Risk management will improve once PSE is formed

KSE MD says no distinction between TREC holders of different locations

KARACHI:

Small investors of Islamabad and Lahore will have “better, quicker and more efficient price discovery” following the proposed integration of the three stock exchanges into one national bourse, said Karachi Stock Exchange (KSE) Managing Director Nadeem Naqvi.

Representatives of the KSE, ISE and LSE signed a memorandum of understanding (MoU) last week, which will lead to the integration of the three entities into the Pakistan Stock Exchange (PSE).

Currently, ISE and LSE brokers have to first place orders with Karachi-based brokers on behalf of their investors and then they are routed through the KSE’s trading system called Karachi Automated Trading System (KATS).

But this practice will change after the merger of the three stock exchanges, as Islamabad- and Lahore-based investors will trade shares through direct brokers of a single stock exchange, Naqvi said while speaking to The Express Tribune on Monday.

“Risk management will improve for investors, as the various criteria for risk management on the KSE are higher than those on other exchanges,” the KSE MD said.

With regard to the brokers of the three exchanges, Naqvi said the trading right entitlement certificate (TREC) holders of the existing ISE and LSE will obtain, free of initial cost, the KSE’s Karachi Internet Trading System (KITS). It will remove any need for their own heavy IT infrastructure and associated costs, he said.

ISE and LSE brokers will then be able to focus fully on marketing for new investors and providing them with better service supported by the single stock exchange’s infrastructure, marketing and human resource capability, he added.

Referring to emerging and developed economies like the United States, United Kingdom, Australia, Japan, Korea, Indonesia, Malaysia, Mexico and Brazil, Naqvi said most jurisdictions have a single stock exchange. “The underlying philosophy behind the integration is that a single, deep and centralised stock exchange will bring greater efficiency, enhance regulatory oversight and improve the structure of the presently fragmented securities industry.”

Salient features of PSE

According to KSE MD, the proposed PSE will actually be the KSE “with its name changed”. In the same vein, Naqvi is expected to continue serving as the CEO of the rechristened national stock exchange.

The licences of both the ISE and LSE along with their TREC holders will be terminated under the MoU. These brokers will become TREC holders of the PSE, thus increasing the number of brokers on the bourse currently known as the KSE.

“From the management’s perspective, we will make no distinction between TREC holders of different locations. They are all our clients and we will strive to serve them equally to the best of our capability,” Naqvi said.

It is envisaged that all “non-exchange operation” assets of the existing exchanges, which mainly consist of real estate, will be carved out into a separate legal entity under the ownership of present shareholders of the three exchanges.

Once the KSE transforms into the PSE, the exchange will invite interest from potential strategic investors. The sale of the strategic stake of up to 40% equity will be in the exchange operating company, not in real estate assets, Naqvi noted.

Once the strategic equity stake is sold, 20% stake in the exchange operating company (ie PSE) will be offered to the general public through an offer for sale and a subsequent listing on the bourse, he added.

Published in The Express Tribune, September 1^st, 2015.

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