The report on stock market crisis of 2008 on Tuesday revealed that abrupt and adhoc policy shifts and autocracy at Securities and Exchange Commission of Pakistan (SECP) led to the crisis.

According to the report of Shamim Ahmad Khan committee, which was constituted to conduct an independent study regarding great crash of 2008, the SECP did not take any notice of the market situation. Similarly, there was complete absence of coordination between SECP and State Bank of Pakistan regarding stock market crisis of 2008 that had swept over trillion rupees from the market.

The committee became inactive due to Shamim Ahmad Khan’s resignation. However, the SECP Chairman, Zafar Hijazi, reactivated the committee and approved revised terms of references (ToRs) in January 2015. As per revised ToRs, the committee was mandated to study the factors leading to the 2008 crisis, rationale for imposing of the floor by the exchanges under their risk management system (RMS) regulations and review the impact of imposition of the floor on the market. The committee was also asked to give policy recommendations based on the experience of the 2008 crisis.

The committee submitted its report to the SECP on June 5, which the SECP presented to the Policy Board in its meeting held Monday. The report analyses the causes, events, impact and outcome of the 2008 market crisis primarily with a ‘lessons learned’ objective. The Board decided to deliberate on in its next meeting.

According to the report, the then chairman SECP (Razi-ur-Rehman Khan) has taken the decision of flooring the shares price despite the Lahore and Islamabad stock exchanges’ boards opposed the decision, however the Karachi Stock Exchange was supportive to it who’s Managing Director was Adnan Afridi that time. However, the commission was also not solely responsible; all the brokers could also be blamed.

The committee criticised the SECP for not functioning as a collegiate body during the 2008 crisis and emphasised the need for the same. It also recommended development of a strategic capital market development plan by the SECP and procedure for improved coordination between the SECP and the State Bank.

The committee expressed its concern over the arbitrary use of force majeure powers and abrupt and ad hoc policy shifts, including changes to risk management by the stock exchanges. It recommended to the SECP to devise transparent policy clearly spelling out circumstances in which the regulator can intervene in the market under the emergency powers now conferred upon it under the 2015 Securities Act.

It also provides a set of recommendations, which could help prevent recurrence of such a crisis. It has suggested reforms across the SECP, stock exchanges, Central Depository Company (CDC) and National Clearing Company of Pakistan (NCCPL).

“Inaction by the commission and no use of collegiate wisdom by it and some commercial motives by brokers in KSE, the floor was placed, said Chairman SECP Zafar Hijazi while talking to media. In 2008, brokers were the managers of the KSE, “may be every broker was responsible,” Hijazi added.

The committee recommended to revamp the existing broker regime and suggested stringent criteria for CDC participants whereby only select institutions fulfilling required criteria are allowed custody of clients’ securities. The committee suggested that the NCCPL should function as a statutory body and to be converted into a central counterparty (CCP) with adequately funded Settlement Guarantee Fund (SGF). Additionally, the committee observed conflict of interest on the boards’ of stock exchanges, NCCPL and CDC due to presence of broker directors.

While presenting the committee’s report, Chairman Hijazi briefed the Policy Board that since recommendation of the committee pertain to 2008, about 90 percent of these have already implemented. The remaining is part of the SECP’s reform agenda and in the implementation stage.

He informed the board that the committee’s feedback regarding the SECP’s working has been addressed as SECP is functioning as a fully collegiate body and all important matters are deliberated on at the Commission level. For improved coordination, he said, the SECP entered into an MOU with the State Bank in March 2009 and dialogue is being maintained through coordination committee and taskforce meetings.

Moreover, with the promulgation of the new act, the stock exchanges’ powers in terms of force majeure have been vested with the SECP. The SECP is devising broad policy parameters in which it can intervene under the emergency powers.

In order to address the need for developing a long-term strategy and plan for development of stock market, the SECP has drafted a capital market development plan, which will be rolled out once the consultation process with the stakeholders is completed.