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).

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

Regulatory Structure 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.

Corporate Structure of the Stock Exchange

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)

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

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.

Spot/T+1 Transactions

• Spot transactions imply delivery upon payment. Normally in spot transactions the trade is settled within 24 hours.

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.

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.

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.

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.

Functions of KSE

Functioning of Stock Exchange

• Main activities• To provide liquidity to the investors

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

Brokerage and clearing

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.

• 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

• 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

• 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”.

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.

Clearing BrokersBrokers/intermediaries should consider the financial condition, operational capacity and other materialrisks of the clearing brokers through which they execute and/or clear transactions on those markets wherethey do not clear directly (or through affiliates). The primary factors to consider in evaluatinga clearing broker should include, among others, its credit standing, capital and financial condition, theexchanges/clearinghouses of which it is a member and the type of firm (for example, a bank, securitiesbroker, insurance company or an affiliate thereof). Other factors that might also be considered include theclearing broker's management experience and capabilities, its margin policies and customer creditprocedures, its operational capacity, risk management systems and disaster recovery procedures andwhether 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, toprotect 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 thebrokers/intermediaries' trading activities with such clearing brokers should establish and maintain back-upclearing relationships with other clearing brokers to be utilized in emergency situations. Such relationshipsshould include completed contractual arrangements with such back-up clearing brokers and periodic testingof procedures for transfers of positions and property and continuation of trading.

CustomersA 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 experienceand sophistication;(b) the creditworthiness of the customer, as measured by established credit policies and proceduresof the broker/intermediary; and(c) the authority (including apparent authority) of the customer to conduct its proposed tradingactivities, including the customer's legal authority and the capacity of the individuals responsiblefor the trading.

Review of customers financial condition, and related decisions with respect to customers, should beconducted by persons and business units within thebroker/intermediary (a) that are independent of the sales personnel and (b) whose compensation is notdirectly related to the volume or profitability of trading conducted by customers.

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

Legal Relationship with CustomersBrokers/intermediaries should prepare and utilize written agreements with their customers that clearlydelineate the respective rights and obligations of the brokers/intermediaries and their customers. Suchagreements should provide a basis for allocating between brokers/intermediaries and their customer’sresponsibility 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

Example Procedure of OTCOTC 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.