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Along with the integration of the Karachi, Lahore and Islamabad stock exchanges into Pakistan Stock Exchange (PSX) was the adoption of a strong reform package for the National Clearing Corporation of Pakistan Limited (NCCPL) and other self-regulatory organizations. This is to ensure that the objectives and benefits of the integration are fully realized and the capital market performs according to international standards.
The promulgation of the Securities Act 2015 requires the NCCPL to transform its role from facilitation agent into a full-fledged role of central counterparty. Wherein NCCPL, through novation, shall interpose as buyer to seller and seller to buyer in respect of all trades and transactions executed at stock exchanges and report to NCCPL for clearing and settlement.
This entails the implementation of a comprehensive risk management system of the entire capital market. This involves the implementation of a centralized settlement guarantee fund (SGF) mechanism at NCCPL. As NCCPL CEO Muhammad Lukman recalls, dealing with three stock exchanges – before their integration into PSX – was a bit of a challenge to NCCPL as far as risk management is concerned because the transaction has to shift from the brokers of one exchange to the brokers of another exchange.
So since it handles the clearing and settlement of trading at the stock exchange, it is essential for the NCCPL that it also has the responsibility for managing the entire risk management system for seamless operations. As such, the entire margining regime and default management would be exclusively handled by NCCPL.The cash amounts in the existing clearing house funds of the stock exchange shall be transferred to the SGF under the control of the NCCPL in line with the requirements of the Securities Act.
The Securities and Exchange Commission of Pakistan has mandated NCCPL to function as the central KYC organization and to introduce a centralized KYC mechanism for registration of investors and maintenance of KYC records. KYC functionality would be initiated for equity market investors in the initial stage and thereafter it will be extended to other markets such as unit holders of mutual funds and insurance policy holders, among others.
Currently, the NCCPL handles a daily clearing and settlement volume averaging between 10 billion rupees (US$100 million) and 15 billion rupees. “We are expecting a surge in volume on the basis of the valuation of the PSX and whatever is the trading activity at the exchange as they plan to launch quite a few new products,” says Lukman.