ISLAMABAD, Feb 7: A committee formed by the Securities and Exchange Commission of Pakistan (SECP) for introducing exchange-traded derivatives (ETDs) in Pakistan has recommended an open licensing regime so that existing and new exchanges could qualify for derivatives trading.
The committee, which presented its feasibility report to SECP chairman Razi-ur-Rahman Khan here on Tuesday, seeks adequate legal, regulatory and governance infrastructure and oversight.
“It is essential that the current futures contract at Karachi Stock Exchange be brought into conformity with International Best Practices (IBP) both in its design and the environment in which it is traded. Similarly, as new derivative products are introduced it should be ensured that these too are in accordance with IBP”, the report observes.
The feasibility report has accommodated the experience of four emerging markets — Korea, Malaysia, Brazil and India — which reveals that innovation and growth in derivatives activity over the past 15 years has yielded substantial benefits in terms of market expansion and overall economic growth.
ETDs have facilitated access of businesses to international capital markets, lowering their cost of funds and diversifying their funding sources. Thus derivatives have improved the competitive position of firms in an increasingly competitive global economy, the commission maintains.
The report shows that despite phenomenal growth, Pakistani capital market has recently witnessed extra-ordinary volatility and is today one of the most volatile markets in the world. Following periodic crashes at KSE a number of investigations were carried out.
“They (investigations) have identified causes of aggravating market volatility. These including non-standard practices (when viewed from the perspective of international best practices and deficiencies of Carry Over Transactions (COT) or Badla. However, irrespective of the reasons for excessive volatility no one can deny that it has led to systemic problems, market manipulation, and investor losses”, says the report.
The committee has asked for a functional risk management framework and independent market and member surveillance. It equally believes that the market intermediaries should be subject to independent oversight of capital adequacy, professional proficiency and standards of business conduct through a registration and licensing procedure.
The committee’s chairman is Ali Ansari, while its members include Arif Mian, Imran Kamal, Imran Janjua, Mian Asif Said and Nihal Cassim.
ROADMAP: For future development and introduction of derivatives in the marketplace, the committee has recommended that the regulator should create and expand the legal infrastructure (including the draft Futures Trading Act). The regulator, exchanges, and intermediaries should adopt best international practices for risk management and build competent staff at all levels.
“Market infrastructure at all levels including exchanges, clearinghouses and intermediaries should be upgraded”, it recommends.
Phased introduction of derivatives, with single products at the initial stage, should be as follows:
Introduction of 60, 90 and 180 days tenures for equity futures March 2006; introduction of Futures on acceptable equity index by June 2006; introduction of single stock call and put options with writing restricted to market-makers of licensed exchanges by June 2006.