ARCHI: Following is the text of report of the committee on study of the Pakistan Stock Market Crisis of 2008.
Chapter 1: Introduction
The Securities and Exchange Commission of Pakistan (SECP) constituted a Committee to conduct a study of the stock market crisis of 2008. The Committee comprises the following:
(i) Mr. Shamim Ahmad Khan – Chairman
(ii) Mr. Habib-ur-Rehman – Member
(iii) Mr. Rashid Sadiq – Member
Mr. Sajjad Ali, Deputy Director, SECP was appointed as Secretary to the Committee, who was assisted by Mr. Awais Ali, Assistant Director, SECP.
1.1 Terms of Reference and Scope
The Terms of Reference (TOR) of the Committee are as under:
1. To study the nature of the stock market crisis of 2008 in Pakistan and the factors leading to it.
2. To evaluate the rationale for placing floor on the share prices of listed securities w.e.f. August 27, 2008 in terms of the Force Majeure clause of the Regulations Governing Risk Management of the three stock exchanges in Pakistan;
3. To analyse the role of the three stock exchanges and the Securities and Exchange Commission of Pakistan in the decision to impose the floor;
4. To review the impact of imposition of the floor on the market;
5. To examine the events which took place during the imposition of the floor;
6. To examine the process of lifting of the floor;
7. To review the measures taken and the reforms introduced during and immediately after lifting of the floor;
8. To examine the role of the Central Depository Company of Pakistan Limited and the National Clearing Company of Pakistan Limited during and immediately after the crisis;
9. To give policy recommendations based on the experience of the 2008 crisis.
It was clarified by SECP that the study, unlike enquiry and investigation reports on the earlier crises, should focus on constructive analysis of the factors which led to the crisis. The Committee is also required to recommend measures which could help prevent recurrence of such crisis. Keeping in view the TORs, the Committee has taken a broader perspective of the issues which caused the crisis and, based on the experience of 2008 crisis would submit a set of recommendations.
Unfortunately, the crisis in Pakistan’s stock market in 2008 continues to cast an ominous shadow on the market. Five years after this episode, a press report commenting on the delisting of a major multinational from Karachi Stock Exchange Limited (KSE), observed that “Investors are still nursing the wounds of an unwise decision by regulators in 2008 to close the exit door by putting a ‘floor’ under a stock’s fall. That had quite the effect of sending the shares reeling down, so as to plunge the benchmark KSE-100 index to its all-time low.”1 An article published in the Dawn dated January 09, 2012 quoted Mr. Simon Cox of Hong Kong based Emerging Markets Stock Invest Fund as “I have gone through the record of stock exchanges and never since the oldest stock exchange in the world at Amsterdam was established in 1602, I could locate one example where a stock exchange had ever blocked the exit in violation of basic principles of free market mechanism”.
As a fall-out, foreign portfolio investment dried out and Pakistan was removed from the MSCI Emerging Markets Index by MSCI3 on the basis of “deterioration of investability conditions in the Pakistani equity market since the imposition of the floor rule at the end of August 2008 which has resulted in the practical shutdown of the Pakistani equity market.”
The press note issued by MSCI on December 10, 2008 also observed that “by preventing securities from trading on the exchange below the closing prices of August 27, 2008, the floor rule has led to the near total paralysis of market activity in Pakistani equities and caused significant distortions to investors’ portfolio valuations by maintaining price at artificial levels.”
In March 2009 the MSCI considered the proposal for inclusion of the Pakistan MSCI Index in the MSCI Frontier Markets Index. MSCI at that time observed that “a majority of market participants stressed the need for the Pakistani equity market to function without any trading disruptions for some time as a condition to any potential consideration of the MSCI Pakistan Index for re-inclusion in the Emerging Markets Index.” It was accordingly decided to assign Pakistan to the Frontier Markets Index. It amounted to downgrading of the market since prior to December 2008, Pakistan enjoyed the status of Emerging Markets. This decision had grave implications for portfolio investment in Pakistan.
1.2 Methodology
The study is based on the information obtained from the SECP and the three stock exchanges as well as CDC and NCCPL. Minutes of KSE board were particularly helpful in providing information about the course of events in 2008 and 2009. The Committee met and held extensive interviews with a number of market participants and management of the three stock exchanges, CDC and NCCPL. The Committee also interviewed senior officials of Securities Market Division in SECP some of whom dealt with the stock market crisis of 2008. (A list of persons met by the Committee is at Annexure I)
The Committee has been informed that the Supreme Court of Pakistan had taken note of the stock market crisis of 2008 in view of petitions filed by some investors whose securities had been moved without their authorization by the members of the KSE from their CDC subaccounts for pledging with the banks and meeting margin requirements6. The Committee has studied the correspondence between the Human Rights Wing of the Supreme Court and the SECP relating to these petitions. The Committee has obtained relevant information from National Investment Trust (NIT) regarding the market stabilization funds and held discussions with their senior officials. The Committee has looked at the reports appearing in the press and the comments of the analysts prior to and during the crisis. Data regarding economic situation prevailing in 2008 was obtained from the reports of the State Bank of Pakistan (SBP) as well as
the Economic Survey of Pakistan.
The Committee has studied the policies adopted and followed by regulators in other jurisdictions for managing market crisis in 2008 in their respective jurisdictions. The Committee has also benefited from the two comprehensive rulings of the Competition Commission of Pakistan (CCP) – by single bench comprising Dr. Joseph Wilson dated March 18, 2009 and by Appellate Bench comprising Mr. Khalid A. Mirza as Chairman CCP and Ms. Rahat Kaunain Hassan member CCP dated November 26, 2009. CCP while taking notice of the decision to impose floor on the prices as violation of Section 4 of the Competition Ordinance, 2007 (which later became the Competition Act, 2010), also provide insight into the process of imposition of the floor.
Before proceeding further, the Committee would like to make a few preliminary observations:
1. Study of the crisis of 2008 was initiated after more than five years of the occurrence of the crisis. A study immediately after the crisis would have been more useful to the regulators.
2. The Committee has found that a number of recommendations which had been made by the enquiry reports into the earlier crisis have not been given due attention. Some of these related to governance of stock exchanges and leverage products. Implementation of these recommendations would have definitely helped the regulator.
Chapter 2: Background of 2008 Crisis
2.1 Review of Earlier Crises
Pakistan’s stock market has experienced recurrent crises with regularity. Some major crises occurred in 2000 and 2005 which were probed into by SECP. Since there are a number of common underlying factors of the various crises, it may be useful to analyze the earlier crises.
The report of SECP’s Taskforce constituted to enquire into the 2005 crisis mentions the earlier crises in some detail. Therefore, the Committee has decided to discuss only the crisis of 2005. In the early part of 2005, the market showed a highly bullish trend reflecting rise in the index from 6,220 points on January 03, 2005 to 10,303 points on March 15, 2005.
This was accompanied by exceptionally high trading volumes. The Taskforce attributed the phenomenal rise of the market to increased COT financing, arbitrage between ready and futures market, statements made by senior functionaries of the Government, brokers and market analysts expressing highly optimistic view about the market index levels. The badla system which had driven up the market caused the subsequent downward trend when badla financiers started pulling out the facility after March 04, 2005. This period saw speculative trading in some companies like OGDCL and PTCL, excessive day trading and incidence of market abuses like wash trades. Apprehending possible systemic risk of the crisis, KSE management initiated bailout package including intervention by State Life Insurance Corporation, National Insurance Corporation and NIT to stabilize the market.
The Taskforce questioned the need and the objectives of the bailout as in its view, the bailout saved some private investors using public funds.
As advised by the Taskforce, an independent firm for forensic investigations, Diligence Inc. USA (“Diligence Inc.”) was engaged in 2006 “to examine in greater detail the activities surrounding the March 2005 events and especially to determine if manipulative schemes or illicit conduct were prevalent and played a key role in the market’s precipitous decline”7. Diligence Inc. looked into the question of possible complicity of financiers, who withdrew COT facility and that of influential brokers in manipulative practices like wash trades. Diligence Inc. while examining the transactions and the available data experienced difficulties since necessary information on a unique client identification code basis was not available. It did not have sufficient evidence to conclude that brokers had “collectively designed a scheme to obtain illicit gains”8. However, Diligence Inc. was able to find instances of individual acts of brokers aimed at exploiting the bullish sentiment.
2.1.1 Commonalities among Past Crises
A common underlying factor of all the crises since 2000 is badla financing and its variants. In 2005, one of the reasons for the crisis was the phasing out of COT financing and introduction of margin financing. In earlier crisis of 2000, rules regarding COT (badla) were unjustifiably and abruptly changed as pointed out by the Enquiry Report. It has been noticed that badla and its variants caused settlement difficulties in practically all the crises experienced by the stock market.
Another common feature underlying various crises was ad hoc decisions and abrupt changes in policies by the frontline and the apex regulators. In 2000 abrupt changes were made in the COT rules. In 2005 the KSE decided to offer COT financing to buyers in the Deliverable Futures Market (DFM) deviating from the product model.
The enquiry reports in respect of previous crises have also highlighted the presence of conflict of interest in the boards of the stock exchanges. It has been pointed out that decisions taken by the conflicted members were not in the interest of the market and the other stakeholders, particularly the investor public.
There is yet another commonality i.e. the stock exchanges did not adhere to their respective regulations in order to avoid default of their members. In the year 2000, stock exchanges did not
follow their own regulations regarding Members Default and Procedure for Recovery of Losses
Regulations. In 2008, force majeure provision of Regulations governing Risk Management of the
stock exchanges (the “RM Regulations”) and the Regulations governing Default Management of
the stock exchanges (the “Default Regulations”) were not followed.
2.2 Global Financial Crisis and its Impact
Pakistan experienced crisis in the stock market in 2008 when US and most of the developed
countries were undergoing financial crisis of a much larger dimension. It is appropriate to
discuss the global financial crisis of 2008 which had disastrous results for the world economy. It also needs to be seen if there is any linkage of Pakistan’s domestic market crisis with the global crisis.
Although gravity of the crisis became visible in early 2008, it originated in 2007 with potential
defaults by sub-prime holders. Low interest rates regime in the US accompanied by sub-prime
mortgages and mortgage securitization exposed the US financial system to serious risks. Leading
investment banks like Bear Sterns collapsed in March 2008 followed by Lehman Brothers in September 2008.
The financial crisis swiftly hit the real economy in the US and across the world. The OECD has estimated contraction of world economy by 2.1% in 200910 and WTO estimated fall in volume of world trade by 12% the same year11.
It may be relevant to briefly discuss the response of the regulators and the governments of respective countries to the financial crisis which led to economic turbulence of horrendous magnitude, some comparing it to the Great Depression of 1929. The intervention by the regulators was mainly in the banking sector as it had potential to cause serious systemic risk. The regulators took a number of measures to restore confidence while some governments decided to assume huge financial obligations for protecting the banking sector.
The British Government responded to the crisis in the banking sector by providing guarantee to
the deposits and a rescue package for banks amounting to £500 billion. The British Treasury also
allocated £37 billion to recapitalize some defaulting banks. The US Government bailed out the two major mortgage lenders, Freddie Mac and Fannie Mae assuming liability of $5 trillion. The US Congress decided to allow the highest ever bail-out package of $700 billion. In view of the crisis, Morgan Stanley and Goldman Sachs lost the status of investment banks and became traditional commercial banks.
In view of the recession in the economy caused by the financial crisis, central banks of most of
the developed countries lowered the discount rates. In October 2008, US Federal Reserve cut the
interest rate to half a percent.
Even though most of the developing countries were not integrated with the world economy, these
were hit by the fallout from the slowdown of the world economy. The negative impact was on
account of reduction in exports, decline in foreign investment, fall in portfolio investment, drop
in remittances and difficulties in accessing financing from the developed countries. The worst hit
countries by the crisis were those which were already suffering from fiscal deficit and balance of
payment difficulties. In India, the main effect was on the equities market as there was reversal of
foreign portfolio investment. A report in 2008 discusses the negative impact of the crisis on
Indian economy till that date. It states that “as the global financial crisis began unfolding in the
first nine months of 2008, foreign institutional investors pulled out close to USD 10 billion from
India, dragging the capital market down with it.”12 It has also pointed out the impact of liquidity
crisis and the credit squeeze on the manufacturing sector. As in the case of Pakistan, the global
crisis of 2008 took place at a time when the Indian economy was experiencing slow down and
credit squeeze as well as increased interest rates.
12 Article dated October 28, 2008 appearing in the Bloomberg Businessweek “World Financial Crisis: India’s
Hurting, Too”
11
2.2.1 Impact of Global Crisis on Pakistan
As Pakistan’s financial market was relatively insulated from the international markets, it escaped
direct negative impact of the global crisis. However, Pakistan’s economy which was already
under severe stress due to various domestic factors was hit by indirect fall-out of the crisis. The
increase in the world oil prices affected Pakistan’s economy in many ways. Burdening the
current account, it widened the fiscal deficit since the government took a politically motivated
decision to subsidize the consumers instead of passing on the full burden of increased import
prices of oil. This further fuelled the inflationary pressures. It has been estimated that subsidies
constituted 47% of the fiscal deficit13. Due to the global recession, Pakistan’s exports also
declined and cost of international borrowing increased. Mr. Muhammad Mansoor Ali while
analyzing impact of the 2008 crisis on Pakistan, has pointed out “that the operating environment
of the financial sector experienced significant deterioration in 2007 and 2008 due to a confluence
of factors emanating from both the domestic and international economic financial
developments”14. He has also pointed out that the policy response of the central bank and the
government to the mounting inflationary pressures and weak macroeconomic situation was twofold.
Initially, SBP increased the policy rate which was 7.5% in April 2005 to 15% by November
2008 and that Cash Reserve Requirement (CRR) and Statutory Liquidity Requirement (SLR)
were also increased. Subsequently, SBP took measures to respond to the liquidity crunch which
was partly triggered by withdrawal of deposits caused by rumors about the viability of local
13 Mohammed Mansoor Ali, Director, Economic Analysis Department, State Bank of Pakistan: Global Financial
Crisis: Impact on Pakistan and Policy Response, July 2009.
14 Ibid.
12
banks15. SBP extended liquidity support to banks and facilitated access to concessional financing
schemes. It may be pointed out that while central banks of many countries lowered discount rate
in the crisis environment, the SBP could not follow the trend due to high rate of inflation.
2.2.2 Global Stock Markets
The global financial crisis had a negative impact on the stock markets in both the developed and
the developing countries. Significant decline in the indices of 16 countries is mentioned in the
following table:
15 http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=140101&Cat=3&dt=10/9/2008
13
Table 1: Regional and Global Stock Indices during Jan 2008 to Dec 2008
Index Country
Index open Level
as on Jan 02, 08
Index Level as
on Dec 22, 08
% Index
Change –
YTD
Regional
KSE 100 Pakistan* 14,075.83 6924.15 -51%
SENSEX 30 India 20,393.1 9686.75 -52%
SET Thailand Thailand 858.74 440.4 -49%
FTSE ST All Share Singapore 969.7 414.06 -57%
Kuala Lumpur Comp Malaysia 1,445.03 871.16 -40%
Nikkei 225 Japan 15,307.78 8723.73 -43%
Hang Seng Hong Kong 27,632.19 14220.79 -49%
Global
NASDAQ USA 2,653.24 1521.54 -43%
DAX Germany 8,045.97 4629.38 -42%
S&P 500 USA 1,467.97 863.16 -41%
Dow Jones Avg USA 13,261.82 8419.49 -37%
FTSE 100 United Kingdom 6,456.9 4255.98 -34%
*Opening of KSE dated Jan 01, 2008.
Source: SECP
It is important to study the response of regulators in different countries which experienced sharp
fall in the market indices in their jurisdiction. The International Organization of Securities
Commission (IOSCO) carried out a survey on the effectiveness of the market interventions in
emerging markets during the global crisis of 200816. The survey of 29 jurisdictions carried out by
the Emerging Markets Committee of IOSCO shows that only three regulators closed their
respective markets during the peak of the global financial crisis, however, the duration of the
closure of the market was very short. Indonesia closed its market for three days after sharp fall of
the Index in October 2008. In Romania, market was closed twice in October 2008 due to
increased market volatility. However, the maximum duration of the closure was 1 day. The
16 “Effectiveness of Market Interventions in Emerging Markets”, Emerging Markets Committee of the International
Organization of Securities Commissions (IOSCO), October 2010.
14
duration of the three closures of the markets in Peru during this period was only 30 minutes
twice and one and a half hour respectively. The survey report also mentions the decision of
Karachi Stock Exchange to set a floor for share prices to limit losses due to drastic fall in the
index for four months. It is significant to note that the regulators in about 25 emerging markets
did not intervene in the market in any manner despite sharp decline in the index. The survey
report does not mention any intervention by regulators in India where the index fell by 52% in
2008 or in Malaysia where the market fell by 40% during this period. While Hang Seng Index of
Hong Kong fell by 49%, the regulators did not take any extraordinary measure. It appears that all
these markets allowed their normal risk management systems to operate in order to address the
sharp decline and volatility in the markets. These markets relied on self-correcting measures of
the market to bring the indices to normal levels and to diffuse the volatility17.
2.3 Macro-economic Scenario
Later part of 2007 and the year 2008 was marked by slower GDP growth of Pakistan, rise in
inflation, widening of current account deficit and dwindling international reserves.18 Partly, this
situation was the result of global crisis 2008 which caused enormous increase in our import bill
of biofuels.
Headline CPI inflation rose sharply from 8.8% YOY in December 2007 to 17.2% in April
200819. The Government budget was burdened by rising prices of fuel and huge subsidies. The
Government continued to borrow heavily from SBP. During May-June 2008, external account
17 Ibid.
18 Letter of Intent, Memorandum of Economic and Financial Policies (MEFP), and Technical Memorandum of
Understanding, International Monetary Fund (IMF)November 20, 2008
19 Pakistan Economic Survey 2007-08
15
deficit widened considerably leading to depreciation of Pakistan Rupee (PKR). Rising fiscal
deficit and spiraling inflationary pressures forced the SBP to raise discount rate. Between July
2007 and July 2008 SBP increased discount rate in several steps by 350 basis points, to 13%20. In
November 2008 the discount rate was raised to 15%.
Depreciation of Pakistan Rupee also led to capital flight. From April 2008, foreign portfolio
investment in our stock market kept falling, coinciding with the fall of the KSE Index. The sharp
fall in the value of Pak Rupee against US dollar in 2008 is indicated in Figure 1. Rapid
devaluation of Pakistan Rupee while reflecting worsening macro-economic situation further
exacerbated it in many ways. It increased debt servicing burden of the country as well as
increased exchange rate risk for the foreign investors.
Figure 1: Parity of PKR to USD during the period January 01 to December 31, 2008
Data Source: University of British Columbia
20 Memorandum of Economic and Financial Policies, 2008
60
65
70
75
80
85
PKR/USD
PKR/USD
16
The macro economic situation of Pakistan in 2008 has been summarized by Moody’s spokesman
while downgrading Pakistan’s government rating from B1 to B2 on May 21, 2008. He
highlighted Pakistan’s fast erosion of the fiscal position, increasing current account deficit
touching 7% of GDP, intensifying inflationary pressures and political turmoil21. Subsequently,
Pakistan’s B2 rating outlook was changed to negative on September 23, 2008 and was further
downgraded to B3 on October 28, 2008. “The failure to obtain timely assistance from Saudi
Arabia, China, the US and other friends, and delays in disbursements from the World Bank have
eroded investor confidence and resulted in a substantial drawdown of Pakistan’s foreign currency
reserves…Ongoing negotiations for an IMF assistance program represent a last resort, but even
this may not fully assure Pakistan of the ability to remain current over time on its external
obligations, including payment on its global bond due in February 2009”22.
The deteriorating macro-economic situation in Pakistan caused negative sentiments in the stock
market. The sharp rise in the discount rate adversely impacted the capital markets in many ways.
It squeezed liquidity and diverted capital from stock market to risk free investment avenues like
National Saving Schemes. Consequently investment in National Saving Schemes increased by
28% from 2007-08 and 3 times during the 2008-0923. It also increased the cost of business which
led to lower corporate profitability.
21 Rating Action: “Moody’s lowers Pakistan’s government ratings to B2”, May 21, 2008, Moody’s
22 Rating Action: “Moody’s lowers Pakistan’s ratings to B3 and keeps it on review for downgrade”, October 28,
2008, Moody’s
23Savings Mobilized by National Savings Schemes, State Bank of Pakistan.
17
As indicated in the graph given below, there was marked withdrawal of foreign portfolio
investment mainly due to depreciation of PKR, political situation and the global financial crisis.
This situation forced distressed foreign financial institutions to withdraw investments from
emerging markets. During the financial year 2008-2009, there was net foreign portfolio
investment outflow of USD 177.7 million from Pakistan’s market24. Besides external factors, the
massive outflow was caused by imposition of floor on securities prices by the stock exchanges in
August 2008. The trend of pull-out of funds by the foreign investors correlates with the fall in the
KSE-100 Index. While the market started falling from April 19, foreign investors started making
sharp and consistent withdrawals from June 2008 onwards.
Figure 2: KSE-100 index vs. inflow/outflow of funds by foreign investors during January
01, 2008 to June 30, 2009
Source: SBP website, KSE website and SECP
24 Economic Survey of Pakistan 2008-09
–
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
14,000.00
16,000.00
18,000.00
(60,000)
(40,000)
(20,000)
–
20,000
40,000
60,000
SCRA-Net (Amounts in
‘000 USD)
KSE-100
18
Chapter 3: Build up to the Crisis
The euphoria generated by the national elections held on February 18, 2008 marked by
transformation to democratic set-up and the post-election display of warmth among hither to
opposing political leaders generated investor confidence. In fact, this confidence had started
building up even before the elections as the market registered rise of 469 points during last four
trading sessions before the elections. About the same time there was a sharp increase in the
foreign portfolio investment as on February 20, 2008, there was a net inflow of about USD 56.5
million (PKR 3.5 billion)25. The market responded positively to these developments and
remained buoyant till mid of April. The resulting investor confidence drove up both the index
level and trading volumes. The month of March witnessed positive political developments. On
March 09, the two major political parties signed the Murree declaration26.
Unfortunately, market buoyancy ended in April. The market realized that due to the stringent
economic conditions, the government may impose capital gains tax in order to raise Tax to GDP
ratio. On 24th April, an IMF announcement expressed concern over gradual slowing down of
Pakistan’s economy from 7% to 6%. It also pointed out that subsidies on fuel and electricity had
reached two and a half percent of GDP27. These developments triggered negative sentiment in
the market. The market started sliding from 21st April and by end of the month, the index had
25 NCCPL figures for Foreign Investors’ Portfolio Investment during 2008
26 https://humaimtiaz.wordpress.com/timeline-pakistan-2008/
27 https://www.imf.org/external/np/tr/2008/tr080424.htm
19
shed 554 points i.e. 3.5%. Market capitalization eroded by PKR 156.21 billion and volumes also
decreased.28
May, 2008 witnessed both political and economic uncertainty. On May 13, 2008 ministers of
PML(N) resigned from the Cabinet.29 On the economic front, reserves kept falling to the level of
$11.512 billion30 and the value of Rupee depreciated and hovered around PKR 66-67 against
dollar in the Interbank Market. On May 21, Moody’s downgraded Pakistani government’s rating
to B2 from B1. On May 23, SBP increased policy rate by 150 basis points from 10.5% to 12%.
On May 26, a member of KSE failed to meet margin requirements of PKR 98.4 million and
defaulted. The continuous fall of the market in May, 2008 started causing concerns. These events
sent a signal of an impending crisis in the market. On May 31, 2008 Pakistan foreign exchange
reserves stood at $11.178 billion31. On May 29, the board of directors of KSE in its meeting
allowed CFS and CFS MK-II facilities to all DFM net purchase positions for May contracts
invoking force majeure provision contained in the RM Regulations. This step was taken despite
the claim of the Managing Director of KSE in the board meeting that the risk management
mechanism at the exchange level did not have much problem except for one brokerage house
which also came out of the difficulties32. The decision to postpone the settlement of DFM
contracts and to allow financing through CFS and CFS MK-II had serious implications for the
market. The decision not only deviated from the declared policy of allowing CFS and CFS MKII
only to the ready market investors, it altered the product model of Deliverable Future
Contracts’ (DFC) which were to be settled within 30 days. Such an abrupt and ad hoc decision
28 Data obtained from SECP
29 https://humaimtiaz.wordpress.com/timeline-pakistan-2008/
30 http://www.aaj.tv/2008/06/the-rupee-sharp-recovery-versus-dollar/
31 http://www.opfblog.com/2634/pak-economy-foreign-currency-reserves-depleting-fast/
32 Minutes of KSE board Meeting held on May 29, 2008
20
undermined the credibility of KSE. This measure was one of the series of quick fixes and
midstream changes in policy in response to the market situation. It may be mentioned that
trading activity in DFM during this period was quite substantial. This measure rescued weak
holders and speculators. In view of the prevailing stock market conditions, a KSE delegation
held meetings with political leadership and Finance Minister to discuss the declining trend in the
market33. The delegation urged for postponement of imposition of the Capital Gains Tax (CGT).
During May, the KSE-100 Index went down by 2,992 points i.e. 19.8% and around PKR 888.57
billion was wiped out from the market.
The assurances received by KSE from the Finance Minister in the meeting held on May 29 for
extension in the exemption period of the CGT as well as roll over of the DFM contract had an
immediate positive impact on the market. During the first three trading sessions in June, the
market went up by 959 points. However, the volatility in the market continued during the month.
Formal announcement of exemption in CGT was made on June 07 by FBR. June 13, the day
thousands of people converged in Islamabad for the long march for the restoration of Judiciary,
triggered the slide in the market and the negative trend continued till June 23. During this period
the market fell by 1,863 points.
In order to take stock of excessive volatility and declining trend in the market, an important
meeting was held on June 23, 2008 under the chairmanship of Chairman, SECP which was
attended by board of directors and management of KSE. It was decided in the meeting to take a
33 Meeting held on May 29, 2008
21
number of measures to arrest the declining trend and to ensure stability of the market. These
measures announced through a press note34 were as under:
a. As a force majeure for a period of 30 days, the applicable security wise circuit breaker
in ready, deliverable future contract and cash settled future contracts markets were
revised from -5% to +5% to -1% to +10%. This was to be reviewed on July 15.
b. Short selling was completely prohibited in deliverable future contract market and short
sale in ready market with preexisting interest against purchase on another exchange was
also prohibited. These prohibitions were for a period of one month effective June 24,
2008 and were to be reviewed again 1 week prior to the start of August Deliverable
Future Contracts.
c. Bank Guarantees from “A” and above rated banks to be allowed as margin eligible
security for margin deposit in the ready, future and CFS market; and tender of mark-tomarket
losses in future market to remain in cash.
d. Methodology of calculating the receivables for the purposes of Members’ Capital
Adequacy was agreed to be revised subject to regulatory approval.
e. KSE would be submitting a proposal for establishment of Market Stabilization Fund of
PKR 30 Billion in line with international practice. The Fund was to be structured in
such a manner that it would be automatically triggered if and when volatile
circumstances are witnessed in the market.
While decisions regarding eligibility of bank guarantees from high rated banks are
understandable, prohibition of short-selling in the ready market and futures market, revision of
34 Press Release: Measures for Market Stabilization dated June 23, 2008 available on KSE and SECP website
22
circuit breakers and announcement of a possible market stabilization fund of PKR 30 billion had
significant implications.
The Committee has analyzed the above-mentioned decisions which were intended to force
upward movement of the market and discourage exit of investors. It is debatable as to whether a
regulator should take such ad hoc measures with the intention of influencing the movement of
the market. The internationally accepted role of the regulator is to ensure that the market operates
in a fair, efficient and transparent manner and he should not be concerned with fluctuations in the
index.
As for specific decisions, the Committee is of the view that the decision to prohibit short selling
in the ready market appears to be favouring those holding long positions in the market to the
detriment of the short-sellers. As regards restrictions imposed on short selling in the futures
market, it led to only one sided activity in the market. With restrictions on sellers, the futures
market quickly became inactive. This inactivity accompanied with rapidly declining ready
market, resulted in a disproportionately widening gap in the prices of ready and futures market.
The change in circuit breakers was ad hoc in nature and involved abrupt change of rules of the
game. This measure was intended to force upward movement of the market and discourage exit
of investors. During a single day, 136 scrips touched the newly applicable upper circuit breaker
limit of 10% while only 70 scrips touched the revised lower circuit breaker of 1%35.
35 Circuit breaker report, KSE website
23
A market analyst observed that “Investors started realising that a market could not artificially be
given a direction and if trades had to occur, a 1% lower breaker would only delay the fall in
prices. All too often, the circuit breaker was hit and trading stopped because buyers and sellers
refused to transact at the price permitted on the screen. Circuit breakers converted price risk into
liquidity risk. Average daily volumes fell to 10-year lows to around 20 million shares a day, from
last year’s daily average of 240 million shares. Brokers started feeling the consequences of the
SECP decision as their volume driven income depleted.”36
Two keen observers of stock market discussing the decisions taken on June 23 commented that
“While each of these measures taken is objectionable, the one that is simply absurd is reducing
the lower price limits from 5 percent to just 1 percent and doubling the upper limit to 10 percent,
perhaps a record in its own right. What this means is that the price of a stock may rise by 10
percent but will be allowed to fall only by 1 percent compared to its price the day before. This is
just a step short of the regulators deciding the share prices, rather than the market forces.”37 They
have also raised an important policy issue that “by resorting to this extreme action, the KSE and
the SECP have accepted that they have not been able to ensure sound management of settlement
risk, which is their fundamental regulatory responsibility.”38
As regards the proposal for establishment of a market stabilization fund of PKR 30 billion, it
appears to be premature as it was not backed by any firm commitment for subscription nor any
organizational arrangements had been finalized. In the absence of such a commitment, the
36 Junaid Khalid, Karachi’s experiments with circuit breakers, December 29, 2008
37 Dr. Adeel Malik and Usman Hayat, A record we can’t be proud of, The News, July 02, 2008
38 Ibid.
24
announcement of the fund could have misled the investors. It may be noted that NIT managed
Equity Market Opportunity Fund (EMOF) was launched on ad-hoc basis on July 25, 2008.
During the three days following the announcement of the launch of EMOF, the KSE-100 index
gained 1,290 points. It has also been noticed that on the very next day of the announcement offmarket
volumes rose sharply39. However, after the rise for three days, KSE-100 Index started its
gradual declining trend.
The fall in KSE index was rather gradual till July 11, 2008 since the revised circuit breakers
artificially restricted decline in the prices to only 1%. From July 1 to July 11, KSE 100 index fell
by 593 points. However, the market fell sharply soon after the revised circuit breakers were
restored on July 14 to June 23 level and circuit breaker mechanism reverted back to 5% lower
and upper limits. The removal of the revised circuit breakers enabled release of the selling
pressure which had accumulated during the period of revised circuit breaker limits. This also
provided an opportunity to the mutual funds to encash their securities in order to meet their
redemption obligations. During four days after the restoration of the circuit breakers to 23rd June
level, KSE-100 index fell by 1,483 points. The restoration of short sales from July 14 may also
have led short-sellers to further drive down the market. Selling pressure was also triggered by
grave concerns about security situation. During the month, there was build-up of NATO troops
around the Pak-Afghan borders and occurrence of many incidents of violence. However, the
news in the market about establishment of the EMOF led to rise in the KSE index from July 18,
2008. The fund was actually launched on July 25, 2008. The rise of the index by 922 points from
July 21 to July 24, 2008 could be attributed to the news of the launch of EMOF as well as visits
39 Average trading volume from June 24 to 27 in ready and off-market was 188 and 38 million shares, respectively.
25
of the Governor of the State Bank of Pakistan and the Finance Minister to KSE on July 21 and
22 respectively. During the visit of the Finance Minister, members of KSE urged the
Government to intervene in the market.
During the next three trading sessions from the date of launch of the fund, the index again fell by
708 points. Therefore it can be assumed that the news of the fund had already been absorbed by
the market prior to its launch. A view has been expressed by some market participants that the
bull-run during the days leading up to the launch of the fund was due to securities being
accumulated at the depressed prices to be sold later to the fund at comparatively higher prices.
The market had an abnormal rise on July 30, 2008 and the index went up by 405 points.
It was noticed in July, 2008 that there was a significant gap in prices prevailing in the Ready and
Deliverable Future Market of the same scrip which had led to abnormal spread between the two
markets. The abnormal spreads in the same scrips noticed in July 2008 reflected lack of buyer’s
interest. Sellers found it hard to reduce their open interest. It was observed that, as a
consequence, the required mark to market margins were not being collected.40 It was therefore
apprehended that members may get huge cash call on the final settlement to be based on closing
price in the ready market. In view of this situation, KSE decided to adjust the prices of scrips in
the DFM and collect the mark to market losses in five (5) equal installments41. On July 30, 2008
KSE index rose possibly due to buying activity of institutional traders particularly EMOF.
40 Minutes of meeting of KSE board held on July 16, 2008
41 Ibid.
26
It appears that the slide of the Futures Market was not as rapid as that of the Ready Market.
Normally, the gap between the prices of the two markets should have provided an arbitrage
opportunity to bring prices between two markets at an equilibrium level. However, this was not
possible due to abnormally high prices in the DFM42.
The decline of the Index by 1,376 points in August, 2008 caused widespread consternation
among the market participants. The market broke the psychological benchmark of 10,000 points
on August 04, 2008 when it touched 9,853 points. KSE Board met on August 01 and twice on
August 5 to review the deteriorating situation of the market. In the meeting held on August 01, it
was decided to hold Special Trading Session (STS) on Saturday, August 02 to provide an exit to
investors and to ease the selling pressure on the market. The STS was to be held as a voluntary
exercise for allowing buyers and sellers to execute trades at the closing price of Friday, August
01, 2008. The amount wise bids received during the trading session were mostly over and above
the sale offers.43 The result of the special trading session interestingly shows a larger presence of
buyers as compared to those willing to sell and exit the market in such depressed market
conditions. This indicates that investors were buoyant on expectations of an announcement of a
bail-out package by the Government, which would allow them to obtain better prices.
An emergent meeting of the Board held on August 05 in the morning reviewed the situation. It
was pointed out that while KSE’s clearing house was not at risk, significant stress signs were
being witnessed. It was noted that there had been instances of delay in the collection of margins
from some 5-6 weak brokers, the aggregate exposure to whom was approximately PKR 1
42 Ibid.
43 Minutes of meeting of KSE board held on August 05, 2008
27
billion44. Delay in margin/losses payments from two brokers also came to light and these brokers
had exposure of around PKR 400 million. Some members were also facing pressure from the
banks for non-payment of margins. One of the members attributed the difficulties of brokers to
meet their obligations to the lack of liquidity in the market.
During the meeting, the Chairman of KSE board identified following three options before the
board;-
(i) temporary closure of the market;
(ii) delayed opening of the market; and
(iii) freezing the market on a specified floor level.
It may be pointed out that the Chairman made an important suggestion that the board may
consider a contingency plan in the event that the expected rescue funds were not made available
by the Government. Unfortunately, no such plan was prepared, although such a plan was needed
in view of the difficult fiscal situation being faced by the Government at that point of time. It
appears that expectation or reliance on the direct support of the Government in the circumstances
was not realistic. Mr. Ali Ansari, an SECP nominated director, emphasized that while taking
decision about remedial actions, it must be ensured that the market should be allowed to continue
functioning.
44 Ibid.
28
The Committee has noted with concern that the notice issued by the KSE following the emergent
meeting45 is silent about the three options which had been placed before the board, particularly
the option of freezing the market which was subsequently implemented after 15 trading days.
Lack of dissemination of this critical information to the public violates the basic principles of
good governance. The Committee feels that the asymmetry in the information available with the
member directors and the general investors is a serious matter since it provided opportunity to
the member directors to take full advantage and adjust their individual positions in the market
accordingly.
In the board meeting held in the evening of August 05, 2008, KSE board deliberated reduction of
VaR margins to provide relief to members and investors. Both the Chairman and Mr. Ali Ansari
strongly opposed the proposal as they thought that any relaxation of the risk management regime
was not appropriate at that point of time. Mr. Ansari recalled that there had been allegations of
introducing abrupt changes in the rules of the game at the exchange in the past and approval of
the proposal would fortify such perceptions.
45 KSE Notice KSE/N-4606 dated August 05, 2008 available on KSE website
29
Chapter 4: Imposition of Floor on Prices of Securities
The emergent meeting of the KSE board on August 27, 2008 was held against the backdrop of a
grim situation. KSE Index had lost 1,774 points during the last 6 trading sessions and stood at
9,145 points on August 27, 2008. NIT managed Equity Market Opportunity Fund which had
been launched on July 25, 2008 had invested only PKR 4.27 billion by August 27. Within a year
from July 2007 to July 2008 discount rate had been raised by 350 basis points by the State Bank
of Pakistan in gradual steps. On July 29, 2008 Governor, SBP had justified increase in the
discount rates on the grounds of “risks relating to rising external current account and fiscal
deficits and worsening inflationary outlook”. The depreciation of rupee against the US dollar
which accelerated from April 2008 continued in the later months. Between April and August
2008 the rupee had depreciated by around 17.97%46. The environment in the country was
dampened by a number of sporadic incidents of violence.
The emergent meeting held on August 27, 2008 took stock of the decline of the market since
April, which according to a member of the board was due to economic recession, free fall of
rupee, sharp hike in discount rate and political turmoil. The board was informed that various
meetings had been held on the previous day to deliberate upon the situation. Members of the
board had consultations with various stakeholders following which two separate meetings of
members were held, which were attended by 35 members and 103 members respectively.
46 Month end foreign exchange rate (Pak Rupee per US $), State Bank of Pakistan
30
The members expressed difficulty in meeting the margin requirements of the exchange, the
lending banks and financial institutions; and expressed disappointment at the failure of public
institutions to support the EMOF. 100 out of 103 members urged upon the board to impose floor
based on the closing price of securities as on August 27, 2008. According to the minutes of the
board, senior members of KSE who were especially invited to advise did not propose any viable
solution to stem the slide of the market and went along with the majority members for imposition
of the floor.
As recorded in the minutes of the meeting of KSE board on August 27, the Chairman KSE while
summing up the discussions identified three viable options for consideration of the Board:
“i. To let the market continue and let it settle down on its own merits.
ii. To temporarily close the market in terms of the powers vested with the Board as per Articles
of Association of the Exchange.
iii. To place a floor based on closing prices of securities as on August 27, 2008, whereby the
individual security prices will remain free to trade within the normal circuit breaker limits, but
not below the floor price level as mentioned above.”
The board after voting decided in favor of imposition of floor, by a majority47. It was argued that
“the market would remain open enabling it to perform to some extent. It will discourage the short
sellers as well as stimulate covering of the short sales positions. It will also allow off-market
47 Minutes of meeting of KSE board held on August 27, 2008
31
transactions to be executed and reporting of the same to the Exchange.”48 During the discussions,
the board was cognizant of the reaction to the decision as the minutes record that “such action
may invite allegation of abrupt change of rules to protect vested interest and thus the credibility
of the Exchange may be affected.”49
The main stated objective of the decision to impose the floor was to release the pressure of
margin calls and to avoid multiple defaults. It is interesting to note that in the subsequent
meetings of the KSE Board held on September 03, 2008 and September 09, 2008 a number of
other factors were quoted as objectives of the decision like facilitation of buy-back of shares by
listed companies and reforming the CFS Margining System.
In the meeting held on October 25, 2008 Mr. Muhammad Sohail Dayala stated that the board
while deciding the imposition of the floor had envisaged duration of the floor to be only 5 days,
expecting some positive actions from the Government. This statement suggests that the
motivation of the decision was to galvanize support of the government.
In view of the divergent views of the members of the board on the possible remedial measure to
be taken, the matter was put to vote. The result was as follows:
• The Chairman as well as Mr. Ali Ansari and Mr. Adnan Afridi voted for Option-I i.e. to let
the market continue.
48 Ibid.
49 Ibid.
32
• Mr. Ali Ansari and Mr. Adnan Afridi voted for Option-II, in case Option-I was not adopted
i.e. to temporarily close down the market.
• The remaining five broker directors voted for Option-III i.e. to place a floor on prices of
securities.
It may be noted that while all the five broker directors supported imposition of floor, the three
non-member directors (two of whom were nominated by SECP and one was an ex-officio
director) opposed the proposal for imposition of floor. It may be pointed out that one position of
SECP nominated director happened to be vacant and one of the SECP nominated directors had
been granted leave of absence for the meeting. It is presumed that if all the non-member directors
nominated by SECP would have been present in the meeting, the Chairman of the meeting could
have exercised his casting vote against imposition of floor. In such a situation the subsequent
course of events of the market could possibly have been quite different. It would have spared our
stock market the dubious distinction of being the first stock market to impose floor on prices.
The record consulted by the Committee refers to the following sequence of events:
• The KSE Board convened an emergent meeting at 3 p.m. on August 27, 2008 and decided in
favour of option of placing floor on closing prices of securities as on August 27, 2008.
• Managing Director KSE wrote a letter the same day to Chairman SECP conveying decision
of the board and seeking approval of SECP for imposition of floor effective August 28, 2008.
33
• Director, SECP sent an email to LSE and ISE on August 27, 2008 at 7:21 p.m. informing
LSE and ISE about the three options which KSE had considered50 to deal with the continuous
declining trend of the stock markets namely:
“1. Freezing/flooring of market at 9,144.93 (KSE 100 Index Level);
2. Market closure for a definite/indefinite time period and/or
3. Market continuation”
• Mr. Shakeel Aslam, Managing Director LSE responded to SECP the same night at 9:10 p.m.
i.e. in less than two hours, stating that:
(i) He had discussed the matter with board directors/members and the general view was that
interfering with market mechanism could have negative repercussions for the market
and confidence of investors, especially foreign investors.
(ii) LSE is of the view that certain other measures should be taken to address the current
volatile situation such as stabilization fund, abolishing/reducing CVT, mandating listed
companies to distribute minimum of 40% of its profits as dividend. He also stated that
clearing house of LSE was fully under control through the adoption of required risk
management system and margins were intact.
(iii) However, if KSE decides to freeze or close the market, LSE would follow the same in
order to avoid technical/procedural problems and avoid any distortion of the market and
hence maintain uniformity.
(iv) Out of the options, LSE would prefer freezing the market and if so done, it should not be
for a day or two but more of a sustained period of time.
50 Copy of email provided to the Committee by SECP
34
• ISE responded to SECP at 9:28 p.m. stating that though ISE was not in favour of any
“contrived interventions in the market”, it would go along with the proposal for freezing the
market in view of the prevalent situation. It also emphasized that artificial interventions in
the market did not prove sustainable.
• In another letter dated August 27, MD KSE informed SECP that KSE Board had decided to
place floor based on closing prices of securities of August 27, 2008 which mechanism will be
introduced effective August 28, 2008 and shall continue till further notice.
• On August 28, 2008 the three stock exchanges issued notices to the members informing them
of the decision to place a floor on the closing prices of August 27, 2008 both in the ready and
futures market, whereby the individual prices would remain free to trade within the normal
circuit breaker limits but not below the floor price level of August 27, 2008.
• The minutes indicate that during the meeting, KSE board had multiple conference calls with
Chairman SECP and received feedback from one of the leading fund managers.51
• CEO’s of NCCPL and CDC were also consulted who agreed to the KSE proposal of placing
the floor.52 However, according to the order of appellate bench of CCP, letters of CDC and
NCCPL produced before it mention that CDC and NCCPL were only informed rather than
consulted.53
It is important to discuss the process of imposition of floor prices. The above sequence highlights
the following facts:
1. The decision for imposition of the floor was taken in haste.
51 Para 1.7 of Minutes of the KSE board Meeting held on August 27, 2008
52 Ibid.
53 Page 40 of the order dated November 26, 2009 passed by the Appellate Bench of the CCP.
35
2. Consultation with LSE and ISE cannot be treated as meaningful since they appeared to be
under pressure to deliberate and respond within a couple of hours.
3. MD KSE wrote two letters to SECP on August 27, 2008. In the first letter he sought approval
on the recommendations of the KSE board for imposition of the floor and in the second he
conveyed decision of the board to impose the floor. It is not clear as to what transpired in the
time gap between the two letters.
4. Although LSE and ISE responded to SECP about the proposal/decision of KSE, record of
SECP does not show that these responses were formally conveyed to KSE.
5. Although LSE and ISE conveyed their concurrence to imposition of the floor, both the stock
exchanges emphatically pointed out that intervention of any kind in the market could not be
sustainable and as such was not desirable.
6. The force majeure provision in the RM Regulations does not appear to have been followed
by the three stock exchanges either in letter or in spirit. In this regard, the Appellate Bench of
the CCP in its order dated November 26, 2009 has made some pertinent points. Firstly, while
determining a force majeure event KSE did not follow the established principles of law
which required it to prove that force majeure circumstances existed notwithstanding its own
efforts. The justification of loss of liquidity for imposition of the floor became questionable
in the light of the report submitted by KSE to the Appellate Bench.
The Committee is also of the view that while exercising powers under force majeure of the
RM Regulations, KSE board should have applied its mind to determine that an emergency or
exceptional market condition existed in the market and after making reasonable
determination should have consulted NCCPL and CDC. It appears and as argued by KSE in
the CCP case, the KSE board imposed floor under clause (e) which empowered KSE to take
36
or omit to take all such other actions as KSE Board deems to be reasonably appropriate in the
circumstances having regard to the positions of the Exchange, Clearing Company, the
Members and other customers.” The Committee is of the considered view that clause (e) does
not give a blanket approval to the KSE to impose floor on prices and the said clause must be
interpreted in line with the other clauses and reasonability of the decision must be ensured.
The minutes do not indicate discussion on each of the steps stipulated under the RM
Regulations and further various options available to the Board under clause (e).
7. LSE and ISE also did not follow the procedure required to be followed for exercising powers
of force majeure under the RM Regulations.
8. The decision to impose the floor was taken by KSE in its board meeting through split vote.
The final decision was taken on the basis of the vote of five broker directors of KSE. It raises
questions of serious conflict of interest as the broker directors who were to personally benefit
from decision for imposition of the floor did not disclose their interest nor abstain from
voting as mandated by section 214 and 216 of the Companies Ordinance, 1984.
9. As stated by the Appellate Bench of the CCP, the primary reason for imposition of the floor
by KSE was to protect its members and it may not be correct to say that it was in public
interest.
10. One of the requirements of actions under force majeure clause of RM Regulations is that it
should take into account the interest of customers/investors. While the interest of members
was given importance there is nothing on record that KSE board considered the interest of
investing public (other investors). It may also be pointed out that the meeting of the KSE
board refers to consultation with a leading fund manager. It is interesting that the KSE board
decided to consult an individual fund manager instead of The Mutual Funds Association of
37
Pakistan (MUFAP) which is the representative body of all Asset Management Companies
(AMCs).
The process of decision making and the decision itself raise some fundamental questions and
issues. Firstly, the situation which led to the imposition of the floor had not arisen abruptly. As a
matter of fact since April 2008, the market was going through bearish trend with consequential
pressures on leveraged financees. Therefore, both SECP and the stock exchanges had ample time
to analyse the situation in detail and consider various options for dealing with the situation. The
fact that no in-depth analysis was available at the time of taking this decision shows serious
weakness of the institutions. The Committee is of the view that the regulators should have
organised systems for continuous monitoring and evaluation of risks in the market so that
preemptive measures could be taken in time.
Secondly, the question of imposition of the floor had been coming under discussion before its
final implementation. In the KSE board meeting held on August 05, imposition of floor had been
discussed as one of the options. It is surprising that the implications of implementing such a
decision were not considered either by SECP or by the KSE and not shared with the LSE and
ISE.
Thirdly, the provision of force majeure in the RM Regulations approved in February 2008 by
SECP was used by the stock exchanges to make ad hoc and midstream changes in policies. This
provision was used in May 2008 for allowing roll-over of DFM positions to CFS MK-II and on
June 23, 2008 for changing circuit breakers and prohibiting short sale. There is visible tendency
38
to use this provision indiscriminately, ever since its incorporation in the regulations. In
December 2008 LSE members again demanded use of force majeure for dealing with the CFS
MK-II situation. This provision gives blanket powers and can be resorted to easily for interfering
in the market. Given the indiscriminate use of this provision, SECP may decide as to whether it
needs to be substituted by more specific provisions in the regulations.
The issue of imposition of the floor has been widely discussed both within the country and
abroad. Three main issues which have been debated are (i) who was responsible for the decision
to impose the floor; (ii) was imposition of the floor the best available option to deal with the
prevalent situation; and (iii) why the floor was allowed to continue for four months.
The record available with the Committee shows that the decision to impose the floor was that of
KSE which had been considering it as one of the options since August 05, 2008. Once this idea
was mooted, the members jumped at it and mobilized support in its favour. 103 members of KSE
gathered on August 27 to discuss the market situation and 100 out of them voiced their
agreement with option of imposition of the floor. It can be presumed that these members put
pressure on the board to take this decision. SECP did not convey its views or decision to KSE
and thus allowed it to implement the decision. The Committee is of the view that given its
responsibilities under the Securities and Exchange Commission of Pakistan Act, 1997 (the
“SECP Act, 1997”) for dealing with capital market and its powers under sections 20 of the said
Act, its silence tantamount to tacit approval. This view is fortified by the fact that it issued a
directive to stock exchanges to lift the floor price levels with effect from December 15, 2008
exercising its powers under section 30 of the SECP Act, 1997.
39
As regards the second issue KSE considered three options i.e. allowing the market to continue,
closing the market for a brief period and imposition of floor on prices. As has already been
discussed in 2.2, Global Financial Crisis and its Impact, a survey of the impact of 2008 crisis on
the emerging markets carried out by IOSCO indicates that most of the markets which had dipped
during the global crisis of 2008 allowed their markets to continue functioning. Only three stock
exchanges resorted to closure of the market for brief periods, the maximum period being three
days. The Committee is of the view that keeping in view the experience of other jurisdictions, it
would have been in the long-term interest of the market to allow continued functioning of the
market under normal parameters. As has been mentioned elsewhere i