10th acg cross training seminar 1 straight through processing (stp) for improving market liquidity...

10th ACG Cross Training Seminar 1

Straight Through Processing (STP) for Improving Market Straight Through Processing (STP) for Improving Market LiquidityLiquidity

Presentation for the 10th ACG Cross Training Presentation for the 10th ACG Cross Training Seminar Seminar

at Bali - Indonesiaat Bali - Indonesia

ByAli Abbas ZaidiFaisal Parekh

Abdul Rasool Hooda


AgendaAgenda

Pakistan Economic Fundamentals & Capital Pakistan Economic Fundamentals & Capital MarketMarket

Central Depository Company of Pakistan Central Depository Company of Pakistan LimitedLimited

Straight Through Processing (STP) for Straight Through Processing (STP) for Improving Market LiquidityImproving Market Liquidity


PAKISTANPAKISTANAn emerging economy……. An emerging economy…….

A view of Pakistan’s miracle mile - Karachi’s Financial district


The Economic Turnaround

Economic growth has accelerated to 7%YoY average over FY03-06

Robust consumer spending, rising investment and accelerating exports creating sustainable growth

Emerging middle class and favorable demographics Improved sovereign risk ratings

Geopolitical challenges managed for sustained economic growth

Proactive policy environment keeps challenges neutral for economic growth story. Command structures of militant elements defused Major gains made in Pakistan-India peace process. Musharraf’s rule has created unprecedented domestic political stability

Market at a discount due to perceived risk

Attractive entry level for investors Growing themes for investors are private equity and public equity Portfolio investors are well placed to enter the listed equity space after an extended period of

market consolidation and attractive valuations Several structural and cyclical themes are noteworthy for investors

Pakistan - Pakistan - Economic FundamentalsEconomic Fundamentals


Economic Fundamentals - Economic Fundamentals - Driving Market Driving Market PerformancePerformance

Sustainable Economic Growth Generated through strong domestic demand

Real GDP Growth (%) GDP Per Capita* (USD)

Source: Economic Survey 2004-05, 2005-06, 2006- 07 Source: Economic Survey 2004-05, 2005-06, 2006-07 * At current dollar prices

Real GDP has grown at an average 7.5% between FY04 - FY07 and remains on a sustainable and accelerated trajectory

FY07 nominal GDP is USD146.5bn with USD925 GDP/capita Per capita income projected to cross USD1,000 in FY08 - and USD2,000 by FY14

1.8

3.1

4.8

7.6

8.6

6.6 76.8

0

2

4

6

8

10

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08E200

400

600

800

1000

1200

US

DFY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08E

US$ 1,000 crossed


57.0

58.0

59.0

60.0

61.0

62.0

Dec-03Jun-04

Dec-04Jun-05

Dec-05Jun-06

Dec-06

Stable Exchange Rate & Healthy FX Reserves

US$/PKR FX Reserves (US$ mn)

Source: Economic Survey 2005-06 Source: SBP Website

Strong capital inflows stabilizing currency financing continuing trade deficit FY07 expected current account deficit /GDP is 4.5%-5.0%. Capital account surplus/GDP may

exceed though. Significant FX reserves cushion against US$/PKR volatility

2,279 1,9683,220

6,432

10,719

12,32712,618 13,111

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06

Economic Fundamentals - Economic Fundamentals - Driving Market Driving Market PerformancePerformance

The Economic Turnaround


PakistanPakistan’’s Equity Markets Equity Market

Stellar performance set to continueStellar performance set to continue ……


Currently three Stock Exchanges in Pakistan at Karachi, Lahore and Islamabad

Karachi Stock Exchange (KSE) is the main bourse with 654 listed companies as of Apr 30, 2008.

KSE started operations in 1947 but came into limelight in early 1990s due to financial sector liberalization.

KSE has 200 fixed members. Around 163 are active. Out of 200 , 173 are corporate and rest work as sole proprietor. Only 10 are listed.

Around 30 brokers have proper research department with on average 3 analysts.

Financial institutions (Mutual Funds, Commercial Banks, DFIs, etc), foreign fund managers & high net-worth individuals are main players in the market.

Process of demutualization of Karachi Stock Exchange (KSE) has began.

Pakistan – Pakistan – Showcasing Stock MarketShowcasing Stock Market


KSE100 IndexKSE100 Index – – Walking the trendlinesWalking the trendlines

15122

9989.41

7450.12

5278.18

3402.481054.67879.62

1520.74

1366.441770.12

13772.46

0

2000

4000

6000

8000

10000

12000

14000

16000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 30-Apr-08

The KSE 100 Index has witnessed a compounded annual growth rate of 34% over the past 10 years

KSE 100 is a capital weighted index consisting of 100 companies representing 85% of the total market capitalization of the Exchange.


Regional Market - Regional Market - Index Growth Comparison for Index Growth Comparison for 20072007

Regional Market Index % Increase in 2007

China Shanghai Composite 96.66

Jakarta Composite 52.08

Bombay BSE 30 47.15

Karachi KSE 100 40.19

Hong Kong Hang Seng 39.31

Seoul Composite 32.25

Kuala Lumpur KLSE Composite 31.82

Bangkok Set 26.22

Singapore Strait Times 16.63

Taiwan T. Weighted 8.72

Tokyo Nikkei 225 -11.13


CDC CDC –– The only Securities The only Securities Depository of the CountryDepository of the Country


About Us!About Us!

Central Depository Company of Pakistan Limited

(CDC) was incorporated in January 1993 as an

unlisted limited liability company to manage and

operate the Central Depository System (CDS) and

started its Live Operations in September 1997. The

equity partners include all there stock exchanges

and reputable commercial banks and other financial

institutions


About our BusinessAbout our Business

Depository Services: responsible to operate and maintain Central Depository System (CDS)

Investor Account Services: Allows retail investors to open and maintain securities accounts directly with CDC.

Trustee & Custodial Services (T&C): provide services to open end and closed end funds. Emerged as largest T&C service provider in the private sector in a short span of time.

Securities Registrar Services: carry out all statutory compliance of Issuers towards their shareholders including maintenance of statutory registers and matters relating to transfers & corporate actions under service contract


CDS Account StructureCDS Account Structure

Central Depository System (CDS)Central Depository System (CDS)

Issuers / Registrars

Issuers / Registrars Account HoldersAccount Holders PledgeesPledgees

Account HoldersAccount Holders Investor Account Services

Investor Account Services

Main Account

Main Account

House Account

House Account Indv

Investor A/c

Indv Investor A/c

Corp Investor A/c

Corp Investor A/c

CFSH AccountCFSH Account

CFS Sub AccountCFS Sub Account

Cash Account

Cash Account

CFS ParticipantsCFS Participants

ParticipantsParticipants

Main A/cMain A/c

House A/c

House A/c

Sub Account

Sub Account


Types of Accounts in CDSTypes of Accounts in CDS

Main Account: This account is used as a transit account where securities moved from one account to another are routed through this account

House Account: This account is meant for keeping securities beneficially owned by the Participant

Sub-Account: Multiple Sub-Accounts are opened and maintained by the Participants to record title to securities owned by his clients commonly known as Sub-Account Holders

Investor Account: CDC provides service where retail level investors can have direct custody account with CDC for maintaining their investment portfolios

CDC provides following types of accounts to facilitate custody and settlement of securities:


About our Legal FrameworkAbout our Legal Framework

Central Depositories Companies (Establishment and

Regulation) Rules, 1996

Central Depositories Act, 1997 (XIX of 1997)

CDC Regulations

The Companies Ordinance, 1984 (XLVII of 1984)

Listing Regulations of Stock Exchanges

Zakat & Ushr Ordinance, 1980 (XVIII of 1980)

NBFC Rules and Regulations


Implementation of National Clearing & Settlement System

Launch of trustee and custodial services

Launch of Investor Account Services

Launch of enhanced version of CDS (eCDS)

Induction of Open-end Mutual Funds in CDS

Launch of CDC call centre

CDC Access (i.e IVR & Web services)

SMS (Short messaging services)

Registrar / Transfer Agent Services

About some of our Achievements About some of our Achievements


586 PARTICIPANTS / ACCOUNT HOLDERS

106 ELIGIBLE PLEDGEE

691 CDS LIVE SECURITIES

285,750

NUMBER OF CLIENT ACCOUNTS (INCLUDING JOINT ACCOUNTS)

*as at April 30, 2008 contd..

Operational HighlightsOperational Highlights


54.46(In Billion)

TOTAL NUMBER OF SHARES IN CDS

74.16 US$

(In Billion)

TOTAL MARKET CAPITALIZATION OF SHARES IN CDS

78.05%SHARES IN CDS w.r.t ISSUED SHARE CAPITAL

87.30% UNITS OF TERM FINANCE CERTIFICATES w.r.t TOTAL ISSUE

*as at April 30, 2008

Operational HighlightsOperational Highlights


About our future plansAbout our future plans

100% Dematerialization of Pakistani Capital Market

Trusteeship for REITS

Back Office Accounting Functions for Mutual Funds

Web-based Transactions

Investment Road Shows (Local & International)


Straight through Straight through ProcessingProcessing

(STP)(STP)

What is STP?

Straight-through Processing (“STP”) is a mechanism that automates the end-to-end processing of transactions of the financial instruments in a manner where no physical activity is involvement during the progression of a transaction. STP can be defined as electronically capturing and processing of transactions in one pass, from the point of initiation of a deal to the final settlement. STP is the name given to the automation of all processes related to the trade lifecycle of financial securities, including equities, fixed income, and derivatives.


Advantages of STPAdvantages of STP

STP ensures accuracy speed & secured connectivity at all

stages of the transactions using the efficient IT systems.

STP enables the entire process for capital market and

payment transaction to be conducted electronically without

the need for re-keying or manual intervention.

STP minimizes settlement risks as clearing & settlement

occurs simultaneously.

STP also helps in reducing the systemic & operations

risks to improve certainty of settlement & reduces

operations costs.


Ready Market

Spot Market

Deliverable Futures Contracts Market

Continuous Funding System Market

Type of MarketsType of Markets

Following type of markets exists to cater various securities transactions:


Infrastructure InstitutionsInfrastructure Institutions

Stock Exchanges (Karachi-Lahore-Islamabad)

Clearing Company (geographically neutral)

Settling Banks

Central Depository Company (geographically neutral)

Following are the infrastructure institutions of the

Pakistani Capital Market:


Investor

SettlingBank

Stock BrokerAutomated

TradingSystem

Clearing & Settlement

System

Central Depository

System

Integration of InstitutionsIntegration of Institutions

The market participants & institutions involved in the securities transactions are integrated in the manner to achieve STP


Buyers and Sellers of the securities are required to transact through intermediaries i.e. Stock Brokers or their authorized agents. Both buyers and sellers are required to open Sub-Accounts with the Stock Broker or an Investor Account directly with the Central Depository Company.

Investors are also required to possess a Unique Identification Number (UIN) issued by the Clearing Company before entering into stock trading. UIN is recorded at the time of placing of order by the Stock Broker with the Stock Exchange which is passed on to the Clearing Company.

Orders can be placed either through online trading portal (provided by some of the prominent brokerage houses) or through conventional mode of trading, e.g. via telephone calls, personal visit, text messaging (using cell phones) or emails to the Stock Brokers or their authorized agents.

In case of online trading, orders placed by the clients are received and stored in the online trading portal of the Stock Broker and directly transmitted to the automated trading system of the Stock Exchange, hence, no manual intervention is required for execution of trade orders.

In Pakistani capital market, STP is implemented to a great extent, however, there is still room for further improvement. Step by step activities performed during progression of a trading cycle is mention as under:

STP of Ready Market (T+2)STP of Ready Market (T+2)

contd..


Once trade is executed, the online system automatically sends the confirmation to the client, provided that the order was a ‘market price order’ where no limit of price was quoted by the client. In case of a ‘limit order’, client is informed after trade is executed upon matching price is fetched. In this case client has to contact the Broker/agent for a confirmation. Most of the broker provides timely SMS facility to ensure execution of trade.

All outstanding trades are settled through an automated Clearing Company where trade feeds are automatically transmitted from the trading systems of Stock Exchanges to the Clearing System of Clearing Company.

Upon receipt of trade feeds, Clearing System prepares balance order after netting all trades showing net delivery obligation of the Selling Broker. Such balance order report is prepared and transmitted by the Clearing Company through the automated feature, which reflects on the screen of Stock Broker on the Settlement Date.

On or before the Settlement Date, the Selling Broker manually places the securities in his Main Account from his House Account / Sub-Account (client account). Such securities are automatically picked by the Clearing System of the Clearing Company and delivered to the Buying Broker in blocked form. This activity can also be done anytime prior to settlement date using Future-Dated Intra-Account Delivery.


contd..


Simultaneously, the Settling Bank, after confirming as to the availability of sufficient funds in Buying Broker’s bank account manually marks (by ticking the online report reflected on its screen) the report, which results in automatic unblocking of securities delivered in the Main Account of the Buying Broker.

Once securities are unblocked as a consequence of action performed by the Settling Bank, the Buying Broker manually moves the securities from his Main Account to his House Account or, as the case may be, the respective Sub-Accounts of his clients. With this, the trading and settlement completes.

In case of delivery default on the part of the Selling Broker on the Settlement Date, the Clearing System initiates the default proceedings as per their rules and regulations and squares-up the trade.

In case of money default, the Clearing System, on the electronic instruction of the Settling Bank, retrieves the securities delivered in to the Main Account of the Buying Broker in blocked form into its retrieval account for further processing as per procedures.

Institutions are required to become an Account Holder of and an Associate Clearing Member of Clearing Company.


contd..


In case of an institutional trading, the only change is that the risk management is done

directly with such institution, whereby at the time of trading, the Stock Broker specifies

that trading is done on behalf of an institution. Based on such information, the trade feed

send by the Stock Exchange to the Clearing Company are tagged specifying the details

of such institution. The Clearing Company then obtains affirmation from such institution

and securities are then directly delivered to such institution subject to payment. The

whole process is done without any manual intervention.

As per this STP model, there are manual interventions at three stages as mentioned

above



In the deliverable futures contract, the settlement is made

after 30 days (every Friday of last week of the month), the

securities are traded in the forward market and after the

script is live on ready market the securities are settled

accordingly. However, marked to market profit/loss is

calculated on daily basis.

STP of Deliverable Future Market ContractsSTP of Deliverable Future Market Contracts


In this market, the settlement cycle is 22 business days. Securities purchased by an investor are delivered to the authorized financier. Upon payment along with agreed mark-up, such securities are delivered to the investor or the investor may sale the said securities in the ready market resulting in the closure of CFS contract.

In case the investor is interested in extending financing period, it can be rolled over after the expiry of 22nd business day for another 22 business days.

However, any corporate action accrued during the intervening period are automatically passed on the respective investor.

STP of Continuous Funding System MarketSTP of Continuous Funding System Market


Trade Execution on Automated Trading System

Automated Trading System daily generates a report at close of trading hours of executed trades which is sent to the Clearing House each trading day

Receiving & Payment Orders Delivering & Payment Orders

(Securities in CDS in book-entry form)

Issue Cheques / notify of receipt Release Payment

Securitiesdelivery

Fundspayment

Flow of Settlement of Trade (T+2)Flow of Settlement of Trade (T+2)

Buying Investor

BuyingBroker

SellingBroker

Selling Investor

ACTIVITIES

Stock ExchangeTrade Execution on Automated Trading System

Automated Trading System daily generates a report at close of trading hours of executed trades which is sent to the Clearing House each trading day

Clearing Company(Netting of trades)

Receiving & Payment Orders

Buying Broker Selling BrokerSecurities delivered

Clearing CompanyIssue Cheques / notify of receipt Release Payment

Buying Investor Selling Investor

Securitiesdelivery

Fundspayment

Manual Intervention by moving securities from Main A/c to client

account after settlement

Manual Intervention by manually marking the securities confirming the availability

of sufficient balance

Manual Intervention by moving securities from Client Account to Main A/c for settlement purpose

Settling Bank


STP Development - A Look Ahead…STP Development - A Look Ahead…

As per the current system design, all securities are routed through the Main Account while delivering one account to another. Due to such setup, true STP is not achieved.

In order to bring in more efficiency and transparency in the securities transactions, it would be appropriate to change the present model such that securities are directly transferred from one account to another.

Such model would greatly facilitate settlement of securities where UIN would play major role in identifying the buyer and seller. The system would have all the information regarding buyer and seller, based on which securities would be collected from the seller’s account and directly delivered to the buyer’s account without any manual intervention.


THANK YOU

10th acg cross training seminar 1 straight through processing (stp) for improving market liquidity...

Documents

th acg cross training

economic turnaround

economic survey

economic growth story

market liquidity slide

cross usd1

crossed slide

market liquidity presentation