The 8th ACG Cross Training Seminar

Merits & De-Merits of

Direct & In-Direct Accounts
in the Pakistan Capital Market

by:

Shabnam Fahim
Syed Faisal Hashmi
Shariq Naseem
 Agenda
 Pakistan Capital Markets.

 Central Depository Company of Pakistan

 Merits and Demerits of Direct and Indirect

account Method
 Pakistani Capital Markets
 Market regulators

 Stock Exchanges

 Instruments Traded

 Trading Environment

 Clearing and Settlement

 Past Brief and Current Situation

 Market Regulators
Securities & Exchange Commission of
Pakistan (SECP)
 Regulating stock exchanges, NBFCs, CDC and
Corporate Sector
 Functional Responsibility: framing of rules and
regulations
 Recent developments, REIT, VPS, NBFC rules, debt
market

State Bank of Pakistan (SBP)

 Regulating banking institutions
 Policy measures
 Monetary
 Credit
 Foreign exchange mechanism
Stock Exchanges

 Three Stock Exchanges in Pakistan:

The Karachi Stock Exchange
Lahore Stock Exchange
Islamabad Stock Exchange

 The Stock Exchanges:

Most active and Liquid- KSE
Self regulatory body
 Instruments Traded
Equity
Ordinary Shares
Preference Shares
Bonds
 TFCs
 Other Debt Instruments- TBs, PIBs
Derivatives
 Stock Exchange offers equity futures
 Monthly contract- overlap of at least 2 trading days
b/w contracts
 The Trading Environment
 Equities
 All Stock exchanges have own trading platforms
 Automated Trading System:
 Processing based on bids & offers and
 Intimation of trades executed
 Circuit Breakers- 5%
 Bond Market
 Primary Market
 PIBs Auctioned monthly & TBs fortnightly
 TFCs by Pakistani Companies
 Secondary Market
 PIBs and TBs traded freely
 Investors hold TFCs until maturity- low liquidity
 Clearing and
Settlement
 Clearing
Government bonds through SBP
Others through National Clearing Corporation
 Scrip less
Settlement System T+3
Payment released-broker ascertains stock transfer- CDC A/c
 OTC
 No formal organized market
 Physical
 Less than 1% Settlement
KSE Current Situation
 Pakistan Included in MSCI Emerging Market index- May 2005
 World Bank-Investment report 2005- one of top ten reformer countries
 Market capitalization- $ 57 billion with 663 securities (April 17, 06)
 4th year- one of the best performing markets- Business Week- US
newspaper, USA today
 Past four years compound annual growth rate-56%
 KSE100 share index- increased 53.6% July 05 - May 06 - 3rd highest
 Capital markets exceptional performance– Reasons
 Pakistan Economic Revival- GDP growth- 2002 onwards
 Consistent and transparent economic policies
 Successful privatisation process-PTCL/National refinery etc
 Impressive Corporate Results
 Sound Monetary Polices- SBP, & Capital Market reforms- SECP
 CDC ...
… the Country’s only Securities’
Depository
Central Depository Company (CDC)

 Incorporated in 1993

 To manage and operate the Central Depository

System (CDS)

 Live Operations in 1997

 Our services
 Depository Services

 Trustee and Custodial Services

 Registrar & Transfer Agent (in near future)

 Legal Framework
 Companies Ordinance

 Central Depository Company Regulations

 Central Depositories Act

 Listing Regulations
Achievements
 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
Securities handled through CDS
 Ordinary Shares

 Preference shares

 Term Finance Certificates

Certificates of Open-ended mutual Funds

 Certificates of Closed-end Funds

 Modaraba Certificates
 Transactions Supported through CDS

Deposit of Securities
Delivery (Transfer) of Securities
 Withdrawal of Securities
Pledge
Corporate Action
Merger / De-merger
Consolidation /Split
Conversion
IPO
Issuance and Redemption of Open End Mutual Fund Units
 CDS Elements

CDS Elements

Issuers Account Holder Pledgee

Account Holder Participant

Account Holders
 Account Holders
 Account holders have direct access to the CDS & are
allowed to keep their beneficially owned securities in
CDS.

 Participants
 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

 House Account – Account Holder’s own account

 Sub Account – Client Account

 IAS Account – Client Account

Account Structure
Central Depository System (CDS)

Account Holder
Account Holder

Account Holder Participants

Main A/C
Main A/C Investor A/C.
Investor A/C.

House A/C
House A/C

Sub-A/C
 Admission Criteria
Direct Account Indirect Account

Member Stock Exchanges Any person or corporate entity.

Financial Institutions
Qualified investors that meet:
 Technical requirements
 Business Integrity
requirements
 Capacity requirements
 having Data Processing &
Operational Capabilities
 Merits & De-Merits
of
Direct & In-Direct Accounts
 Benchmarking

 Forthcoming slides would provide you the behavior of Direct & In-
direct Accounts, taking different important parameters of Capital
Markets as the Yardstick.

 We would analyze the merits & de-merits of both the type of

accounts, by placing each of them individually, in different dynamic
Capital Market motions.

 This exercise would allow us to determine the effectiveness of each

type of account in a more practical & realistic milieu.
 Cost
Direct In-Direct

Definitely DAs cost more than Comparably IDAs do prove cost-

IDAs. A significant difference is of effective than their adversary,
“Security Deposit” which is a however we might find cases
refundable amount and required at where Custodians charge and an
the time of joining the CDC as a additional cost as “processing
DA. Another additional cost is and/or convenience charges”.
pertaining to the “CDS
Connection Fee”.
 Efficiency

Direct In-Direct

Capital Markets, anywhere in the In the dynamic Capital Markets,

world, are dynamic & momentary in dependency Is always treated as
nature. DAs always prove more a Shortcoming. No matter how
fruitful in such dynamic environments efficient your Custodian is, you
as you have more control and less remain dependent on them and
dependency. dependency is not advisable.
 Confidentiality
Direct In-Direct

Letting your cards known to others Adding a third party in sharing

is treated as a Cardinal Sin in your confidential information would
Capital Markets. DAs always always add risk.
protect your confidentiality and
ensure that your portfolio remains
known to you ONLY.
 Clearing

Direct In-Direct
.

DAs allows investors to reach the Clearing through IDAs always keep
1st layer of Clearing & you on the backseat. You may not
settlement in some cases like via be able to avail the advantages of
IDS. In such cases sometimes you reaching the 1st layer of clearing &
may also get the chance of dealing Settlement
with the Virgin Transactions.
 Settlement
Direct In-Direct

Where reaching to the 1st level of IDAs always remain away from
Clearing & settlement can be settlement cycle means also
fruitful in many ways like getting remains away from the risk &
access to the virgin transactions, rewards associated to it.
sometimes (specially in cases of
Failed settlement from one of the
involved parties) you may place
yourself in a very Risky situation.
 Compliance & Audit
Direct In-Direct

DAs are subject to number of IDAs only involve minimal level of

regulatory requirements. It also Regulatory and compliance
requires compliance to number of related requirements.
regulatory frameworks including
CDC Regulations. DAs are also
exposed to the CDC Participant
Audit requirements.
 Risk Management & Security

Direct In-Direct

DAs are always more IDAs are more prone to

secure and Risk risk then their counterparts.
mitigating in nature. Having
your securities under your
own control is always
advisable.
 Information

Direct In-Direct

In CDC, DAs have an edge Although IDAs do not have

mainly due to two reasons: the access to the two main
sources of information which
 Access to complete set of DAs have, but having an IDA
with “Global Custodian”
CDS reports. may also be very informative.
 E-mail Integration process.
 Global Operations

Direct In-Direct

Investors having Global IDA’s in this case have a

Operations may find it clear edge over their rival,
difficult to maintain Direct specially in case of “Global
Depository Account in every Custodians”, you only have
location they operate. to deal with a single party
for your complete Global
Operations.
 Maintenance & Convenience

Direct In-Direct

DAs are definitely convenient IDA’s are more convenient

in cases where you have huge for smaller investors.
Operations and you do not However, they also prove
want to involve in lot of paper very convenient in cases
transactions like “Global Operations”
and cases where the
investor need to maintain
numerous accounts.
 Registration
Direct In-Direct

There are minimal chances IDA’s do have a imminent

of Registration risk in DAs as registration threat, leaving
even in cases of leaving shares in Main account of
securities in main account Custodian, because of any
do not have any Registration reason, may create a
threat. serious Registration threat.
 Entitlements

Direct In-Direct

Dealing with entitlements In IDAs, you add an

and other corporate actions additional leg to your
is safer with DAs. You entitlement cycle which is
remain on the top as far as not advisable.
the announcements are
concern.
 Value Added Services

Direct In-Direct

IDA’s are only exposed to IDA’s have an edge

the value added services specially in cases where
extended by the depository your account is with a
itself. “Global Custodian” like
Cash Management, proxy
services, etc.
 Thank You!

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