Overview, Functionalities, Control and Check on NCSS by

1. Overview, Functionalities, Control and Check on NCSS by NCCPL NATIONAL CLEARING COMPANY OF PAKISTAN LIMITED

2. The Company’s Overview

3. BACKGROUND NCCPL – NCSS Design • In March 1999 the Capital Market Project Consultants (Arthur Anderson & Co.) were mandated to develop recommendations for a National Clearing and Settlement System (NCSS). • Accordingly various committees were formed comprising of representatives from the three Stock Exchanges, CDCPL and users. • Based on recommendations submitted by consultants, deliberation of the committees and subsequent approvals from the three Stock Exchanges and SECP, System design was finalized in October 2000.

4. BACKGROUNDCont…d NCCPL - Incorporation & Implementation • The NCCPL was incorporated on July 03, 2001 to provide Independent Clearing & Settlement Services to all the three Stock Exchanges in Pakistan. • NCSS Live operations were commenced from December 24, 2001. • Initially the company was managed by CDC. • Since July 01, 2005, the Company complete severed itself from CDC and now has his own management.

5. Board of Directors Audit Committee Chief Executive Officer C F O / Com.Sec. Chief Information Officer Head of Operations Chief Internal Auditor Legal & Compliance Fin. Dept. Admin & HR Software Management Network Management Systems Management G L Sec. Pay & Collect Product Development Customer Support Customer Support Operations Help Desk Database Management Customer Support Lahore Customer Support Karachi Customer Support Karachi Customer Support Islamabad Information Security Business Continuity Organization Structure of NCCPL

6. NCCPL - Legal Frame Work The operations of NCCPL are governed by the following: • NCSS Regulations 2003; • NCSS Procedures 2003; • Clearing House Companies (Registration and Regulations) Rules 2005; and • Companies Ordinance, 1984

7. Corporate Governance • Board of Directors The Board of the Directors comprises of 11 Directors of which 9 are appointed by the shareholders,1 is nominated by the SECP and the CEO by virtue by his office. • Code of Corporate Governance The Company has voluntarily adopted the Code of Corporate Governance to implement good governance practices. These inter-alia include; • Forming an Audit Committee of the Board comprising of non-executive directors; • Appointment of Chief Internal Auditor, Chief Financial Officer and Company Secretary by the Board; • Holding the number of the Board Meetings as recommended by the Code; • Issue of Quarterly, Half yearly and annual financial statements; Cont……

8. Corporate Governance • Circulation of ‘Statement of Ethics and Business Practices’ to establish a standard of conduct for directors and employees of the Company; • Adopting of vision/mission statement and overall corporate strategy by the Board; and • Hold presentation for the orientation of directors, as required by the Code;

9. Corporate Governance Cont….. • I.T. Steering Committee The Company also has a I.T. Steering Committee; • deliberate IT related strategies and policies; • Committee Comprising of experts from stock exchange and Financial Institutions.

10. NCCPL – Shareholding Structure

11. Company’s Achievements Following major achievements have been accomplished by the Company: • Independent management • Registration under Clearing House Companies (Registration and Regulations) Rules 2005 on March 7th, 2006 • Appropriation of Rs 100 million as initial contribution towards Clearing and Settlement Fund as required by the above Rules • Formation of Clearing & Settlement Fund Trust • Successful implementation of Unique Identification Number (UIN) functionality on the National Clearing & Settlement System (NCSS)

12. Company’s AchievementsCont… • Introduction of mechanism for Cash Settled Future Contracts (CSFC) to collect and disburse marked-to-market losses and profit through its NCSS Pay & Collect Functionality • Implementation of Institutions Delivery System (IDS) functionality to Institutions for Clearing and Settlement of their regular trades directly through National Clearing and Settlement System (NCSS) • Modifications in NCSS to facilitate Unified Trading System (UTS) Platform for LSE and ISE members for execution of their trade and transaction on the same unified trading System (UTS). • Establishment of DR/BC site along with Branch Office

13. Company’s Achievements • Independent IT Set-Up effective from July 01, 2007 • Procurement of Server and Hardware • Implement Network infrastructure and connectivity • Establish four Data Centers

14. Future Projects • Following are the major upcoming future ventures • Implementation of CFS MK-II through NCCPL • Risk Management of Financial Institutions • Recording & Settlement of Futures Market Contracts Through NCSS • Establishment of Company’s Owned Head Office • Issuance of Share Capital

15. Major Challenges • Hiring of appropriate Human Resource • Space constraint

16. NCCPL Data Centers • Main Data Centre at Head Office in KSE • Business Continuity Site in Karachi • Branch Data Centers at Offices in LSE and ISE

17. Network Links • Intercity connectivity through 1-MB DXX connectivity through PTCL • First-level Redundancy through Frame Relay link (provided by Supernet) • Second-level Redundancy is available through ISDN lines • All these links are available at Head Office, BC Site, Lahore Office and Islamabad Office • Head Office and Business Continuity Site are connected through Dark Fiber

18. Remote Access • Clients in KHI, LHE and ISB who do not have offices in KSE, LSE or ISE have the option to dial in to the network of NCC • They have the option to use normal phone lines (56 kbps) or ISDN-BRI lines (128 kbps) • Redundant PRI lines have been provided in each office for remote connectivity • Also, the PRI lines available at Main and BC sites can be used as backup of one another

19. Business Continuity • Business Continuity site shall be fully functional in July 2007. • All business data shall be copied to the BC site in real time thereby ensuring zero-loss of data.

20. Network Resilience • In case of unavailability of NCC Data Centre in KSE, the network provides seam less connectivity for KSE with the BC Site of NCC • In case of unavailability of NCC Data Centre in LSE/ISE, the network provides seam less connectivity for LSE/ISE with the Main/BC Site of NCC

21. System Security • All transactions between Clients and business machines are encrypted through VPN tunnels • All client machines are installed with host-based security software which eliminates any malicious activity as well as protects against viruses, spam, etc. • During next quarter, we plan to provide Digital Certificates stored on Smart Cards to all our clients. These certificates shall be used initially for User and Terminal Authentication, and later on Transactional Non-repudiation will be implemented in NCSS through the digital signatures.

22. High Availability • Most of the networking equipment has been implemented in highly-available configuration • For example, if one firewall goes down the other firewall continuously provides the protection without any interruption to the business activity

24. National Clearing & Settlement System (NCSS) Overview

25. Major Benefits of NCSS • Cross Exchange Netting for both cash & securities. • Automated Pay & Collect • No physical receipt / issuance of instruments • Automated process of securities settlement directly between CMs. • Settlement of non-broker institutions for CFS transactions directly with NCSS. cont…d

26. Major Benefits of NCSScont… • Settlement of broker to broker transactions directly with NCSS to facilitate transactions of brokers of different exchanges. • Cross Exchange Netting for both cash & securities for CMs who are members of more than one Stock Exchange. • Margin Financing through independent module on NCSS. • Settlement of net obligations directly between CMs as per undisclosed Balance Orders. • Registration of Unique Identification Number (UIN) of all clients with codes

27. Monthly per Day Average No. of Trade and Transaction Settlements on NCSS 200,000 192,454 182,256 180,000 167,904 160,000 150,767 146,291 139,166 140,000 126,522 126,790 126770 124,578 114,944 120,000 112,582 109,341 102,235 100,000 80,000 60,000 40,000 20,000 - Jan '06 Feb '06 Mar '06 Apr '06 May '06 Jun '06 Jul '06 Aug '06 Sep '06 Oct '06 Nov '06 Dec '06 Jan '07 Feb '07 NCSS – Operational Highlights

28. Monthly per Day Average of Settlement Volume (Shares in million) 196 200 180 160 141 135 140 126 121 120 101 100 100 90 85 77 77 76 80 71 59 60 40 20 - Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 NCSS - Operational Highlights

29. Monthly per Day Average of Settlement Value (Rs. in million) 297,169 300,000 248,363 250,000 230,316 213,536 206,740 200,000 187,814 182,145 146,836 143,881 150,000 139,851 124,727 123,632 123,157 100,866 100,000 50,000 - Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 NCSS - Operational Highlights

30. NCSS - Operational HighlightsHighest Ever

31. Active Clearing Members (As of May 2007) Broker 340 Non Broker 202 Total 542 Statistics

32. Statistics

33. Statistics

35. Types of Trades/Transactions on NCSS Exchange Trades and Transactions • Exchange Trades are • Locked-in contracts between broker CMs executed through Exchange trading system in the Regular Market • Exchange Transactions are • Locked-in contracts between broker CMs executed through Exchange trading system in the Continuous Funding System (CFS) Market. • Net-buy or net sell position of broker CMs based on their futures contracts at the close of Futures Contract Period transmitted to NCSS for settlement.

36. Types of Trades/Transactions on NCSS Non-Exchange Transactions • Broker to Broker (BTB) Delivery Module provides the facility of recording non-Exchange transaction between broker CMs of different exchanges based on underlying exchange trades. • Institutional Delivery System (IDS) provides the facility of recording non-Exchange transactions between broker CMs and non-broker CMs based on underlying Continues Funding System (CFS) . • Margin Financing (MF) module facilitates Broker CMs to arrange funds from other Broker / Non-broker CMs based on their purchases.

37. Types of Trades/Transactions on NCSS • Broker to Broker (BTB) BTB module facilitates Broker CMs in settling their inter-exchange transactions. Whereby a Broker CM, based on his underlying exchange trade, initiates BTB transactions while the other Broker CM affirms it. Once a transaction is affirmed, the settlement obligation of the initiating Broker CM is passed onto the affirming Broker CM. 1.1 Initiation Process Under this module • A BTB transactions can only be initiated by Broker CM of one Exchange to the Broker CM of another Exchange for affirmation; 1.2 Affirmation Process A counter Broker CM can affirm the initiated transactions. However, the affirming Broker CM cannot edit the details of transactions posted by the initiating CM. Upon affirmation the settlement obligation of the initiating Broker CM is passed onto the affirming Broker CM.

38. Trades executed by the Broker Clearing Members of Stock Exchanges BTB Module on NCSS Initiation of BTB transaction on the Basis of Exchange Trade in Regular Market Affirmation of BTB transactions by Broker CM of Other Exchanges Settlement in NCSS by the affirming Broker Clearing Members (CM) Payment/Receipt in NCSS Received/Delivered Securities through NCSS RECORDING OF BTB TRANSACTIONS ON NCSS

39. Types of Trades/Transactions on NCSS • Institutional Delivery System (IDS) IDS module facilitates a Broker CM and a Non-broker CM to record their CFS transactions in settling their exchange transactions directly through the NCSS. Once a transaction is affirmed, the settlement obligation of the initiating Broker CM is passed onto the affirming Non-broker CM. IDS transaction is based on locked-in Continuous Funding System (CFS & CFSR) transactions traded by a broker CM at an Exchange. 1.2 Initiation Process Under this Module • An IDS transactions can only be initiated by Broker CM to a Non-Broker CM for affirmation; 2.2 Affirmation Process A counter Non-broker CM can affirm the initiated transactions. Upon affirmation the settlement obligation of the initiating Broker CM is passed onto the affirming Non-broker CM.

40. Transactions executed by the Broker Clearing Members of Stock Exchanges IDS Module on NCSS Initiation of IDS transaction on the Basis of CFS/CFSR Transactions Affirmation of IDS transactions by Non-Broker Clearing Member Settlement in NCSS by the affirming Non-Broker Clearing Members Payment/Receipt in NCSS Received/Delivered Securities through NCSS Types of Trades/Transactions on NCSS RECORDING OF IDS TRANSACTIONS ON NCSS

41. Buy Trade / Transactions executed by the Broker Clearing Members in Stock Exchanges Margin Financing (MF) Module on National Clearing & Settlement System (NCSS) Initiation of MF transaction on the Basis of Aggregate Buy by Financee Affirmation of MF transactions by the Financier Settlement in NCSS by the affirming Clearing Members (CM) Payment to NCSS Received Securities through NCSS Types of Trades/Transactions on NCSS RECORDING OF MF TRANSACTIONS ON NCSS

42. Sale Trade / Transactions executed by the Broker Clearing Members in Stock Exchanges Margin Financing Reversal (MFR) transactions on NCSS Initiation of MFR transaction on the Basis of sale position at Stock Exchanges & Upto his MF open Position Affirmation of MFR transactions by the Financier Settlement in NCSS by the affirming (CM) Payment From NCSS Received Securities through NCSS Types of Trades/Transactions on NCSS RECORDING OF MFR TRANSACTIONS ON NCSS

43. Balance Order Multilateral Netting T+3 Settlement Cycle T+1 Settlement Cycle Settlement Options

44. CM’s Accounts Settling Account with SB SE Trader Id (Membership Id) CDS Account with CDC Prerequisite for Broker CMs on NCSS Single Trader ID

45. Prerequisite for Broker CMs on NCSS Multiple Trader IDs CM’s Accounts CDS Account with CDC Settling Account with SB KSE Trader Id LSE Trader Id ISE Trader Id (Membership Ids)

46. Securities • Eligibility: • CDS live Securities listed at any Stock Exchange • Trading Symbol: • Trading symbols are allocated by NCCPL to NCSS live securities. • Marketable lot: • Marketable lots are determined by NCCPL as per following criteria. Face Value Market Value Marketable Lot Upto Rs. 10 Upto Rs. 50 500 shares Upto Rs. 10 Greater than Rs. 50 100 shares Greater than Rs. 10 Any market value 20 shares

47. Buying Broker Selling Broker Execution of Trades at the Stock Exchange Online trade feed to NCSS Generation of NE Transactions Netting of trades Payment orders and Delivery Receive order Money Receive orders and Delivery order Delivery of NCSS eligible securities (with blocked status) Buying Broker Selling Broker Unblocking of securities on Payment Confirmation Payment to NCSS Collect Payment Release Payment Settlement Flow in NCSS T T+2 SD-1 T+3 SD

48. Delivery Schedule • CMs to deliver securities to buying CMs by 12:00 noon for getting credit within Banks’ Cash Counter Timings. • CMs to deliver securities to buying CMs by 3:30 PM for getting credits by 4:30 PM. • Remaining CMs to deliver securities to buying CMs by 4:15 PM for getting credits with next Settlement Date Pay & Collect.

49. Balance Order • Balance Orders in NCSS are computed on net basis for the following transactions of a CM: • Exchange Trades/Transactions • Regular Market Trades • Future Market Trades • CFS Market Transactions • Non-Exchange Transactions • Broker To Broker (BTB) • Institutional Delivery System (IDS) • Margin Financing (MF)

50. Balance Order Netting Mechanism • Balance Order (BO) is based on Multilateral Netting Mechanism prioritized as under: • Netting of sell and/or buy positions of CM having multiple Exchange memberships. • Sell and buy positions matched among CMs of same Exchange. • Remaining sell buy positions are matched among CMs of different Exchanges.