the 8th acg cross training seminar merits & de-merits of direct & in-direct accounts in the...
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The 8th ACG Cross Training SeminarThe 8th ACG Cross Training Seminar
Merits & De-Merits ofMerits & De-Merits ofDirect & In-Direct AccountsDirect & In-Direct Accounts
in the Pakistan Capital Marketin the Pakistan Capital Market
by:by:
Shabnam FahimShabnam Fahim
Syed Faisal HashmiSyed Faisal Hashmi
Shariq NaseemShariq Naseem
Agenda
Pakistan Capital Markets.Pakistan Capital Markets.
Central Depository Company of PakistanCentral Depository Company of Pakistan
Merits and Demerits of Direct and Indirect Merits and Demerits of Direct and Indirect account Methodaccount Method
Pakistani Capital Markets
Market regulatorsMarket regulators
Stock ExchangesStock Exchanges
Instruments TradedInstruments Traded
Trading EnvironmentTrading Environment
Clearing and SettlementClearing and Settlement
Past Brief and Current SituationPast Brief and Current Situation
Market Regulators
Securities & Exchange Commission of Securities & Exchange Commission of Pakistan (SECP)Pakistan (SECP)Regulating stock exchanges, NBFCs, CDC and Regulating stock exchanges, NBFCs, CDC and
Corporate Sector Corporate Sector Functional Responsibility: framing of rules and Functional Responsibility: framing of rules and
regulationsregulationsRecent developments, REIT, VPS, NBFC rules, debt Recent developments, REIT, VPS, NBFC rules, debt
marketmarket
State Bank of Pakistan (SBP)State Bank of Pakistan (SBP)Regulating banking institutionsRegulating banking institutionsPolicy measuresPolicy measures
MonetaryMonetary CreditCredit Foreign exchange mechanismForeign exchange mechanism
Stock Exchanges
Three Stock Exchanges in Pakistan:Three Stock Exchanges in Pakistan:The Karachi Stock Exchange The Karachi Stock Exchange Lahore Stock Exchange Lahore Stock Exchange Islamabad Stock Exchange Islamabad Stock Exchange
The Stock Exchanges:The Stock Exchanges:Most active and Liquid- KSE Most active and Liquid- KSE Self regulatory body Self regulatory body
Instruments Traded
EquityEquityOrdinary SharesOrdinary SharesPreference SharesPreference Shares
BondsBonds TFCs TFCs Other Debt Instruments- TBs, PIBsOther Debt Instruments- TBs, PIBs
DerivativesDerivatives Stock Exchange offers equity futuresStock Exchange offers equity futures Monthly contract- overlap of at least 2 trading days Monthly contract- overlap of at least 2 trading days
b/w contractsb/w contracts
The Trading EnvironmentEquitiesEquities
All Stock exchanges have own trading platforms All Stock exchanges have own trading platforms Automated Trading System:Automated Trading System:
Processing based on bids & offers and Processing based on bids & offers and Intimation of trades executedIntimation of trades executed
Circuit Breakers- 5%Circuit Breakers- 5%
Bond MarketBond Market Primary MarketPrimary Market
PIBs Auctioned monthly & TBs fortnightlyPIBs Auctioned monthly & TBs fortnightly TFCs by Pakistani CompaniesTFCs by Pakistani Companies
Secondary MarketSecondary Market PIBs and TBs traded freelyPIBs and TBs traded freely Investors hold TFCs until maturity- low liquidity
Clearing and Settlement
ClearingClearingGovernment bonds through SBPGovernment bonds through SBPOthers through National Clearing CorporationOthers through National Clearing Corporation
Scrip lessScrip lessSettlement System T+3Settlement System T+3Payment released-broker ascertains stock transfer- CDC A/cPayment released-broker ascertains stock transfer- CDC A/c
OTCOTCNo formal organized marketNo formal organized market
PhysicalPhysicalLess than 1% SettlementLess than 1% Settlement
KSE Current Situation Pakistan Included in MSCI Emerging Market index- May 2005 Pakistan Included in MSCI Emerging Market index- May 2005 World Bank-Investment report 2005- one of top ten reformer countriesWorld Bank-Investment report 2005- one of top ten reformer countries Market capitalization- $ 57 billion with 663 securities (April 17, 06) Market capitalization- $ 57 billion with 663 securities (April 17, 06) 44thth year- one of the best performing markets- Business Week- US year- one of the best performing markets- Business Week- US
newspaper, USA todaynewspaper, USA today Past four years compound annual growth rate-56% Past four years compound annual growth rate-56% KSE100 share index- increased 53.6% July 05 - May 06 - 3KSE100 share index- increased 53.6% July 05 - May 06 - 3rdrd highest highest Capital markets exceptional performanceCapital markets exceptional performance– – ReasonsReasons
Pakistan Economic Revival- GDP growth- 2002 onwardsPakistan Economic Revival- GDP growth- 2002 onwards Consistent and transparent economic policiesConsistent and transparent economic policies Successful privatisation process-PTCL/National refinery etcSuccessful privatisation process-PTCL/National refinery etc Impressive Corporate ResultsImpressive Corporate Results Sound Monetary Polices- SBP, & Capital Market reforms- SECPSound Monetary Polices- SBP, & Capital Market reforms- SECP
… … the Country’s only Securities’ the Country’s only Securities’ DepositoryDepository
CDC ...CDC ...
Incorporated in 1993Incorporated in 1993
To manage and operate the Central Depository To manage and operate the Central Depository System (CDS)System (CDS)
Live Operations in 1997Live Operations in 1997
Central Depository Company (CDC)
Our services
Depository Services Depository Services
Trustee and Custodial Services Trustee and Custodial Services
Registrar & Transfer Agent (in near future)Registrar & Transfer Agent (in near future)
Legal Framework
Companies OrdinanceCompanies Ordinance
Central Depository Company Regulations Central Depository Company Regulations
Central Depositories ActCentral Depositories Act
Listing RegulationsListing Regulations
Implementation of National Clearing & Settlement Implementation of National Clearing & Settlement SystemSystem
Launch of trustee and custodial services Launch of trustee and custodial services Launch of Investor Account ServicesLaunch of Investor Account Services Launch of enhanced version of CDS (Launch of enhanced version of CDS (eeCDS)CDS) Induction of Open-end Mutual Funds in CDSInduction of Open-end Mutual Funds in CDS Launch of CDC call centreLaunch of CDC call centre CDC AccessCDC Access
Achievements
Securities handled through CDS Ordinary SharesOrdinary Shares
Preference shares Preference shares
Term Finance CertificatesTerm Finance CertificatesCertificates of Open-ended mutual Funds Certificates of Open-ended mutual Funds
Certificates of Closed-end FundsCertificates of Closed-end Funds
Modaraba CertificatesModaraba Certificates
Transactions Supported through CDS
Deposit of Securities Deposit of Securities
Delivery (Transfer) of SecuritiesDelivery (Transfer) of Securities
Withdrawal of SecuritiesWithdrawal of Securities
Pledge Pledge
Corporate Action Corporate Action
Merger / De-mergerMerger / De-merger
Consolidation /SplitConsolidation /Split
Conversion Conversion
IPOIPO
Issuance and Redemption of Open End Mutual Fund Units Issuance and Redemption of Open End Mutual Fund Units
CDS Elements
Issuers Account Holder Pledgee
Account Holder Participant
CDS Elements
Account HoldersAccount Holders
Account HoldersAccount Holders
Account holders have direct access to the CDS & are allowed to keep their beneficially owned securities in CDS..
ParticipantsParticipants
Participants also have direct access to CDS and are allowed to provide custody services to their clients in addition to keeping their beneficially owned securities.
Account Categories
Main Account – Transitory Account Main Account – Transitory Account
House Account – Account Holder’s own accountHouse Account – Account Holder’s own account
Sub Account – Client Account Sub Account – Client Account
IAS Account – Client AccountIAS Account – Client Account
Account HolderAccount Holder
Central Depository System (CDS)Central Depository System (CDS)
Account HolderAccount Holder
Main A/CMain A/C
House A/CHouse A/C
Main A/CMain A/C
House A/CHouse A/C
Sub-A/CSub-A/C
Investor A/C.Investor A/C.
ParticipantsParticipants
Account Structure
Admission Criteria
Direct Account
Member Stock Exchanges
Financial Institutions
Qualified investors that meet: Technical requirementsTechnical requirements Business Integrity Business Integrity
requirementsrequirements Capacity requirements Capacity requirements having Data Processing & having Data Processing &
Operational Capabilities Operational Capabilities
Indirect Account
Any person or corporate entity.Any person or corporate entity.
Merits & De-Merits
of
Direct & In-Direct Accounts
Benchmarking
Forthcoming slides would provide you the behavior of Direct & In-Forthcoming slides would provide you the behavior of Direct & In-direct Accounts, taking different important parameters of Capital direct Accounts, taking different important parameters of Capital Markets as the Yardstick. Markets as the Yardstick.
We would analyze the merits & de-merits of both the type of We would analyze the merits & de-merits of both the type of accounts, by placing each of them individually, in different dynamic accounts, by placing each of them individually, in different dynamic Capital Market motions. Capital Market motions.
This exercise would allow us to determine the effectiveness of each This exercise would allow us to determine the effectiveness of each type of account in a more practical & realistic milieu.type of account in a more practical & realistic milieu.
Cost
Direct
Definitely DAs cost more than Definitely DAs cost more than IDAs. A significant difference is of IDAs. A significant difference is of “Security Deposit”“Security Deposit” which is a which is a refundable amount and required at refundable amount and required at the time of joining the CDC as a the time of joining the CDC as a DA. Another additional cost is DA. Another additional cost is pertaining to the pertaining to the “CDS “CDS Connection Fee”.Connection Fee”.
In-Direct
Comparably IDAs do prove cost-Comparably IDAs do prove cost-effective than their adversary, effective than their adversary, however we might find cases however we might find cases where Custodians charge and an where Custodians charge and an additional cost as additional cost as “processing “processing and/or convenience charges”.and/or convenience charges”.
Efficiency
Direct
Capital Markets, anywhere in the Capital Markets, anywhere in the world, are dynamic & momentary in world, are dynamic & momentary in nature. DAs always prove more nature. DAs always prove more fruitful in such dynamic environments fruitful in such dynamic environments as you have as you have more control and less more control and less dependency.dependency.
In-Direct
In the dynamic Capital Markets, In the dynamic Capital Markets, dependency Is always treated as dependency Is always treated as a Shortcoming. No matter how a Shortcoming. No matter how efficient your Custodian is, you efficient your Custodian is, you remain remain dependentdependent on them and on them and dependency is not advisable. dependency is not advisable.
Confidentiality
Direct
Letting your cards known to others Letting your cards known to others is treated as a Cardinal Sin in is treated as a Cardinal Sin in Capital Markets. DAs always Capital Markets. DAs always
protect your protect your confidentialityconfidentiality and and ensure that your portfolio remains ensure that your portfolio remains
known to you ONLY.known to you ONLY.
In-Direct
Adding a third party in Adding a third party in sharingsharing your confidential information would your confidential information would
always add risk.always add risk.
Clearing
.Direct
DAs allows investors to reach the DAs allows investors to reach the 1st layer of Clearing & 1st layer of Clearing &
settlementsettlement in some cases like via in some cases like via IDS. In such cases sometimes you IDS. In such cases sometimes you may also get the chance of dealing may also get the chance of dealing
with the with the Virgin Transactions.Virgin Transactions.
In-Direct
Clearing through IDAs always keep Clearing through IDAs always keep you on the you on the backseatbackseat. You may not . You may not be able to avail the advantages of be able to avail the advantages of reaching the 1reaching the 1stst layer of clearing & layer of clearing &
SettlementSettlement
Settlement
Direct
Where reaching to the 1Where reaching to the 1stst level of level of Clearing & settlement can be Clearing & settlement can be fruitful in many ways like getting fruitful in many ways like getting access to the virgin transactions, access to the virgin transactions, sometimes (specially in cases of sometimes (specially in cases of Failed settlement from one of the Failed settlement from one of the involved parties) you may place involved parties) you may place yourself in a very yourself in a very Risky situation.Risky situation.
In-Direct
IDAs always remain away from IDAs always remain away from settlement cycle means also settlement cycle means also remains remains away from the risk & away from the risk & rewardsrewards associated to it. associated to it.
Compliance & Audit
Direct
DAs are subject to number of DAs are subject to number of regulatory requirements. It also regulatory requirements. It also requires requires compliancecompliance to number of to number of regulatory frameworks including regulatory frameworks including CDC Regulations. DAs are also CDC Regulations. DAs are also exposed to the CDC Participant exposed to the CDC Participant
Audit requirementsAudit requirements..
In-Direct
IDAs only involve IDAs only involve minimal levelminimal level of of Regulatory and compliance Regulatory and compliance related requirements.related requirements.
Risk Management & Security
Direct
DAs are always more DAs are always more secure and Risk secure and Risk mitigatingmitigating in nature. Having in nature. Having your securities under your your securities under your own control is always own control is always advisable.advisable.
In-Direct
IDAs are more IDAs are more prone to prone to riskrisk then their counterparts. then their counterparts.
Information
Direct
In CDC, DAs have an edge In CDC, DAs have an edge mainly due to two reasonsmainly due to two reasons::
Access to complete set of Access to complete set of
CDS reports.CDS reports. E-mail Integration process.E-mail Integration process.
In-Direct
Although IDAs do not have Although IDAs do not have the access to the two main the access to the two main
sources of information which sources of information which DAs have, but having an IDA DAs have, but having an IDA
with with “Global Custodian”“Global Custodian”
may also be very informative.may also be very informative.
Global Operations
Direct
Investors having Global Investors having Global Operations may find it Operations may find it
difficult to maintain Direct difficult to maintain Direct Depository Account in Depository Account in every every
locationlocation they operate. they operate.
In-Direct
IDA’s in this case have a IDA’s in this case have a clear edge over their rival, clear edge over their rival, specially in case of “Global specially in case of “Global Custodians”, you only have Custodians”, you only have to deal with a to deal with a single partysingle party for your complete Global for your complete Global
Operations. Operations.
Maintenance & Convenience
Direct
DAs are definitely convenient DAs are definitely convenient in cases where you have huge in cases where you have huge Operations and you do not Operations and you do not want to involve in lot of want to involve in lot of paper paper transactionstransactions
In-Direct
IDA’s are more convenient IDA’s are more convenient for smaller investors. for smaller investors. However, they also prove However, they also prove very convenient in cases very convenient in cases like like “Global Operations”“Global Operations” and cases where the and cases where the investor need to maintain investor need to maintain numerous accounts.numerous accounts.
Registration
Direct
There are There are minimalminimal chances chances of Registration risk in DAs as of Registration risk in DAs as even in cases of leaving even in cases of leaving securities in main account securities in main account do not have any Registration do not have any Registration threat.threat.
In-Direct
IDA’s do have a IDA’s do have a imminent imminent registration threatregistration threat, leaving , leaving shares in Main account of shares in Main account of Custodian, because of any Custodian, because of any reason, may create a reason, may create a serious Registration threat.serious Registration threat.
Entitlements
Direct
Dealing with entitlements Dealing with entitlements and other corporate actions and other corporate actions is is safersafer with DAs. You with DAs. You remain on the top as far as remain on the top as far as the announcements are the announcements are concern.concern.
In-Direct
In IDAs, you add an In IDAs, you add an additional legadditional leg to your to your entitlement cycle which is entitlement cycle which is not advisable.not advisable.
Value Added Services
Direct
IDA’s are IDA’s are onlyonly exposed to exposed to the value added services the value added services extended by the depository extended by the depository itself.itself.
In-Direct
IDA’s have an edge IDA’s have an edge specially in cases where specially in cases where your account is with a your account is with a “Global Custodian”“Global Custodian” like like Cash Management, proxy Cash Management, proxy services, etc.services, etc.
