7. LSE Yesterday
• 1994
– LSE embarked upon the computerization (automation)
program.
– Pakistan Credit Rating Agency (PACRA), the first credit
rating agency was established.
• 1995
– LSE introduced T+3 settlement system. (previously T+5)
– Members’ Contribution Fund was established.
• 1996
– LSE was the first Exchange in Pakistan to introduce
automated trading.
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9. LSE Yesterday
• 2001
– LSE launch Internet Trading System (trading from terminals out of building).
– The National Clearing Company of Pakistan Limited (NCCPL) was incorporated
to replace the separate and individual Clearing Houses operated by each of
the three Pakistani Stock Exchanges.
• 2002
– Pakistan’s stock market was declared as the Best Performing Stock Market of
the World for the year 2002 by international magazine “Business Week”.
– Code of Corporate Governance was incorporated in the Listing Regulations.
– LSE implemented automated Trade Risk Filter (TRF) to monitor the members’
trading exposure on real time basis.
– Banks and financial institutions were allowed to become Associate Member of
LSE Clearing House.
– Trading in Futures Contracts was introduced.
– LSE launched new LSE‐25 Index replacing LSE‐101 index.
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11. LSE Yesterday
• 2005
– LSE opened second Trading Floor at Sialkot.
– LSE launched a series of investor education and awareness programs.
– Investigation & Enforcement Unit was setup to maintain a check on the
market abuses (scope of Surveillance enhanced).
– The concept of Unique Identification Numbers was introduced
• 2006
– LSE Training Institute was established
– MOU was signed with ISE for the establishment of Unified Trading Platform.
– The Finance Act 2006 included provisions for corporatization and
demutualization of Exchanges in Pakistan. The Demutualization Committee of
the Exchange recommended to corporatize LSE.
– VaR based Margining Regime introduced
• 2007
– LSE & ISE started joint trading on a common platform through Unified Trading
System (UTS).
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12. LSE Yesterday
• 2008
– ULTRA Trading Software was sold to Ghana Stock
Exchange
– Cash Settled Future Contracts were launched
• 2009
– Securities Lending & Borrowing Software was
developed and sold
– Client Level Margining was implemented
– Debt Securities automated trading was launched
– Corporatization & Demutualization Act was passed by
National Assembly
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22. Expert Committee on Demutualization &
Integration/Transformation
• Comments
– The Committee is of the view that a demutualized structure would offer a more
conducive environment for addressing critical problems of our market and its
development on healthy lines.
– The Committee is of the view that given the strong public interest involved in
demutualization, SECP should take decision to demutualize the exchanges.
– The Committee is of the view that the arguments and precedents supporting integration
outweigh those against integration. Real and sustainable development of stock
exchanges can only be achieved through demutualization and integration.
• Recommendation
– The process of demutualization and integration occur simultaneously, and that the 3
existing exchanges should form a fully integrated demutualized exchange.
– The Committee proposed to the regulator that if sufficient progress is not made
towards demutualization and integration within 1 year, a new demutualized exchange,
sponsored by financial institutions should be established.
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23. Problems of Stock Exchanges‐1
• Insufficient Growth in Market Capitalization
– Market Size below International Benchmark
– Too Few Listings
– Low Quality of Many Listed Companies
– Limited Free Float and Supply‐Demand Imbalance
• Narrow Base of Investors
– Minimal Share Ownership
– Stagnation in Number of Shareholders
– Small Number of Unit Holders in Mutual Funds
– Lack of the Market Awareness
• Lack of Balance in Governance Structures
– Weak Professional Management
– Ineffective Regulation of Members
– Ineffective Regulation of Listed Companies
– Unequal Access to Corporate Announcements
– Mixed Performance of Non‐Member Directors
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24. Problems of Stock Exchanges‐2
• Fragmentation of Market
– Division of Liquidity and Distortion of Price Discovery
– Cost Inefficiency for All Stakeholders
– Complexity in Operations
– Lack of Inter‐exchange Competition
• Inadequate Investor Protection
• Weak Management of Systemic Risk
• Insufficient Economic Capital
– Limited Revenues
– Inequitable Burden Sharing
– Low Level of Capital Expenditure
– No Financial Guarantee
• Insufficient Human Capital
– Few Professionals
– Inability to develop New Products and Services
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25. Problems of Stock Exchanges‐3
• High Degree of Speculation and Concentration
– Low Levels of Actual Settlement
– Concentration of Liquidity and Market Capitalization
– Preference of Badla Financing (unregulated)
– Excess Volatility
• Large Number and Low Quality of Intermediaries
– Weak Criteria to become a Member
– Weak Criteria to become a Broker
– Weak Criteria to become an Agent or Trader
– Barrier to Entry to New Intermediaries
– Membership Card Treated as Real Estate
– Low Capitalization of Brokers
– A Single Class of Brokers
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27. Advantages of Demutualization
• Better Governance Structures
• Access to Economic Capital
• Access to Human Capital
• Profit Motive for Growth and Development
• Removal of Barrier to Entry for New Brokers
• Unlocking of Value of Membership Cards
• Greater Ability to Attract Listings
• Domestic and International Recognition
• Ability to Make International Alliances
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31. Timeline: Corporatization & Demutualization
• Step 1: Ordinance promulgated
• Step 2: Formation of Demutualization Committee
– Time Period: within 30 days of commencement of
ordinance
– Authority:
• Approve valuation of Exchange by any approved Financial advisor
• Negotiate and finalize sale of 40% to strategic investors
– “Strategic Investor”: means a stock exchange, depository company, a
derivative exchange or a clearing house which has been approved by the
Commission in accordance with the prescribed criteria, for the purposes
of acquiring shares of a stock exchange
• Determine the offer price for sale of shares to General Public
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33. Timeline: Corporatization & Demutualization
• Step 5: Approval of Exchange
– Time Period: within 30 days of approval by SECP
– Actions:
• Adoption of approved of Memorandum & Articles of Association
• Allotment of Shares
• Issuance of Trading Rights Entitlement (TRE) Certificate
• Step 6: M & A of Association Sent to Registrar
– Time Period: within 7 days of adoption by Exchanges.
• Step 7: Certificate of Re‐registration issued to Exchange
– Time Period: within 7 days of receipt of M & A of Association.
Corporatization Complete
Maximum number of days for completion of corporatization = 149 DAYS
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42. The case of NYSE Euronext, Inc.
• NYSE Euronext is an example of:
– International expansion,
– forming alliances and
– mergers & acquisition.
• NYSE Euronext, Inc. is a Euro‐American for‐profit corporation that operates
multiple securities exchanges
• NYSE Euronext is considered as the "first global stock exchange“.
• Euronext N.V. was a pan‐European stock exchange formed in 2000 in order to take
advantage of the harmonization of the European Union financial markets
• Euronext was formed following a merger of:
– Amsterdam Stock Exchange
– Brussels Stock Exchange,
– and Paris Bourse,
• In 2001, acquired the shares of the London International Financial Futures and Options
Exchange (LIFFE).
• In 2002 the group merged with the Portuguese stock exchange
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