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Overview, Functionalities and Products. NCCPL. NCCPL’s Overview. BACKGROUND. NCCPL – NCSS Design In March 1999 the Capital Market Project Consultants (Arthur Anderson & Co.) were mandated to develop recommendations for a National Clearing and Settlement System (NCSS).
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BACKGROUND NCCPL – NCSS Design • In March 1999 the Capital Market Project Consultants (Arthur Anderson & Co.) were mandated to develop recommendations for a National Clearing and Settlement System (NCSS). • Accordingly various committees were formed comprising of representatives from the three Stock Exchanges, CDCPL and Market Participants. • Based on recommendations submitted by consultants, deliberation of the committees and subsequent approvals from the three Stock Exchanges and SECP, System design was finalized in October 2000.
Overview • National Clearing Company of Pakistan Limited (NCCPL) was incorporated on July 03, 2001 to manage and operate the National Clearing & Settlement System (“NCSS”) in a fully automated electronic settlement system. • The operations of NCCPL are governed by the following legislations: • Clearing House Companies (Registration and Regulations) Rules 2005; • Securities (Leverage Markets and Pledging) Rules 2011; • NCCPL Regulations; • NCSS Procedures; • Companies Ordinance, 1984; and • Income Tax Ordinance 2001 • The Board of the Directors comprises of 11 Directors of which 9 are appointed by the shareholders,1 is nominated by the SECP and the CEO by virtue of his office.
Overview • The Company has voluntarily adopted the Code of Corporate Governance to implement good governance practices. These inter-alia include: • Forming an Audit Committee of the Board comprising of non-executive directors • Appointment of Chief Internal Auditor, Chief Financial Officer and Company Secretary by the Board; • Holding the number of the Board Meetings as recommended by the Code; • Issue of Quarterly, Half yearly and annual financial statements • The Company also has a I.T. Steering Committee; • This Committee Comprising of IT experts from stock exchanges and Financial Institutions Deliberate IT related strategies and policies
National Clearing and Settlement System NCSS • NCCPL, being the leading post trade service provider in the country, is continuously introducing diversified products and services which are conducive to the development of the capital market. • Following are the key features of the centralized NCSS: • Balance Order T+2 rolling settlement cycles with multilateral netting; • Automated Pay & Collect by direct debit and credit in the settling bank accounts; • No physical receipt / issuance of instruments; Cont…
National Clearing and Settlement System NCSS • Automated process of securities settlementdirectly between Clearing Members (CM); • Cross Exchange Netting for both cash & securities for CMs who are members of more than one Stock Exchange; • Settlement of net obligations directly between CMs as per undisclosed Balance Orders; • Clearing and Settlement of non-broker institutions for trades/transactions directly with NCSS through Institutional Delivery System (IDS) Module
National Clearing and Settlement System NCSS • Settlement of Broker-to-Broker Transactions directly with NCSS to facilitate transactions executed between brokers of the different exchanges; • Direct securities move-in and move-out on the basis of CDS accounts based on Unique Identification Numbers; • Complete Straight-through-Process in the settlement process, without involving of any manual intervention. • All three core systems of the Capital market; namely Trading systems, Clearing system (NCSS) and the Depository system (CDS) are linked in such a manner that UIN is serving as the “Primary Key”. • Securities are transferred directly into the Investors’ CDS Accounts i.e. “Beneficiary to Beneficiary”account basis.
NCSS Controls and Checks Movement of Securities: • Bought securities are delivered to buying CMs’ CDS sub-account and/or house-accounts in blocked status. Blocked securities are available to buying CMs after discharging their obligations. Short Deliveries Debits: • In case of short deliveries, system additionally debits CMs’ accounts with the previous day Closing Prices (i.e., System Prices) with 15% margin of late/fail deliveries. Retrieval Securities: • In case of money default by CM, blocked securities in his CDS main account are retrieved by NCCPL for selling-out.
Buying Broker Selling Broker T Execution of Trades at the Stock Exchange Online trade feed to NCSS Generation of NE Transactions Netting of trades Payment orders and Delivery Receive order Money Receive orders and Delivery order T+1 SD-1 Delivery of NCSS eligible securities (with blocked status) Buying Broker Selling Broker Unblocking of securities on Payment Confirmation Payment to NCSS Collect Payment Release Payment Settlement Flow in NCSS T+2 SD
Balance Order Multilateral Netting Based on CDS Accounts and UINs T+2 Settlement Cycle T+1 Settlement Cycle Settlement Options
Brief Overview of UIN Functionality Client Types in NCSS • Individual Pakistani Citizen. • Individual Foreigner/overseas Pakistani citizens/Non-Pakistani residing in Pakistan. • Non-individuals; • Corporate/individual – Broker. • Corporate – Company. • Corporate – fund/other organization.
Brief Overview of UIN Functionality Benefits of UIN Implementation • Enable Brokers to register their clients by assigning Unique code to manage their business efficiently and effectively. • Provide Traceable Links for all Trades and Transactions executed in the Capital Market of Pakistan. • Provide great relief and facilitation in monitoring compliance and surveillance of relevant Rules and Regulations by the Apex and Front Line Regulators. • Provides facilitation to the Stock Exchanges to implement effective risk management measures. • Provide facilitation to various Govt. Agencies in investigation and inquiries. • Provides great relief to the market participants to synchronize their Back Office records.
Brief Overview of UIN Functionality Benefits of UIN Implementation • Provides facilitation to the Central Depository Company (“CDC”) to create a logical linkage between CDS Account Holders and Investors. • Provides facilitation to the Mercantile Exchange for the registration of Commodities Investors. • Provides effective control over Pledging of Securities with the Banks by Market Participants. • Bring very useful information for the Capital Market of Pakistan by disclosing Foreign and Local Investors Portfolio on a daily basis, commonly known as “FIPI” and “LIPI”. • Without having UIN Functionality “Automation of Securities Settlement” mechanism could not be implemented • Without having UIN Functionality “Client Level Margining System” could not be implemented at the Stock Exchanges.
Brief Overview of Financial Institutions (FIs) Risk Management System
Brief on (FIs) Risk Management System • All NBCMs are required to affirm Auto-Initiated Institutional Delivery System (“IDS”) transactions based on their trades executed through brokers on the UINs of such NBCMs. • Upon affirmation of IDS transactions, NCCPL shall collect Value at Risk (VaR) based margins against exposure & Mark-to-Market (MTM) losses from NBCMs. • All NBCMs are required to pay collateral against exposure margin & MTM losses to NCCPL with in stipulate time . • Collateral shall be in the form of cash, Approved Securities, Bank Guarantee or Irrevocable Undertaking. • The Exchange(s) will adjust the exposure of their Brokers based on the information, provided by NCCPL.
Brief on UIN Information System (UIS) • In order to bring transparency in capital market and to prevent any misuse of UINs, NCCPL has implemented UIN Information System (“UIS”) . • Directly accessible to UIN holder whereby each investor can be able to monitor all activities carried out on their UIN in stock exchanges. • The said system enables investor to view their all trading, settlement and UIN / Client Code registration data with their respective brokers through dedicated User ID and Password to log on into the web-based application exclusively developed for such system. • UIS provides great value to the Company with reference to bring transparency in the capital market along with investors’ confidence.
Brief Overview of Leveraged Products In order to generate liquidity in the capital markets of Pakistan, following new leveraged products have been introduced under the Securities (Leveraged Market and Pledging) Rules, 2011: • Margin Trading System (“MTS”) effective from March 14, 2011; • Margin Financing System (“MFS”) effective from March 14, 2011; and • Securities Lending and Borrowing System (“SLB”) effective from March 21, 2011.
Brief Overview of Leveraged Products Salient features of Margin Trading System (“MTS”) • Financing in MTS is only be made available on pre-identified ready market purchases termed as ‘Leverage Buy’. • MTS is an undisclosed market for Financees and Financiers. • The maximum mark-up rate in MTS Market is KIBOR+8%. • All transactions executed in MTS Market are based on Financing Participation Ratio (“FPR”) i.e. equity participation by Financees. • Equity participation to be paid by the Financee for the settlement of each MT Transaction is 15% of MT Transaction Value. Whereas, Trading Financier is required to settle 85% of MT Transaction Value on respective settlement date.
Brief Overview of Leveraged Products Salient features of Margin Trading System (“MTS”) • Financees are required to pay Marked-to-Market (MtM) losses to NCCPL on daily basis in Cash only till the settlement of the entire MT Contract. • Such MtM losses will be paid to the respective Financiers on daily basis. • Financiers are required to open a separate MT Blocked Account in CDS for movement of MT Financed Securities. • Each MT Contract shall not exceed from sixty (60) calendar days. However, on every fifteenth (15th) calendar day, MTS will automatically release one fourth quantity of the MT Contract Value.
Brief Overview of Leveraged Products Salient features of Margin Trading System (“MTS”) • Rollover of MT Contract is allowed in MTS. • Risk management measures such as exposure margins, concentration margins, and MTM are applied on all MT Contract. • Capital adequacy limits and position limits are also applicable on Financiers and Financees in accordance with the Regulations.
Brief Overview of Leveraged Products Salient features of Margin Financing System (“MFS”) • Margin Financing (MF) facility is made available to all brokers against net ready market purchases of their clients and proprietary positions. • MF can be obtained as per agreed Financier Participation Ratio (FPR). However, minimum of 25% or VaR whichever is higher should be contributed by financee. • Financing terms and conditions are pre-determined by Margin Financee and Margin Financier. • NCCPL provides a system to MF Participants for recording and settlement of MF Transactions. • All MF Transactions are based on counterparty risk in a disclosed manner.
Brief Overview of Leveraged Products Salient features of Securities Lending and Borrowing System (“SLB”) • SLB is defined as the temporary exchange of securities with an obligation to redeliver the same securities in the same number and at an agreed premium on a future date. • The motivation for lenders is to earn income/return on their Idle Securities. • The borrowers may utilize SLB functionality to avoid delivery failure in ready market or to make a short sale. • SLB is done through an automated platform provided by NCCPL to lenders and borrowers for placing offers and bids on un-disclosed manner.
Brief Overview of Leveraged Products Salient features of Securities Lending and Borrowing System (“SLB”) • The Premium of SLB is capped to KIBOR+8%. • SLB Contract period is maximum for 22 working days. • On Settlement Day, the lender delivers the lended securities and borrower pays the total amount of borrowed securities.
Brief on the Computation and Collection of Capital Gain Tax (CGT)
Brief on the Computation and Collection of Capital Gain Tax (CGT) • The SECP as a part of its mandate to develop Capital Market in Pakistan, forwarded a proposal to the Federal Board of Revenue (“FBR”) for Revamping of CGT Regime. • CGT Rules have been revised though the promulgation of Finance (Amendment) Ordinance, 2012 effective from April 24, 2012. • Accordingly, NCCPL shall be Responsible to Compute, Determine and Deposit CGT to FBR. • Following are the Persons/Investors to which new CGT Regime will be applicable by NCCPL: • Individual Investors; • Brokers; and • Corporate Entities.
Brief on the Computation and Collection of Capital Gain Tax (CGT) • Following Persons/Investors will NOT be covered under new CGT Regime by NCCPL: • Mutual fund; • Banking Company; • Non-Banking Finance Company; • Insurance Company; • Modaraba; • ‘Foreign Institutional Investor’ being a person registered with NCCPL as a foreign institutional investor; and • any person or class of persons as notified by the FBR.
