July 28, 2020: The Securities and Exchange Commission of Pakistan (SECP) has undertaken reforms and initiatives at an unprecedented pace during the past few months.
The timely measures by SECP resulted in the most remarkable turnarounds by a stock exchange, according to sources in SECP.
The SECP revamped the regulatory framework to remove non-practical and burdensome requirements, ease out operational level requirements to create a facilitative environment for the market intermediaries and investors.
To end the strict margining regime which has been affecting working capital management and liquidity, SECP removed the additional VAR based margins which were imposed in 2017 and also abolished additional haircuts on securities deposited as collateral with NCCPL.
Further, security deposit requirements in the deliverable futures segment were also reduced significantly.
In addition, the mechanism for the imposition of liquidity margins was revisited whereby margins were only imposed on large positions while also taking into account the credit rating of clearing members.
Another major initiative was on the product development front where the regulations for market-making and Exchange Traded Funds (ETFs) were revamped to remove bottlenecks and facilitate the introduction of this product.
ETF is one of the most popular modes of investment in the capital market across the globe, however, Pakistan’s capital markets have been missing this lucrative product.
Another major initiative of SECP towards the development of capital markets in line with international practices is the widening of circuit breakers and the introduction of market halts.
Circuit Breakers are considered to curb price discovery, the effect of curbing price discovery, making exit difficult for investors, and are an inefficient mode of managing price volatility.
The prevailing circuit breakers at PSX were also considered by market participants as narrow and hindrances to efficient price discovery and growth of the market in line with international best practices.
The SECP has approved changes in regulations of PSX and NCCPL to enable gradual widening of circuit breakers by 0.5% on a fortnightly basis until the same reach the level of 7.5% from the existing level of 5%.
Market halts are also introduced initially at the variation of 4% in the KSE-30 Index. The new regime is to be effective from the third week of January 2020. This was a long-awaited reform which has generated positive feedback and appreciation from the market participants.
Paving way for the development of the Shariah-compliant segment in Pakistan, SECP introduce the Morabaha Share Financing product.
The lack of a Sharia complaint leverage product in the market served as a hindrance towards attracting a large pool of potential investors. Shariah-compliant banking has proven to be successful in Pakistan, indicating a tremendous potential in other segments as well.
Another key reform by SECP was approving the PSX regulations for the introduction of minimum brokerage commission which was again a long outstanding matter. The implementation of much-awaited reform is expected to bring transparency and discipline in the market.
As a part of reform measures, the Margin Financing product was also revamped whereby bottlenecks and hurdles were removed.
Further, the limit of investment in Sahulat account was also increased from Rs. 500,00 to Rs. 800,000 thereby facilitating outreach to small investors and allowing the opening of accounts is a much-simplified manner.
Many other reform measures have also been taken by SECP which include simplification in the listing requirements, removal of practical difficulties in meeting the KYC requirements of CKO, increase in the securities eligible for collateral, the inclusion of more financial institutions as clearing members, improved disclosure requirements, removal of the requirement to place quarterly financial statements on the website by brokers, etc.
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