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ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has revamped the regulatory framework for the capital market to remove non-practical and burdensome requirements for creating a facilitative environment for the market intermediaries and investors in the stock market.

According to a document of the SECP on the capital market reforms, the SECP has undertaken reforms and initiatives, which resulted in most remarkable turnarounds by a stock exchange.

During the Covid situation, the SECP has taken measures to ensure continuation of capital market operations and provide maximum facilitation to market participants.

The reforms included categorisation of brokers; rationalisation of margining regime and removal of bottlenecks; digitisation and simplification of account opening by residents and NRPs for investment in capital market; First Exchange Traded Fund (ETF) launched in 2020 (followed by 3 more); landmark Rs200 billion Sukuk issued by PHL through Pakistan Stock Exchange (PSX); introduction of standardised brokerage commission to stem unhealthy competition and implemented effective volatility control measures (Circuit breakers plus market halts).

To end the strict margining regime which has been affecting working capital management and liquidity, the SECP removed the additional VAR based margins, which were imposed in 2017 and also abolished additional haircuts on securities deposited as collateral with the NCCPL.

Moreover, the security deposit requirements in the deliverable futures segment were also reduced significantly.

In addition, the mechanism for imposition of liquidity margins was revisited whereby margins were only imposed on large positions, while also taking into account the credit rating of clearing members.

Another major initiative was on the product development front where the regulations for market making and Exchange Traded Funds (ETFs) were revamped to remove bottlenecks and facilitate introduction of this product.

The ETF is one of the most popular mode of investment in capital market across the globe; however, Pakistan's capital markets have been missing this lucrative product.

Similarly, another major initiative of the SECP towards the development of capital markets in line with international practices is the widening of circuit breakers and introduction of market halts. Circuit Breakers are considered to curb price discovery, effect of curbing price discovery, making exit difficult for investors and are an inefficient mode of managing price volatility.

The prevailing circuit breakers at the PSX were also considered by market participants as narrow and a hindrance to efficient price discovery and growth of market in line with the international best practices.

The SECP had approved changes in regulations of the PSX and the NCCPL to enable gradual widening of circuit breakers by 0.5 percent on a fortnightly basis, until the same reach the level of 7.5 percent from the existing level of five percent.

Market halts are also introduced initially at the variation of four percent in the KSE-30 Index.

This was a long-awaited reform, which has generated positive feedback and appreciation from the market participants.

Paving way for development of Shariah-compliant segment in Pakistan, the SECP introduce Modaraba Share Financing product. The lack of a Shariah-complaint leverage product in the market served as hindrance towards attracting a large pool of potential investors. Shariah-compliant banking has proven to be successful in Pakistan, indicating a tremendous potential in other segments as well.

Another key reform by the SECP was approving the PSX regulations for introduction of minimum brokerage commission, which was again a long outstanding matter. The implementation of much-awaited reform is expected to bring transparency and discipline in the market. As a part of reform measures, the Margin Financing product was also revamped whereby bottlenecks and hurdles were removed.

Further, the limit of investment in Sahulat account was also increased from Rs500,000 to Rs800,000 thereby facilitating outreach to small investors and allowing opening of accounts is a much simplified manner.

Many other reform measures have also been taken by the SECP, which include simplification in the listing requirements, removal of practical difficulties in meeting the KYC requirements of CKO, increase in the securities eligible for collateral, inclusion of more financial institutions as clearing members, improved disclosure requirements, removal of requirement to place quarterly financial statements on website by brokers, etc, the SECP added.

Copyright Business Recorder, 2021

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