The document summarizes the regulatory structure and functions of the Karachi Stock Exchange (KSE) in Pakistan. The KSE is the largest stock exchange in Pakistan and is regulated by several government entities including the Ministry of Finance, State Bank of Pakistan, and Securities and Exchange Commission of Pakistan. The KSE's board of directors oversees its operations. It facilitates trading through an electronic trading system and has various markets for different types of trades. It provides liquidity for investors and serves important functions for both companies and investors.

2. Introduction
• Founded on August 14 ,1949, Karachi Stock
Exchange (KSE) is the biggest and most liquid
exchange in Pakistan. (66 years ago)
• On May 28, 2013, total market capitalization
reached Rs. 5.22 trillion (US$ 53.3 billion
approximately).

3. Regulatory Structure Stock Exchange
Parliament
Ministry of
Finance
State Bank
of Pakistan
Federal
Board of
Revenue
Securities
and
Exchange
Commission
of Pakistan
Stock
Exchange
National
Clearing
Company
Central
Depository
Company
Banks and
Financial
Institutions

4. Corporate Structure of the
Stock Exchange
The affairs of the Exchange are run by the Board of
Directors.
Composition of the Board:
Elected from Members of the Exchange 5
Nominated by SECP 4
The Managing Director 1
Total 10
• Managing Director is a member of the Board by
virtue of his office. The Chairman of the Board is
elected out of the non-member directors.

5. KSE AND ITS TRADING SYSTEM
• The system being operated at Karachi Stock Exchange is
called Karachi Automated Trading System (KATS).
• T+3 Settlement System
• Provisionally Listed Counter
• Spot/T+1 Transactions
• Futures Contract
• Odd Lots Market
• COT Market
• OTC Market (In Process)

6. T+3 Settlement System
• In the T+3 settlement system, purchase and sale of
securities is netted and the balance is settled on
the third day following the day of trade

7. Provisionally Listed Counter
• The shares of companies, which are not already
listed and which make a minimum public offering of
a specified amount, which is presently Rs.150
million, are traded on this counter from the date of
publication of prospectus/offering document.

8. Spot/T+1 Transactions
• Spot transactions imply delivery upon payment.
Normally in spot transactions the trade is settled
within 24 hours.

9. Futures Contract
• A Futures contract involves purchase and sale of
securities at some future date (normally within one
calendar month), at a price fixed today.

10. Odd Lots Market
• This market has been created to provide an
automated platform through KATS enabling the
investors to trade securities in lots which are less
than the normal trading units (lots) of the securities
approved for Ready Market.

11. COT Market
• Equity repurchase transactions, better known, as
“Badla” are called Carry- over trades.
• These are an established form of transactions used
in the stock market for temporary financing of
trades by speculators and jobbers.

12. OTC Market (In Process)
• In order to encourage enterprising promoters to set
up new industries or expand their existing
enterprises by raising finance in a cost-effective
way through listing mechanism with comparatively
lesser requirements, an Over- The-Counter (OTC)
market is proposed to be operative soon.

13. Functions of KSE

14. Functioning of Stock Exchange
• Main activities
• To provide liquidity to the investors

15. Functions from different aspects
• Functions as an organization are
• Functions in favor of the investor
• Function in favor of the companies
• Constant following of the quotations

16. Brokerage and clearing

17. brokerage
• brokerage, is a financial institution that
facilitates the buying and selling of financial
securities between a buyer and a seller.
• A broker is a member of stock exchange and
securities can only be purchased and sold
through him.

18. • 1.Selection of Broker:
After selecting the broker the investor has to convince the broker to
buy or sell securities on his behalf. For this purpose, the investor
may have to make an advance or give references of a bank or some
other persons.
• 2.Placing the order:
There are three parties involved in the dealing of shares:
• The Stock Broker
• The Client
• The Jobber

19. • For Example, Mr. Ali wants to sell one thousand shares of a Company. He
contacts a broker dealing on the stock exchange. The broker asks a jobber
to give quotations. He does not disclose the jobber whether he wants buy
or sell the shares of a company. The jobber gives two prices, one at which
he is willing to sell and the other at which he is ready to buy. For instance,
the two quoted prices are Rs.21.90 and Rs.22.00 in a thousand. This
means broker is willing to purchase at Rs.21.90 and sell at Rs.22.00 per
share. If the broker is not satisfied, he can go to another jobber or ask the
first one to make it closer (i.e. to reduce the margin between buying and
selling). If the broker is satisfied with the new quotation, he then contacts
with his client informs him the bid of the share. If the client agrees to the
bid price, then bargain is struck

20. • 3.Preparing the contract note:
The stock broker prepares a contact note, one copy of which is given to the client; second one to
the jobber and the third remains with the broker. The contact note generally contains the following
information:
• Name and the address of the stockbroker.
• The name and address of the jobber.
• The type and price of the share.
• The commission of the broker.
• The date of transaction
• 4.Settlement:
• In case of ready delivery contract, the buyer pays the money and the seller delivers the securities
one same day.
• In the case of forward delivery contracts settlements are done in a week or once in a month. On the
settlement day, the difference in the purchase and the sell price may be paid without any delivery
of securities. The parties may also postpone the deal to the next settlement date through mutual
consent. This is known as “carryover” or “budla”.

21. Exchanges/Clearinghouses
• Brokers/intermediaries should consider information available about the
risks of trading on a particular exchange/clearinghouse prior to executing
trades on such market. Such risks should be monitored on an ongoing
basis.
• Among the factors that might be appropriate to consider in determining
whether to transact on a particular exchange/clearinghouse are the
quality of the regulatory and oversight system of the
exchange/clearinghouse; the applicable financial integrity system, relevant
customer protection mechanisms (e.g., segregation requirements, account
insurance, guarantees or compensation funds)
• The source and liquidity of relevant financial support; the margining and
settlement system; the ability to transfer positions and property in the
event of a default the ability of the exchange/clearinghouse to impose
capital requirements on its members, to require its members to increase
their capital, or to assess its members, the description of the clearing
members and/or shareholders, and the regulatory and legal system
including applicable bankruptcy laws in the relevant jurisdiction.

22. Clearing Brokers
Brokers/intermediaries should consider the financial condition, operational capacity and other material
risks of the clearing brokers through which they execute and/or clear transactions on those markets where
they do not clear directly (or through affiliates). The primary factors to consider in evaluating
a clearing broker should include, among others, its credit standing, capital and financial condition, the
exchanges/clearinghouses of which it is a member and the type of firm (for example, a bank, securities
broker, insurance company or an affiliate thereof). Other factors that might also be considered include the
clearing broker's management experience and capabilities, its margin policies and customer credit
procedures, its operational capacity, risk management systems and disaster recovery procedures and
whether or not it engages in proprietary trading. Based on the results of this consideration,
brokers/intermediaries may consider implementing procedures, to be applied in appropriate instances, to
protect against the risks of clearing through certain clearing brokers or categories of clearing brokers.
Those brokers/intermediaries with substantial exposure to clearing brokers as a result of the
brokers/intermediaries' trading activities with such clearing brokers should establish and maintain back-up
clearing relationships with other clearing brokers to be utilized in emergency situations. Such relationships
should include completed contractual arrangements with such back-up clearing brokers and periodic testing
of procedures for transfers of positions and property and continuation of trading.

23. Customers
A broker/intermediary, prior to establishing a relationship with a customer, should assess the risks of
doing business with that customer and should regularly monitor these risks throughout the term of the
relationship with the customer. In general, a broker/intermediary's consideration should focus on the
following areas:
(a) the nature of the customer (e.g., institutional or retail) and its corresponding level of experience
and sophistication;
(b) the creditworthiness of the customer, as measured by established credit policies and procedures
of the broker/intermediary; and
(c) the authority (including apparent authority) of the customer to conduct its proposed trading
activities, including the customer's legal authority and the capacity of the individuals responsible
for the trading.
Review of customers financial condition, and related decisions with respect to customers, should be
conducted by persons and business units within the
broker/intermediary (a) that are independent of the sales personnel and (b) whose compensation is not
directly related to the volume or profitability of trading conducted by customers.

24. Brokers/intermediaries should establish and enforce policies and procedures
regarding the prompt collection of customer margin (other than in the case
where there are appropriate credit arrangements in place) and the liquidation
of customer accounts (or other appropriate action) where necessary.
Brokers/intermediaries should establish and enforce procedures regarding
account opening and trading by omnibus and introduced accounts,
recognizing the potential exposure to the broker/intermediary that may arise
from such accounts.
Brokers/intermediaries should establish risk management procedures for
trading by affiliates carried on their books. Such procedures should include,
among others, position limits for affiliates' trading activities based on their
financial status

25. Legal Relationship with Customers
Brokers/intermediaries should prepare and utilize written agreements with their customers that clearly
delineate the respective rights and obligations of the brokers/intermediaries and their customers. Such
agreements should provide a basis for allocating between brokers/intermediaries and their customer’s
responsibility for all material aspects of their relationships and risk exposures and should take into
accountthe particular requirements of each customer and its relationship with the broker/intermediary.
A broker/intermediary should provide its customers, upon request, with information regarding the
financial status of the broker/intermediary (subject to appropriate confidentiality considerations) and
the identities of depositories and clearing brokers utilized by the broker/intermediary.
In general, where a customer seeks to obtain beneficial treatment for positions held for hedging,
arbitrage or other purposes, a broker/intermediary should be able to rely on representations provided
by its customer that the positions are eligible for such treatment. A broker/intermediary should
establish and enforce procedures, however, to deal with those situations in which the
broker/intermediary forms a judgment (based on information known to the broker/intermediary) that
such representations are not accurate. Such policies or procedures might include making appropriate
inquiries of the customer's senior management or requiring the customer to provide documentation to
support its representations

26. Example Procedure of OTC
OTC clearing procedures:
• The OTC clearing procedures apply to all account holders and brokers when involved in OTC clearing. The OTC clearing procedures are non-exhaustive
and are in addition to applicable rules set out elsewhere in the clearing rules.
• OTC clearing is available to account holders having entered into an OTC transaction which is available for OTC clearing in accordance with the product
specifications, and who are eligible as counterparties.
• In case of clearing clients, their client representative shall act on behalf of its clearing clients, as further set out in the clearing rules. Clearing clients
will only have access to OTC clearing through their client representative.
Use of brokers
• Brokers may represent clearing members, but not clearing clients, in OTC clearing.
• Clearing members may appoint one or more brokers to act on their behalf using a standard broker appointment form.
• Please note that the actually availability of brokers, even though listed in this document, is conditional upon the applicable broker signing a broker
agreement with the clearinghouse. Please check with your broker whether or not it has signed up as broker; no OTC clearing can be performed
through the broker until has obtained status as broker with the clearing house.
• Is your broker not listed. Please contact your broker and ask them to contact the clearinghouse in order to sign up as broker.
Registration and processing of clearing requests
• Clearing requests may be registered by a broker or the account holders involved in the OTC transaction as follows:
• Joint registration: a broker may register an OTC transaction for clearing if both account holders involved have appointed the broker as their broker
with the clearing house. The registration by the broker represents matching clearing requests on behalf of both account holders involved in the OTC
transaction.
• Two-sided registration: account holders may register an OTC transaction for clearing, in which case both account holders must register opposite and
matching clearing requests with the clearinghouse, nominating the other account holder as counterparty to the OTC transaction.
Registration errors
• Account holders must in respect of claims for registration errors in OTC transactions make a complaint to the clearinghouse as soon as possible, and
no later than five (5) minutes following the registration of each clearing transaction. Complaints shall be made by telephone call to the clearing house
at its designated point of contact. To the extent the applicable clearing request was submitted by a broker, communication in accordance with this
section 5 shall take place exclusively through the broker acting on behalf of the account holder(s) involved.