Aligning regulations with global standards
With a mission to develop a fair, efficient and transparent regulatory framework, the Securities and Exchange Commission of Pakistan (SECP) strives to implement a host of capital market reforms aligned with international legal standards and best practices to mitigate systemic risk and to protect investors.
On July 2 this year, it framed its roadmap for the development of the Pakistan capital market as contained in the Capital Market Development Plan for 2016-2018. The plan outlines how it will tackle the multiple challenges being faced by the capital market, including the introduction of regulatory, structural and developmental initiatives at self-regulatory organizations, reforms for issuers and capital market intermediaries and reforms for product and market development.
The specific focus will be on the development of derivatives and debt capital markets, reforms for facilitating ease of doing business and reforms for investors’ awareness and facilitation.
One of the SECP’s achievements last year was the promulgation of the Securities Act 2015, which contains various provisions for the effective enforcement of disciplinary measures to protect the investors. The Act highlights the heightened significance of the SECP’s role as a regulator as it takes away from the Pakistan Stock Exchange (PSX) the authority to close the stock market as was the case in 2008 following the imposition of a floor that led to the downgrading of MSCI Pakistan Index from emerging markets index to frontier markets index.
In adopting the new regulatory regime, the SECP based its tenets on international best practices, such as the IOSCO (International Organization of Securities Commissions) principles.
“As far as the whole approach is concerned, we have to benchmark ourselves with international practices and standards,” SECP commissioner Akif Saeed tells The Asset. “That cuts across all the areas that we are regulating.”
Indeed, the SECP has made significant progress in complying with the international regulatory standards as noted by the IOSCO assessment committee in its first country review on the SECP.
The SECP was the first jurisdiction to be assessed by IOSCO, providing SECP with an opportunity to comprehensively review its regulatory and supervisory framework for securities regulation and to engage in a constructive dialogue with the IOSCO review team on how to further enhance the framework.
In addition to the Securities Act, there are a number of subsidiary legislations, rules and regulations that are being framed at present, including the establishment of a centralized KYC registration. “This is a new concept that we will be bringing into the market and we feel that the National Clearing Corporation of Pakistan is the most suitable for it,” says SECP execuive director Musarat Jabeen.
At present, investors in the capital market have to undergo multiple process to comply with KYC requirements, while opening accounts with different intermediaries of mutual fund, brokerage and insurance industries. In order to remove redundant processes and boost transparency, the Securities Act envisages the creation of a centralized KYC organization for the registration of investors and maintenance of their KYC records.
Customer compensation fund
Another provision that has been provided in the Securities Act is the establishment of a centralized customer protection compensation fund. Before the integration of the Karachi, Lahore and Islamabad stock exchanges into PSX, each of them had their own investor protection fund. The Act aims to consolidate these under one fund to address unsettled claims or liabilities.
The SECP has already undertaken an extensive investor education and awareness campaign under which a series of seminars are being held in collaboration with the stakeholders. A new investor education portal called “Jama Punji” was also launched. SECP plans to intensify investor education campaign to reach the smaller investors using web portal, SMS and social media as well as seminars and investor forums.
SECP also notes the need for Pakistan to develop its debt capital market. An efficient and liquid debt market can help mitigate the adverse impact of a financial crises. The country’s debt market has largely remained underdeveloped. SECP believes such measures as the integration of national savings scheme instruments into the capital market and the establishment of a neutral bond pricing agency are essential to boost the bond market.
Unlike other international jurisdictions, Pakistan does not have a bond pricing agency which acts as an independent entity that provide fair valuations of debt securities based on comprehensive data collection, validation, pricing and dissemination to the stakeholders. According to Jabeen, valuation of only corporate debt is being carried out by the Mutual Fund Association of Pakistan and this obviously creates a conflict of interest as the mutual funds are also the buyers of the bonds.
For the benefit of the issuers in the capital market, the SECP is putting in place concrete initiatives, including the establishment of an audit oversight board, which Saeed asserts will enhance the quality of audit in the market. “This is a weak area that was identified by IOSCO, which should be in line with the public interest,” he adds.
The SECP has forged a formal agreement with the Institute of Chartered Accountants of Pakistan for the establishment of an audit oversight board.
The SECP is also working to revitalize an SME (small and medium enterprises) counter. Pakistan has an over-the-counter market for the listing and trading of small cap companies, but that has remained inactive due to operational and regulatory issues.
PSX moved to establish its own SME board for the listing and trading of small cap companies. Institutional buyers and high-net-worth individuals are allowed access to the SME board.