Harry Javed/ISLAMABAD
The arbitrary use of force majeure powers, abrupt and ad hoc policy shifts and autocracy at the Securities and Exchange Commission of Pakistan (SECP) led to the 2008 crisis in the stock market, said the Shamim Ahmad Khan committee report.
The SECP had constituted the committee in 2012 to analyze the crisis, but it became inactive due to Mr Shamim Ahmad Khan’s resignation. However, the SECP Chairman, Mr Zafar Hijazi, reactivated the committee and approved revised terms of references (ToRs) in January 2015.
As per revised TORs, the committee was mandated to study the factors leading to the 2008 crisis, rationale for imposing of the floor by the exchanges under their risk management system (RMS) regulations and 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 held Monday. 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 in its next meeting.
The committee criticized the SECP for not functioning as a collegiate body during the 2008 crisis and emphasized the need for the same. It also recommended development of a strategic capital market development plan by the SECP and procedure for improved coordination between the SECP and the State Bank.
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 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.
It also provides a set of recommendations, which could help prevent recurrence of such a crisis. It has suggested reforms across the SECP, stock exchanges, Central Depository Company (CDC) and National Clearing Company of Pakistan (NCCPL).
The committee recommended to revamp the existing broker regime and suggested stringent criteria for CDC participants whereby only select institutions fulfilling required criteria are allowed custody of clients’ securities. The committee suggested that the NCCPL should function as a statutory body and to 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.
While presenting the committee’s report, Chairman Hijazi briefed the Policy Board that since recommendation of the committee pertain to 2008, about 90 percent of these have already implemented. The remaining are part of the SECP’s reform agenda and in the implementation stage.
He informed the board that the committee’s feedback regarding the SECP’s working has been addressed as SECP is functioning as a fully collegiate body and all important matters are deliberated on at the Commission level. For improved coordination, he said, the SECP entered into an MOU with the State Bank in March 2009 and dialogue is being maintained through 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 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.
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