Securities and Exchange Commission of Pakistan

1. Securities and Exchange Commission of Pakistan 1

2. Contents Introduction to the Capital Market: Regulated Entities & Market Infrastructure Institutions Steps for Investors and Requirements for Brokers Order Flow Major Market Reforms Stock Market Commodity Futures Market Debt Market Future Plans 2

3. The Capital Market – An Introduction • A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year. • (1) Primary Market • The market for new shares of securities. A primary market is one in which a company issues new securities in exchange for cash from an investor (buyer). • (2) Secondary Market • Once new securities have been sold in the primary market, an efficient manner must exist for their resale. Secondary markets give investors the means to resell/ trade existing securities. 3

4. The Capital Market – An Introduction • Capital Market Instruments • (a) Equities • Common stock/Ordinary shares • Preferred stock • (b) Fixed Income • Corporate bonds/TFCs • (c) Derivatives Market • Stock & Index Futures • Stock and Index Options • (d) Exchange Traded Funds 4

5. The Capital Market – An Introduction 5

6. The Capital Market Institutions 6

7. The Capital Market Intermediaries 7

8. Systems and Processes

9. Market Entry by Investors StockMarket Broker Investor

10. Steps for an Investor 10

11. Requirements for Brokers 11

12. Karachi Stock Exchange • Governance Structure – Board & Committees, Regulations of Constitution of the Board, General Regulations & Articles. • Member Conduct Regulations – General, Proprietary Trading, Risk Management, Market Making, Default Management, Branch Office, System Audit, Short Selling etc. • Market Conduct Regulations – Separate Regulations for each market segment: Deliverable, Cash-Settled, Index Futures, Index Options, ETFs, BATS, etc. • Issuers – Listing Regulations • Investors – address complaints/dispute resolution 12

13. KSE Progress *Figures for 2012 taken as of April 19, 2012. **All other figures have been taken as of December 31st of each year 13

14. Karachi Stock Exchange • MARKET SEGMENTS 14

15. Karachi Stock Exchange Order Work Flow 15

16. National Clearing Company of Pakistan Ltd. Order Work Flow 16

17. Central Depository Company of Pakistan Ltd. 17

18. MAJOR MARKET REFORMS

19. REFORM PROCESS to achieve market integrity - a fair, transparent, and efficient market that engenders investor confidence • Transparency Measures • Abolished disclosed trading to curb front running • “Blank sales" replaced by regulated “short selling” • Standardized Account Opening Form for brokerage houses and a standardized sub-account opening form for CDC have been introduced • In-house Badla which was a non-transparent method of financing has been abolished • Introduction of Unique Identification Number (UIN) • Internet Trading Regulations • Policy for dealing with defunct/defaulter companies • Governance Issues • Independent Chairman and re composition of board • Fit & proper criteria for directors • Brokers of stock exchanges cannot sit on board of listed companies • Revamped System Audit • Code of Corporate Governance • Segregation of Client’s Assets from Broker’s Assets; • Mandatory reporting of Off – Market Transactions • Mandatory use of banking channels above Rs. 25,000 • Introduction of joint procedures to be followed in case of expulsion/suspension • Restriction on brokers trading through other brokers of the same exchange

20. REFORM PROCESS ..continued • Risk Management • VAR based Margining Regime • Position Limits Across Markets • Valuation of Securities deposited as Collateral • Mark-to Market loss collection • Client-Level Netting Regime • Concentration and liquidity margins • 1st day circuit breakers (50% or Rs. 5 whichever is higher) • Introduction of uniform eligibility criteria for Deliverable Futures, Cash Settled Futures and Margin Trading Market. • IDS & FIRMS • Other Measures • Development of OTC market • Introduction of Cash Settled Futures and index Future Contracts • Introduction of T+2; • Development of free float index • Introduction of Islamic Index • Increase in IPF contribution limit • Automation of Securities Settlement project • BATS • Regulatory framework for margin financing, margin trading, securities lending and borrowing and pledging of clients’ securities • AML/CFT Regime • Introduction of ETFs • Introduction of Index Options

21. Commodities Market Reforms • Mandatory registration of all PMEX members as brokers. • New commodities futures contract introduced at PMEX including, cotton, wheat, sugar, varying sizes of gold, silver and crude oil etc. • Introduction of Regulations for implementing the concept of Market Makers. • Fit and Proper Criteria for Directors on the Board of PMEX. • Maintenance of minimum net worth requirements and introduction of capital adequacy requirements similar to those of the stock exchanges. • Universal and Specific Memberships. 21

22. Debt Market Reforms • Bonds Automated Trading System introduced at Exchanges’ platform in line with international standards and Bloomberg based E-bond system • Implemented various recommendations made by the BATS Review Committee for revamping the regulatory and operational framework for trading of debt securities in line with international best practices • Centralized reporting of all unlisted TFCs at NCCPL • The rate of stamp duty on the issuance of corporate bonds and transfer of assets in case of securitization was reduced 22

23. Future Plans • Corporatization and Demutualization of the stock exchanges • Robust Regulatory Framework in line with International Best Practices and International Organization of Securities Regulators (IOSCO) Principles for the Capital Market (SECP Act, Futures Trading Act and Securities Act) • Segregation of Roles of the SECP and the Frontline Regulators • Transfer of Risk Management from the Stock Exchanges to NCCPL • Enable NCCPL to Function as a Central Counter Party (CCP) and Establish CCP Settlement Guarantee Fund • Formulate regulations for the Issuance of Sukuk Certificates • Develop regulations for the Issuance of Call Warrants 23

24. Future Plans • Hold Road Shows, Awareness Campaigns/ Educational Seminars and Publish Reading Material and Employ Specialized Institutions to Carry out Knowledge Building Activities • Measures to develop retail demand through enhanced outreach • Measures to Increase Depository Outreach • Develop code of conduct for arbitrators • Implementation of revised Broker Regime: incorporating improved Capital Adequacy Requirements, Code of Conduct and Fit & Proper Criteria for brokers, Entry Requirements for members of stock exchanges, appointment of Compliance Officers and Risk Managers by brokers and linking of trading activities with financial strength of brokers • Segregation of Trading, Clearing and Custodial Functions of Market Intermediaries 24

25. Future Plans • Implementation of index based market halts • Implement effective KYC and CDD policies and procedures • Introduction of e-dividend and e-voting mechanisms • Introduction of SPAN (Standardized Portfolio Analysis of Risk) Margining System • Develop regulatory framework for inter-exchange trades • Cross listing of Indices • Introduction of large cap and small cap listing boards so as to encourage listing of small capital based companies and study establishment of SME Board/ Exchange • Work towards shifting to 100% demat for IPOs • Development of electronic/online IPO application 25

26. Future Plans • Measures for Debt Market Development • Regulatory changes for listing of debt securities of unlisted companies • Rationalize documents for listing of TFCs / debt market securities • Revamping of credit rating regulatory framework • Listing of Government debt • Measures for Development of Secondary Trading in the Debt Market: • Improve effectiveness of bond trading platforms • introduction of warrants • cross listing of TFCs • establishment of Bond Pricing Agency 26

27. Future Plans • Establishment of a Shariah Board • Shariah-compliant investment alternatives, consolidation of existing Islamic institutions and development of innovative Shariah compliant institutions, products and services • Focus on creating a viable market for the effective mobilization of Islamic funds 27

28. Thank you. 28