1. Securities and Exchange Commission of Pakistan1 1

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

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

9. Market Entry by Investors
Stock Market
Broker
Investor

10. 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

11. 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

12. 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

13. 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

14. Karachi Stock Exchange
MARKET SEGMENTS
Equity
Bonds
Derivatives
OTC 14

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

16. 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

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

18. MAJOR MARKET REFORMS

19. 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

20. 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

21. 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

22. 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 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. Thank you. 28