SECP blames ‘floor’ for 2008 market crashArchive
ISLAMABAD: The report on the 2008 stock market crash was made public by the Securities and Exchange Commission of Pakistan (SECP) on Tuesday.
The report, compiled by the committee headed by Shamim Ahmad Khan and submitted to the SECP on June 5, was released after a lapse of two months. It was presented to the SECP Policy Board on Aug 10.
The report seemed to heap all the blame on the commission itself, absolving the stockbrokers.
“We do not want to waste energies on blame game and trying to see which broker made how much money in the process,” Mr Zafar Hijazi, SECP Chairman told reporters, adding that the “best thing to do was to learn and move on so that things like this do not happen again.”
The incumbent SECP chairman and the relevant staff who were in the Securities Market Division (SMD) in 2008 emphasised that the corporate sector regulator failed to fulfill his duties.
“The main fault lies with the commission for not making the right decision at that time,” Hijazi said, adding “the only but severe fault that triggered the 2008 stock market crisis was placing of floor in the KSE and the worst part was that it continued for 110 days.”
Responding to a question regarding the role of stock brokers in influencing the commission, the SECP chairman said that there was no concrete evidence to prove it. He, however, acknowledged that while there was floor on trading activities, investors were forced to sell their stocks to brokers at off-market rates.
Hijazi said that the Karachi Stock Exchange (KSE) was divided over the decision to place floor on the market and the MD KSE, along with the member nominated by the commission, opposed this decision to impose floor on the market.
“This decision was made by the majority of brokers in the KSE board, but it cannot be claimed if they had any ulterior motive behind it or not,” SECP chairman said.
The SECP officials belonging to SMD said that flooring decision continued for a long period due to various factors, including the discussions with IMF and the finance ministry feared that lifting of the floor might lead to a further crash of the market.
The report recommends revamping the existing broker regime.
The committee suggested to the SECP to establish stringent criteria for CDC participants where only selected institutions fulfilling required criteria are allowed the custody of clients’ securities.
The committee suggested that the NCCPL should function as a statutory body and to be converted into a central counterparty with adequately funded Settlement Guarantee Fund (SGF).
The committee observed that there was a conflict of interest on the boards of stock exchanges, NCCPL and CDC due to presence of broker directors. The SECP, however, maintains that this issue was rectified in March this year.
The report recommended to the SECP to devise transparent policy clearly spelling out circumstances in which the regulator can intervene in the market under the emergency powers now conferred upon it under the 2015 Securities Act.
The report recommends that the SECP should develop a strategic capital market development plan as well as procedure for improved coordination between the SECP and the State Bank.
The report also provides a set of recommendations, which could help prevent recurrence of such a crisis. It suggested reforms across the SECP, stock exchanges, Central Depository Company (CDC) and National Clearing Company of Pakistan (NCCPL).
Hijazi said that around 90 percent of the recommendations have already been implemented while the remaining are part of the SECP’s reform agenda and in the implementation stage.
Published in Dawn, August 12th, 2015
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