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Presentation for the 10th ACG Cross Training Seminar
at Bali - Indonesia
Straight Through Processing (STP) for Improving Market Liquidity
By
Ali Abbas Zaidi
Faisal Parekh
Abdul
Rasool
Hooda
10th ACG
Cross Training
Seminar
1
Agenda
 Pakistan Economic Fundamentals & Capital Market
 Central Depository Company of Pakistan Limited
 Straight Through Processing (STP) for Improving
Market Liquidity
10th ACG Cross Training Seminar
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PAKISTAN
An emerging economy…….
A view of Pakistan’s miracle mile - Karachi’s Financial district
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Pakistan - Economic Fundamentals
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
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Economic Fundamentals - Driving Market Performance
Sustainable Economic Growth
Generated through strong domestic demand
GDP Per Capita* (USD)
USD
Real GDP Growth (%)
10
8.6
7.6
8
6.6
6
1000
800
600
3.1
1.8
400
0
FY01 FY02
US$ 1,000 crossed
6.8
4.8
4
2
7
1200
FY03 FY04
FY05 FY06
FY07 FY08E
Source: Economic Survey 2004-05, 2005-06, 2006- 07
200
FY01 FY02 FY03 FY04 FY05 FY06 FY07
Source: Economic Survey 2004-05, 2005-06, 2006-07
FY08E
* 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
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Economic Fundamentals - Driving Market Performance
The Economic Turnaround
Stable Exchange Rate & Healthy FX Reserves
FX Reserves (US$ mn)
US$/PKR
14,000
62.0
12,327
12,000
12,618 13,111
10,719
61.0
10,000
60.0
8,000
59.0
6,000
58.0
4,000
3,220
2,279 1,968
2,000
57.0
-03
Dec
6,432
-04
Jun
-04
Dec
-05
Jun
Source: Economic Survey 2005-06
-05
Dec
-06
Jun
-06
Dec
0
FY99 FY00
FY01 FY02
FY03 FY04
FY05
FY06
Source: SBP Website
 Strong capital inflows stabilizing currency financing continuing trade deficit
 FY07 expected current account deficit /GDP is 4.5%-5.0%. Capital account surplus/GDP may
exceed though.
 Significant FX reserves cushion against US$/PKR volatility
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Pakistan’s Equity Market
Stellar performance set to continue …
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Pakistan – Showcasing Stock Market
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.
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KSE100 Index – Walking the trendlines
The KSE 100 Index has witnessed a compounded annual growth rate of 34%
over the past 10 years
16000
15122
13772.46
14000
12000
10000
9989.41
8000
7450.12
6000
5278.18
4000
2000
879.62
1054.67
3402.48
1520.74
1770.12
1366.44
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
30-Apr-08
KSE 100 is a capital weighted index consisting of 100 companies representing 85% of the total market
capitalization of the Exchange.
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Regional Market - Index Growth Comparison for 2007
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
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CDC – The only Securities
Depository of the Country
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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
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About 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
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CDS Account Structure
Central Depository System (CDS)
Issuers / Registrars
Account Holders
Participants
Account Holders
Main
Account
House
Account
CFS Participants
CFSH Account
Main A/c
House
A/c
CFS Sub Account
Sub
Account
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Pledgees
Investor Account
Services
Corp Investor
A/c
Indv Investor
A/c
Cash Account
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Types of Accounts in CDS
CDC provides following types of accounts to facilitate custody
and settlement of securities:
 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
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About 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
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About some of our 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 (i.e IVR & Web services)

SMS (Short messaging services)

Registrar / Transfer Agent Services
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Operational Highlights
586
PARTICIPANTS / ACCOUNT HOLDERS
106
ELIGIBLE PLEDGEE
691
CDS LIVE SECURITIES
285,750
NUMBER OF CLIENT ACCOUNTS
(INCLUDING JOINT ACCOUNTS)
contd..
*as at April 30, 2008
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Operational Highlights
54.46
TOTAL NUMBER OF SHARES IN CDS
(In Billion)
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
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About 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)
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Straight through Processing
(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.
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Advantages 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.
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Type of Markets
Following type of markets exists to cater
various securities transactions:
 Ready Market
 Spot Market
 Deliverable Futures Contracts Market
 Continuous Funding System Market
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Infrastructure Institutions
Following are the infrastructure institutions of the
Pakistani Capital Market:
 Stock Exchanges (Karachi-Lahore-Islamabad)
 Clearing Company (geographically neutral)
 Settling Banks
 Central Depository Company (geographically neutral)
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Integration of Institutions
The market participants &
institutions involved in the
securities
transactions
are
integrated in the manner to
achieve STP
Central
Depository
System
Settling
Bank
Investor
Stock Broker
Automated
Trading
System
Clearing &
Settlement
System
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STP of Ready Market (T+2)
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:
 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.
contd..
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STP of Ready Market (T+2)
 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..
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STP of Ready Market (T+2)
 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..
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STP of Ready Market (T+2)
 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
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STP of Deliverable Future Market Contracts
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.
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STP of Continuous Funding System Market
 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.
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Flow of Settlement of Trade (T+2)
Buying
Investor
ACTIVITIES
Buying
Broker
Selling
Broker
Selling
Investor
Stock Exchange
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
Clearing Company
(Netting of trades)
Manual Intervention by moving
securities from Main A/c to client
account after settlement
Receiving & Payment Orders
Buying Broker
Securities
delivery
Manual Intervention by moving
securities from Client Account to
Main A/c for settlement purpose
Delivering & Payment Orders
Securities delivered
(Securities in CDS in book-entry form)
Clearing Company
Issue Cheques / notify of receipt
Buying Investor
Release Payment
Settling Bank
Manual Intervention by manually marking
the securities confirming the availability
of sufficient balance
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Selling Broker
Funds
payment
Selling Investor
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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.
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THANK YOU
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