KSE March 2005 Crash: SECP Forensic Investigation Report

At the request of the Securities and Exchange Commission of Pakistan (“SECP”), Diligence USA, LLC (“Diligence”) conducted a forensic examination of certain alleged manipulative and/or illicit activities related to the stock market events of March 2005, as
transacted on the Karachi Stock Exchange (“KSE”). The primary allegations examined related to the withdrawal of regulated COT (“Carry Over Transaction” financing, also known as “Carry Over Trade” or Badla financing) and in-house Badla, wash trades, and
violations of Clause 3(b) of the Regulations Governing Futures Contracts (exceeding the Rs 50 million reporting threshold).

CFS limit raised to Rs 55 billion: VaR implementation delayed

After a detailed meeting with the stock exchanges management, the Securities and Exchange Commission of Pakistan (SECP) on Thursday enhanced the CFS limit to Rs 55 billion for Karachi Stock Exchange (KSE); Rs 10 billion for Lahore Stock Exchange (LSE) and Rs 5 billion for the Islamabad Stock Exchange (ISE) from November 6.

It also delayed implementation of value at risk (VAR) management system till December 4. It was also due to come into effect from November 6. The SECP and stock exchanges management also reached an amicable solution to VAR management system and institutional margining. The SECP team was headed by its chairman, Raziur Rehman Khan. He was assisted by securities market division commissioner Rashid I. Malik.

SECP terrifying brokers into submission

The directive from Securities & Exchange Commission of Pakistan (SECP) to the three stock exchanges to appoint a non-member director as the chairman of the stock exchanges came on Tuesday, as a bolt from the blue. Till late in the evening on Wednesday, it was not clear whether the directive was in place or was subsequently withdrawn on technical grounds. But the episode is a reminder of the crisis of mid-August 2002, when the commission had issued a similar order. After a great deal of hue and cry by the members, the regulator modified its stance and let the chairman of the bourse be a broker.

More financing modes available at bourses

Investors at capital market after reaching the limit under Continuous Funding System (CFS) have more avenues to finance shares to purchase, like in-house badla, futures options and other derivatives, soon to be formulated.

After being effective from August 22, 2005, the CFS in 14 scrips has reached its upper limit of Rs 25 billion.

The response of the market to the announcements made after the meeting of brokers, SECP and Prime Minister, which included launching of CFS, launching of Pre-Trade Verification System and increased tenors for future contracts, was very positive and the KSE-100 index gained 278 points, with trading volumes increasing by 69 percent on day-to-day basis from less than 200 million to over 300 million shares.

More financing modes available at bourses

Investors at capital market after reaching the limit under Continuous Funding System (CFS) have more avenues to finance shares to purchase, like in-house badla, futures options and other derivatives, soon to be formulated.

After being effective from August 22, 2005, the CFS in 14 scrips has reached its upper limit of Rs 25 billion.

The response of the market to the announcements made after the meeting of brokers, SECP and Prime Minister, which included launching of CFS, launching of Pre-Trade Verification System and increased tenors for future contracts, was very positive and the KSE-100 index gained 278 points, with trading volumes increasing by 69 percent on day-to-day basis from less than 200 million to over 300 million shares.

Continuous funding system takes off

The continuous funding system (CFS) took off at the Karachi Stock Exchange on Monday with enthusiastic investor’s response, as the KSE-100 index gained 279 points. According to analysts, the CFS rate on Monday stood at 16.9 per cent with the level of investment at Rs16.3 billion.

KSE Chairman Yasin Lakhani told Dawn that the new system would fulfil the immediate liquidity need of the market and would create stability and restore confidence. He also said that the CFS would eliminate shortcomings in the badla system.

Body to give final shape to mode of stocks financing

The ‘Shaukat Tarin Committee’ will hold a meeting with all stakeholders of stock market on Thursday evening to give a final shape to a new mode of financing, in order to bring back investors to the lack-lustre stock market and improve liquidity.

According to sources, the Committee has improvised the recommendations to be placed with government officials expected to meet in Karachi on Friday, headed by Dr Salman Shah, Advisor to Prime Minister on Economic Affairs, and Omar Ayub Khan, State Minister for Finance.

Stock market needs Rs 30 billion to improve liquidity

Lack of appropriate system to change the traditional badla to margin financing dried up the volumes, forcing the market to trade in a narrow band, resulting in serious drain market liquidity. According to a report presented to Shaukat Tarin – led Committee on “Stock Market Liquidity”, the stock market is driven by liquidity flows.

In case of Pakistan too, this is equally true. When the implementation of changeover from the traditional badla to margin financing began, a lack of appropriate preparation resulted in liquidity crunch. This is a serious situation and needs to be addressed urgently.

KSE introduces COT freeze system

The board of directors of Karachi Stock Exchange (KSE) has started a system for freezing total outstanding COT positions to Rs 12 billion, irrespective of individual scrip. According to a notice issued by the KSE on Monday, the governing board of directors of the Exchange in its meeting on July 16 reviewed the SECP directive, capping the COT value at Rs 12 billion in D G Khan Cement, Hubco, NBP, OGDC, Pak Oilfields, PSO and PTCL shares.

The board approved the following procedure, which shall be effective from Monday.

“System shall freeze the total outstanding COT positions to Rs 12 billion, irrespective of individual scrip.

Badla is not back!

I am grateful to The News for its backhanded support to the phase-out of badla financing in its editorial “Badla is back” (July 15) – a provocative and totally misleading title which suggests that badla financing had been eliminated and has now been reintroduced. This is simply not true. Even the inference that the process has been rolled back is false. Nonetheless, the editorial makes a very important point in favour of the phase-out of badla financing and, even though it is ostensibly critical of the role of the regulator, I appreciate the spirit behind it.