Making changes: PSX initiates process to launch derivatives

Stock exchange is upgrading technology and tightening regulations to safeguard investors

KARACHI: Barely two months after selling 40% of its stake to a Chinese consortium, the Pakistan Stock Exchange (PSX) has kick-started the process of a technological upgrade and tightening the regulatory regime ahead of the launch of derivative products.

A PSX official, speaking on the condition of anonymity, said investors could see the launch of derivative products within five to six months.

The planned launch of derivatives and technological advancement, in terms of both hardware and software, are in line with the objectives set for the market in the post-divestment era. In December, brokers’ partial stake (40%) was sold to a strategic Chinese consortium.

The other two objectives are that the consortium would increase investor base, and enable Pakistani companies to access international markets.

In a statement, the PSX said that “just last week the SECP-formed Committee on Derivatives Trading has submitted its report to the Commission with specific recommendations on launching derivative products and their risk management regime.”

It is hoped that this will enable the SECP to make appropriate “regulatory changes in order for PSX to launch derivatives trading in Pakistan capital market. This will further improve liquidity and provide investors with greater choices in managing their investment portfolios,” it said.

A derivative/option performs a similar function like that of a stock. However, they carry a higher risk of investment and demand traders to gather greater information about the particular option they want to trade in. Derivative’s price is derived from one or more underlying assets. It is itself a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset.

Tightening regulations

The SECP and PSX, along with two key stakeholders of shares trading i.e. Central Depository Company (CDC) and National Clearing Company of Pakistan Limited (NCCPL), are working to fast-track implementation of two key initiatives destined to safeguard investors at PSX.

One is standardisation of the broker back-office system so that all brokers follow clearly specified standardised recording and accounting procedures of their dealing/transactions with investors and same can be audited easily by the Joint Inspection Team (JIT) on regular and spot-check basis.

Secondly, formation of specialised company as subsidiary of CDC, to be called Professional Clearing Member (PCM), which will take over the responsibility of managing all assets of investors (both money and shares). When implemented, this will allow investors the option to use PCM rather than have assets in brokers’ sub-account.

The initiatives were introduced prior to the recent defaults of two brokerage firms, MR Securities and AWJ Securities.

The PSX statement added that the defaults were underlined by the Joint Inspection Team, which randomly conducts audit of the firms.

It advised investors to remain vigilant and double check brokerage firms statements regarding trades with SECP, PSX, CDC and NCCPL.

A broker-member on PSX board of directors said the role of brokers in monitoring and controlling defaults has come to an end with divestment and demutualization of the market. “This is only the SECP, which remains aware about happenings on brokerage firm default counters,” he said.

Published in The Express Tribune, February 19^th, 2017.

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