Market Booms and Busts, and their impact on Central Securities Depositories M ARKET B OOMS AND B USTS, and their impact on Central Securities Depositories By Muhammad Hanif, CEO – CDC Pakistan

Chief Executive Officer of CDC Pakistan Chartered Accountant by profession Founding Member of the Central Securities Depository and Clearing & Settlement Company in Pakistan Advocate of investor cultivation, awareness and protection in Pakistan Serving as a Director on the Boards of Pakistan Mercantile Exchange Limited and Institute of Capital Markets, Pakistan About the Presenter

Pakistan is one of the Next Eleven Markets named by Goldman Sachs. Incorporated in 1993, CDC is the only depository of Pakistan. Apart from depository operations and retail investor account services, the company’s portfolio includes: Trustee & Custodial Services Shares Registrar Services IT Minds Limited About CDC Pakistan

“One heavy blow is not enough to produce a market crash. It requires several different blows to bring a market to its knees.” David Shwartz, stock market historian

The Roaring Twenties was a time of wealth and excess in the US.

SPECULATION & WARNING Despite the dangers of speculation, many believed that the US stock market would continue to rise indefinitely.

The US stock market collapsed on October 29, It was the most devastating stock market crash in the history of both the US and the world.

STOCK MARKET HYSTERIA On the day of the collapse, the share prices fell as low as 89 percent. The NY stock exchange lost $14 billion in value, ten times the annual budget of the federal government at that time.

GREAT DEPRESSION The subsequent 10- year long Great Depression effected all western industrialized countries. It effectively stifled high-risk investment in the U.S. until after World War II.

GREATEST FINANCIAL CRISIS EVER The crash led to the biggest financial crisis of the 20th century, with mass foreclosures & falling prices, untold bankruptcies and business closures & repossessions.

MASSIVE UNEMPLOYMENT A quarter of working people (13-15 million) were unemployed, with soup kitchens serving to hundreds and thousands at a time.

We all know that Stock Market is a RISKY business

Volatility & Uncertainty Highly dependable external factors like war, political situation, security conditions, natural disasters, currency devaluation, tax implications, etc. Rumor Mongering Domino Effect Risks that involve…

Revenue Management Resource Management (IT & Human) Difficult Strategic Planning Impact on other Stock Market institutions

Just like any other stock market, the Pakistan Capital Market (including The Karachi Stock Exchange) is a volatile market. However, despite challenges, it has progressed continuously and has had an upward index trend. The Pakistan Capital Market

The 2008 Global Financial Crisis and The Pakistan Capital Market

Started Earlier then the Global crisis. Global crisis had a “Multiplier effect” on Pakistan’s Economy, where FTSE 100, Dow Jones and Hang Seng fell 31.33, and percent respectively in 08, KSE 100 index fell percent in 08. Had more direct impact on Investors and stock brokers then Issuers. How was the Pakistani Crisis different from the Global Crisis? 17

On 21 April 2008, KSE touched its pinnacle by reaching 15,739. Downward rally started in May 08, on rumors of new tax in the upcoming budget. SBP started raising interest rate also from May 08. Political/Law & Order situation in Pakistan further aggravated the crisis. Freezing of market for almost 100 days. Causes 18

The Outcome of KSE crash in 2008

Comparison between KSE Performance and CDC Profits

Started diversification in 2002 Cost Controlling Spread tariff Better management But we survived... How?

Comparison of KSE Index, CDC Revenues (Depository and Other Services)

Cost Controls

1.Continued dividend payouts 2.Continued tariff cuts 3.Continued market support 4.Continued diversification Despite the Financial Crisis... We:

Lessons from CDC To hedge the risk of boom and busts, CDC took some concrete steps which include: Business Diversification Capital Adequacy Depository Risk Insurance Investor Protection Compliance & Surveillance Better Planning

Business Diversification Ensured Sustainability CDC diversified its business in a number of areas and entered new sectors and industries, which include: Trustee and Custodial Services for mutual and pension funds Share Registrar Services for Issuer Companies ITMinds Limited (IT Consultancy & Implementation Services)

28 Trustee & Custodial Services Launched in 2002, this service offers safe keeping of assets, settlement of transactions made by Fund Managers and ensures compliance of constitutive documents and relevant legal frame work to safeguard the interest of the unit/certificate holder. Today, CDC is the most preferred Trustee & Custodial Service provided to the Mutual Fund Industry in the country.

29 Some facts about Trustee business (As of June 30, 2013) Type Wise Operational Funds Fund TypeNo. of Funds Open end Funds113 Closed end Funds08 Voluntary Pension Schemes09 Discretionary Portfolios16 Term Finance Certificates01 Total148

30 Share Registrar Services CDC started Registrar Services in It offers a composite portfolio of maintenance, registration, verification, handling corporate actions and direct customer dealing for Issuers and their Shareholders. RTA Statistics of Holding SecuritiesNumber of Securities Listed / Unlisted Securities82 (As of June 30, 2013)

L IMITED Founded in 2009, ITMinds is provider of information technology, consulting and business-process services. Focus: Microsoft and IBM based competencies and technologies Services: Enterprise Technology consultancy and implementation services Training, Ongoing Sustenance and Support services 31

Investor Protection & Convenience CDC took several initiatives to enhance investor protection and convenience. Some of these initiatives include: Business Continuity Planning Free-of-Cost CDC Access Simple Account Opening Form

Investor Account Services (IAS) Launched in 1999, CDC’s Investor Account Services (IAS) is a unique service offered by CDC with minimal charges. Over the years it has become a brand reflecting safety, security, reliability and trust. The main focus of CDC, since launching this service, has been on providing quality service and increasing efficiency of the processes so as to ensure that there are no complaints of mishandling of securities. 33

34 Value added services for investors  IVR – is a round-the-clock Interactive Voice Response system, supported by an state-of-the- art call centre.  Web – enables Account holders to access their account information via Web.  SMS – gives an added level of convenience to investors by providing them their account movement information on their mobile screens.  eStatement - provides Account Balance Statements in the clients inbox on a monthly or quarterly basis.  eAlert - provides real-time alerts about activities in the Investor Account in clients inbox

Future CDC Pakistan is fully geared up for the following strategic actions in future: Bringing the Non-Depository related Revenues in excess of 50%. Launching more businesses / services in other industry sectors like insurance, banking, etc. A Centralized Information Sharing Solution for Insurance Industry is already in its launch phases. Government Securities 35

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