contracts, which would be immediately released once settlement of the March Futures Contracts took place,” the report maintained.
More importantly, it was agreed in the meeting that COT session of Friday, March 25, should be made available on Sunday, March 27, to allow leveraging to those seeking financing through the COT. This is amazing that no minutes of this meeting have been recorded nor any basis has been provided for taking this decision.
“The task force noted that under the regulatory framework of the exchange, COT facility is only provided in the Ready Market (T+3 Settlement System), to facilitate weak buyers of Ready Market to carry over (leverage) their settlement obligations from current date to a subsequent settlement date.... This was not in line with the established practices of the market and not in consonance with the COT rules that regulate the use of Badla only in the ready market,” the report observed.
The report observed that risks were rooted mainly in the structure of the market where concentration of financial power and the unholy nexus between a lender and an investor gave brokers an unfair edge over other investors. The risk arose because the role of the front-line regulators was compromised by the blatant and continuing conflicts of interest on the boards of stock exchanges.
The report also highlighted the role of circuit breakers, the lack of gross margining and offset futures traders at the broker and client levels, mutual funds, commercial and investment banks and the weak implementation of policy reforms by the SECP and the consequent crash of the stock market.
