Securities and Exchange Commission of Pakistan 1 1

Contents Introduction to the Capital Market: Major Market Reforms 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

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

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

The Capital Market – An Introduction Entities Regulated by SECP Stock Exchanges Commodity Exchange Depository Company Clearing Company Brokers and Agents Underwriters Balloters Credit Rating Companies Consultant to the Issue Share registrars 5

The Capital Market Institutions Karachi Stock Exchange (G) Ltd established in 1947 Lahore Stock Exchange (G) Ltd established in 1970 Islamabad Stock Exchange (G) Ltd established in1989 Central Depository Company of Pakistan Limited established in 1997 National Clearing Company of Pakistan Limited established in 2001 Pakistan Mercantile Exchange Ltd. (formerly NCEL) established in 2002 and operations started in 2007 Stock Exchange: Providing an organized market place for bringing together, buyers and sellers of corporate debt and equity securities. Commodity Exchange: Pakistan Mercantile Exchange (formerly National Commodity Exchange Limited) is the only commodity exchange in Pakistan. Provides Futures contracts in commodities such as gold, silver, rice etc. National Clearing Company: Provides clearing and settlement services by acting as a central and geographically neutral clearinghouse for all the three Exchanges for book entry securities. Central Depository Company: Operates a book entry system to record and transfer securities in electronic/demat form. 6

The Capital Market Intermediaries Members (stock & commodity) Stock Brokers & Commodity Brokers Clearing/Settling Banks Agents NCCPL Clearing Members (Brokers and Non Brokers) CDS Participants 7

Systems and Processes Pre-Trade Risk Management Trading Post Trade Risk Management Clearing and Settlement Depository

Market Entry by Investors Stock Market Broker Investor

Steps for an Investor Agreement with Broker/Opening of Account with Broker Allotment of Account Number & Trading Code Opening of Account in CDS Mapping of UIN Deposit of Margins Making an Order 10

Requirements for Brokers Member of an Exchange Participant in CDC Clearing Member in NCCPL Registered with SECP as Broker Trading Terminal Margin and Exposures 11

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

KSE Progress 2006 2007 2008 2009 2010 2011 2012 Number of Listed Companies 652 654 653 651 644 638 591 Total Listed Capital - Rs. Bln 519 671 750 814 919 1,048 1,058 Total Market Capitalization - Rs. Bln 2,771 4,330 1,859 2,706 3,268 2,945 3,572 KSE-100 Index 10,041 14,076 5,865 9,387 12,022 11,347 13,928 *Figures for 2012 taken as of April 19, 2012. **All other figures have been taken as of December 31st of each year 13

Karachi Stock Exchange MARKET SEGMENTS Equity Bonds Derivatives OTC 14

Karachi Stock Exchange Order Work Flow Risk Management System Trading Engine Reporting Engine Transmission of Data to NCCPL 15

National Clearing Company of Pakistan Ltd. Order Work Flow Trading data from Stock Exchanges Preparation of Balance Order Auto Pay and Collect System Automated Securities Settlement UIN Information System 16

Central Depository Company of Pakistan Ltd. Automated Securities Settlement Corporate Actions CDC Account Structure CDC SMS Facility 17

MAJOR MARKET REFORMS

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

REFORM PROCESS Risk Management Other Measures ..continued 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

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

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 In order to rationalize the cost of issue of corporate bonds, the rate of stamp duty applicable on issue and transfer of Term Finance Certificates (TFCs) and Commercial Papers (CPs) were decreased by the Government of Punjab and ICT Administration in 2008. In 2010 the Government of Sindh has also brought down the stamp duty to 0.05% on issue of TFCs and 0.02% on issue of Commercial Papers. 22

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

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

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

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

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

Thank you. 28