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Abrupt, ad hoc policy shifts responsible for 2008 stock market crash: report

Abrupt, ad hoc policy shifts responsible for 2008 stock market crash: report

ISLAMABAD: The arbitrary use of powers for abrupt and ad hoc policy shifts and autocracy at the Securities and Exchange Commission of Pakistan (SECP) led to the 2008 crisis in the stock market, according to the Shamim Ahmed Khan report, which was submitted to the commission on June 5.

The report was a result of investigations by a committee constituted in 2012 to analyse the crisis, but the committee had became inactive after the resignation of former SECP chairman Shamim Ahmad Khan, who was mandated to conduct an independent study and submit a report. SECP Chairman Zafar Hijazi, however, reactivated the committee and approved revised terms of references (ToRs) in January 2015.

Read: SECP to study 2008 stock market crash.

Per the revised ToRs, the committee was mandated to study factors leading to the 2008 crisis, the rationale behind imposition of a floor by exchanges under their risk management system (RMS) regulations, and its impact on the market. The committee was also sanctioned to give policy recommendations.

The great crash of 2008 had swept over a trillion rupees from the market and no participant, including stockbrokers, could escape the damage.

It all started on April 20, 2008, when the stock prices began to collapse and the KSE-100 index plunged by almost 55 per cent in four months.

Also read: SECP report on 2008 stock market crash in the offing.

The SECP presented the report to the Policy Board in a meeting held Monday. The report analyses the causes, events, impacts and outcomes of the 2008 market crisis primarily with a ‘lessons learned’ objective.

The committee criticised the SECP for not functioning as a collegiate body during the 2008 crisis. It also recommended development of a strategic capital market development plan by the SECP and an improved coordination procedure between the SECP and the State Bank of Pakistan.

It also expressed concerns over the arbitrary use of force majeure powers for abrupt and ad hoc policy shifts, including changes to risk management by stock exchanges.

It recommended the SECP to devise a transparent policy while 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 also provides a set of recommendations, which could help prevent recurrence of such a crisis. It has suggested reforms across the SECP, stock exchanges, Central Depository Company (CDC) and National Clearing Company of Pakistan (NCCPL).

It recommended a revamp of the existing broker regime and suggested a stringent criteria for CDC participants whereby only select institutions fulfilling required criteria are allowed custody of clients’ securities.

The committee also suggested that the NCCPL function as a statutory body and be converted into a central counterparty (CCP) with adequately funded Settlement Guarantee Fund (SGF).

Additionally, the committee observed conflict of interest on the boards of stock exchanges, NCCPL and CDC due to presence of broker directors.

While presenting the committee’s report, Chairman Hijazi briefed the Policy Board that since recommendations of the committee pertain to 2008, about 90 per cent of these have already been implemented. The remaining are part of the SECP’s reform agenda and are in the implementation stage, he said.

He informed the board that the committee’s negative feedback regarding the SECP’s working has been addressed and it is functioning as a complete collegiate body and all important matters are deliberated on at the commission level.

For improved coordination, he said, the SECP entered into a Memorandum of Understanding (MoU) with the State Bank in March 2009, adding that a dialogue is being maintained through the coordination committee and task force meetings.

Moreover, with the promulgation of the new Act, the force majeure powers of stock exchanges been vested with the SECP, Hijazi said, adding that the SECP is devising broad policy parameters to intervene under emergency powers at critical situations.

In order to address the need for developing a long-term strategy and a plan for the development of the stock market, the SECP has drafted a capital market development plan, which will be rolled out once the consultation process with stakeholders is completed, said Hijazi.

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