HISTORY OF STOCK EXCHANGE :::::::::::::

The stock market makes an appearance in the news every day. You hear about it when it reaches a new high, in headlines like "The Karachi Stock Exchange Average rose 50 index points today", when a certain stock plummets, or when the political scenario changes.

Obviously, stocks and the stock market are important, but you may find that you know very little about them. What is a stock? What is a stock market? Why do we need a stock market? Where does the stock come from to begin with, and why do people want to buy and sell it? If you have questions like these, you've come to the right place.

Welcome to a whole new world.

The Basic Idea
Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The Karachi Stock Exchange (KSE) is an example of such a market.

In your neighborhood, you probably have a supermarket that sells groceries. The reason you go the supermarket is because everything you need to run your home is available under one roof. It's far more convenient than having to make 10 stops at different stores.

The KSE is a supermarket for stocks. The KSE is like a big room where everyone who wants to buy and sell shares can go to conduct their transactions.

The Exchange makes buying and selling easy. You do not have to actually travel to the Stock Exchange; rather, you can call a stock broker who does business with the Exchange, and he or she will go there on your behalf to buy or sell your stock. With an Exchange in place, you can buy and sell shares instantly.

The Stock Exchange has an interesting side effect. Because all the buying and selling is concentrated in one place, it allows the price of a stock to be known every second of the day. Therefore, investors can watch as a stock's price fluctuates based on news from the company, media reports, economic news and a range of other factors. Smart buyers and sellers take all of these factors into account before making decisions.

Types of Stock Exchanges
There are three Stock Exchanges in Pakistan:

1. Karachi Stock Exchange; formed in 1947
2. Lahore Stock Exchange; formed in 1971
3. Islamabad Stock Exchange; formed in 1989


Out of all the three Exchanges, the Karachi Stock Exchange is the premiere Stock Exchange of the country, with over 700 listed companies. It was established soon after the creation of Pakistan.

ABOUT CDC :::::::::::::

Central Depository Company of Pakistan Limited (CDC) was incorporated in 1993 to manage and operate the Central Depository System (CDS). CDS is an electronic book entry system to record and transfer securities. Electronic book entry means that the securities do not physically change hands and the transfer from one client account to another takes place electronically. An IBM led consortium along with the management of the company implemented CDS in Pakistan.

The aim of CDC is to operate as a central securities depository on behalf of the financial services industry so as to contribute to the country's ability to support an effective capital market system which will attract institutional and retail level investors from Pakistan and abroad.

Mission Statement

CDC is committed to provide secured and dependable services to the capital and financial markets in an efficient and cost-effective manner comparable to best international practices. The Company’s aim is to be the centre of excellence by continuously employing the state-of-the-art technology available and best talent in the country while maintaining good corporate governance in its working. It is committed to provide its employees an environment of professional and personal growth.

History of CDS Project

With exponential growth in the Pakistani Capital Market during the last decade resulting in manifold increase in trading volumes, the physical handling of paper certificates not only became laborious but also time consuming. The manual system was no longer feasible. It was in this perspective that CDC was incorporated to implement and operate the CDS.

Experts of the renowned international firm Price Waterhouse conducted a study in 1993 to develop a conceptual framework for the depository. The study was sponsored by the United States Agency for International Development (USAID) and their report laid the foundation of depository design.

In November 1994, the Board of CDC awarded a turnkey contract to the IBM consortium for the implementation of the system in Pakistan. The IBM consortium proposed a comprehensive Master Implementation Plan (MIP) to the CDC board after a detailed analysis of the following:

• National requirements
• Company and Banking laws
• Regulations & Procedures
• Financial and organizational aspects of the project

In April 1995, MIP was approved by the CDC board.

Thereafter, user groups performed, training sessions were conducted to introduce the system to the clients and the necessary infrastructure was developed. The infrastructural development included testing and development of software, hiring and training of personnel and establishment of CDC offices. The CDC offices at Lahore and Islamabad were connected to the head office through VSAT link leading to the development of a geographically neutral depository.

Problems Faced by the Capital Markets before CDS

Since the last decade, the capital markets of Pakistan have witnessed a substantial growth leading to a manifold increase in the trading volume. The custody and safe keeping of physical certificates required maintenance of huge vaults by the individuals and institutions and the physical settlement of certificates was no longer feasible. Moreover, the manual system was also plagued by lengthy delays, risks of damage, forgeries and considerable time and capital investment.

Following is a list of the major problems faced by the Members of the Stock Exchange, Investors, Issuers of Securities and others are as follows:

a) Increased volume of book keeping and paper work.
b) Problems in settlement due to increased volume.
c) Maintenance of huge vaults for safe keeping of certificates.
d) Long and cumbersome share transfer procedure taking up to 45 days.
e) Payment of stamp duty on share transfers which ranged from 0.1% to 1.5% of the face value.
f) In case of new issues the issuers would take more than two months for the dispatch of certificates
to the successful applicants and for the subsequent preparation and verification of transfer deeds.
g) Risks of damaged, lost, forged and duplicate certificates.
h) Lengthy and tedious procedure involved in pledging of physical securities.
i) Capital and time investment required for issue and dispatch of share certificates, cash dividend, bonus and right issues.
j) Issuance of duplicate certificates.
k) Activities carried out for share transfer during book closure:
• Signature verification
• Checking correct value of transfer stamps
• Verifying genuineness of certificates
• Signature of Director for confirmation of transfer

The answer to all these questions was to set up an electronic book entry system in Pakistan. This led to the establishment of Central Depository Company of Pakistan Limited developed to manage and operate the Central Depository System (CDS).

Benefits of Electronic Settlement through CDS

Following are some of the benefits of electronic settlement of securities through CDS:

a) Reduced workload due to paperless settlement.
b) Reduced manpower and requirements.
c) Instantaneous transfer of ownership.
d) No stamp duty on transfers in CDS.
e) No risk of damaged, lost, forged or duplicate certificates.
f) No impact in case of sudden increase of settlement volumes.
g) Instant credit of bonus, rights and new issues.
h) Substantial reduction of paperwork during book closure.
i) Convenient pledging of securities.
j) Substantial reduction in time & capital investments.
ABOUT CFS :::::::::::::

PREAMBLE:
WHEREAS in order to improve the liquidity in the capital market, it is expedient to introduce Continuous Funding in place of Carry over or badla financing; AND WHEREAS in order to achieve the aforesaid objective, it is desirable that necessary Regulations be framed to regulate the Continuous Funding System; NOW THEREFORE, in exercise of its powers under Section 34(1) of the Securities & Exchange Ordinance, 1969, the Karachi Stock Exchange (Guarantee) Limited with the prior approval of the Securities & Exchange Commission of Pakistan, hereby makes the following Regulations;

1. SHORT TITLE AND COMMENCEMENT
(1) These Regulations shall be called “The Continuous Funding System Regulations, 2005”.
(2) These Regulations shall come into force and effect from August 22, 2005.

2. DEFINITIONS:
In these Regulations, unless the subject or the context otherwise requires or permits:
(a) “Approved Securities” means the securities approved by the Board with the prior approval of the Commission for the purpose of these Regulations.
(b) “Board” means Board of Directors of the Exchange.
(c) “Broker” means any member of the Exchange engaged in the business of executing transactions in securities for the account of others and is registered with the Commission for this purpose.
(d) "CFS" means Continuous Funding System.
(e) “Commission” means the Securities & Exchange Commission of Pakistan.
(f) “Exchange” means the Karachi Stock Exchange (Guarantee) Limited.
(g) “Margin” means the amount of cash or approved securities deposited by the financee or by the financier as security for the purpose of Continuous Funding System as provided under these Regulations.
(h) “Net Capital” means Net Capital as defined under clause (d) of Rule 2 of the Securities & Exchange Rules, 1971.

3. GENERAL CONDITIONS:
(1) The maximum amount for the purpose of CFS is capped at Rs. 25 Billion.
(2) CFS facility will be allowed in 14 top volume approved securities to be selected in accordance with the criteria laid down by the Board. The list of these approved securities shall be subject to review by the Exchange after every six months.
(3) The CFS Market shall be available for the entire trading period. The CFS Market shall run parallel to the Ready Market and transactions thereunder shall take place through the Karachi Automated Trading System (KATS).
(4) The CFS facility shall be available for a period of 30 days at the option of the financee.
(5) CFS facility shall only be provided against purchases in Ready Market.

4. RISK MANAGEMENT:
(1) For the purpose of ensuring risk management, the CFS market shall be separate from the T+3 market and the purchases of a security by financier under CFS shall not be netted against his sale in the same security in T+3 market.
(2) The rates of margin as shall be determined by the Board for the purpose of CFS market shall be graduating automatically. The Margin shall be increased in proportion to the increase in KSE-100 Index.
(3) The financier shall keep the CFS financed securities in a separate account maintained with the Central Depository Company of Pakistan Limited in order to ensure that these securities are not used for loaning against blank and short selling.
(4) Every Broker shall maintain his leverage position in respect of CFS and other derivatives not exceeding 15 times of his Net Capital Balance.

5. SETTLEMENT OF CLAIMS IN CASE OF DEFAULT OF A BROKER:
(1) The Members’ Default and Procedure for Recovery of Losses Regulations shall also be applicable to defaults and recoveries under these Regulations.
However, in case of default of a Broker, all his assets available in the control of the Exchange, except the Margin, will be first utilized for settlement of T+3 trades and then for CFS transactions.
(2) No claim under CFS shall be entertained outside KATS.

6. AMENDMENT IN REGULATIONS
The Board may amend these Regulations with the prior approval of the Commission after giving reasonable notice to the market participants.

7. CFS PHASE OUT
The phase out of CFS shall be reviewed by February 28, 2006.

8. REPEAL
The Carry Over Transactions Regulations, 1993 are hereby repealed.
Copyright 2006 . Stock Master Securities (Pvt) Ltd.  All rights reserved.