Introduction
The regulation and governance of Pakistan's financial market and corporate sector have been
substantially strengthened with the commencement of operations of the Securities and Exchange
Commission of Pakistan (SEC) in 1999. The SEC’s role was further enhanced when it was
assigned regulatory responsibility for the insurance industry, non-banking finance companies
(NBFCs) and private pension schemes in 1999 and 2000, respectively.
The non-bank financial sector has undergone major consolidation and is emerging on strong
footing to act as a productive agent of allocating resources. It is, therefore, of utmost importance
that the capacity of the regulator is further enhanced in terms of skills, systems and procedures,
to meet the challenges in today’s dynamic financial markets.
Financial Markets Governance Program
The first phase of financial market reforms has been successfully implemented under the capital
market development loan of ADB, which was completed in 2002. The SEC took a number of
steps to improve the governance and risk management aspects of all the three stock exchanges
and implemented the Code of Corporate Governance. The observance of International
Accounting Standards (IASs) was further enhanced to boost investors’ confidence. Insurance
companies were asked to enter into reinsurance arrangements with reinsurers that had a
minimum “A” rating. Further, in line with the evolving international practices, the concept of
NBFCs was instituted and implemented. Trading in futures contracts in commodities was initiated
in July 2001. Additionally, a number of steps were taken to reposition and transform SEC in terms
of human resource and automation.
Although, a lot has been achieved over the last few years, there is a lot that still needs to be
accomplished. Market forces demand a more vigorous financial market in the country. In order to
promote vibrant and efficient financial markets in Pakistan, ADB has approved an integrated
assistance package of three loans and two political risk guarantee (PRG) facilities, under the
Financial Markets Governance Program (FMGP) for effecting the second phase of reforms in
Pakistan. Based on the experiences gained while implementing the first phase of reforms during
the last three years, both SEC and ADB have acquired considerable knowledge on the financial
sector development in Pakistan. This second phase of reforms builds on the earlier
developments.
The FMGP intends to support the development of Pakistan’s non-bank financial markets through
reform, capacity building and international private sector participation. It will assist the
Government in further improving governance and operational efficiency in financial markets that
offer a wide range of non-bank products and instruments for savings and investment. This will
strengthen investor confidence and reduce vulnerabilities of the financial system as a whole. In
the context of this program, non-bank financial markets will cover equity markets, debt and
money markets, contractual savings, and other non-bank financial institutions and services
including insurance, leasing and DFI reform. Through the PRG facilities, the program will increase
and sustain private sector flows into the country and support Pakistan's access to international
capital flows and integration with the world's financial markets. Meanwhile, domestically, a more
diversified and efficient financial market will boost productivity, jobs, and strengthen social safety
nets.
Objectives
The main objectives of the FMGP are:
• to strengthen market soundness, stability and investor confidence through improved
governance, transparency and risk management;
•
•
to improve availability of and access to financial instruments for savings and investment
and related services; and
to improve market efficiency and attractiveness to issuers and investors, including
institutional and foreign investors.
Scope
The assistance package comprises a quick disbursing policy loan, two PRG facilities and two
technical assistance (TA) loans for capacity building. The overall assistance package proposes
integration of the following modalities:
1. a policy-based program loan to finance the cost of sector reforms and adjustment cost;
2. two TA loans:
§ TA-1956 to strengthen pension, insurance and savings systems, and
§ TA-1957 to strengthen regulation, enforcement and governance of
financial markets; and
3. two PRG facilities to enhance domestic insurance retention capacity and access
to international reinsurance, and to enhance international portfolio investment
through institutional channels.
Proposed Policy Agenda
The program will carry out reforms on the policy, governance and operational level and stimulate
growth of capital market issues and institutional investment by:
• Improving the fiscal, interest rate and investment policy environment: rationalizing taxes
for financial instruments and investors; providing incentives to stimulate long-term
savings; and removing distortions in securities investment criteria and foreign exchange
transfer for insurance.
• Boosting investor confidence through: increased transparency and better governance
standards; and strengthening the regulator's enforcement capacity.
• Increasing the supply of financial instruments and bolstering market infrastructure
through: establishing a separate counter for newly listed and smaller companies: reform
of the stock exchanges; further upgrading of trading, clearing and settlement systems;
introducing a system of market making for debt and equity; and developing regulations
for the issuance of commercial paper and financial hedging instruments.
• Developing contractual savings to encourage private sector participation through
institutional investment. This includes improving asset management for pensions and life
insurance, developing a framework for private pensions and encouraging mutual funds to
tap into retail investment.
Proposed Reforms under TA-1957
Under the FMGP, the SEC is the executing agency for TA -1957 to strengthen regulation,
enforcement and governance of non-bank financial markets. The TA mainly involves a
consultancy assignment focusing on operations of a wide array of financial intermediaries, i.e.
stock exchanges, NBFCs and insurance companies. Specifically, a detailed review of the legal
and regulatory framework will be undertaken and key issues of the capital market, such as insider
trading, development of new products, risk management and electronic transaction systems for
stock exchanges will be addressed. Capacity building of the SEC and other market participants
will also form a major part of the consultancy assignment. The outputs of the consultancy
assignment shall focus on the following four components:
1.
2.
3.
4.
upgrading of the legal and regulatory framework;
support for development of Non-Bank Financial Institutions (NBFIs) and capital market
(including restructuring of stock exchanges);
capacity building of the SEC (with particular attention to its enlarged mandate for
regulation and supervision of capital market, NBFIs, insurance, and pensions); and
establishment of sustainable mechanisms for skills development and training.
The consultancy assignment under the TA commenced in August 2004. It requires about 109
person-months of consulting services and is expected to last fifteen months from the time of
commencement. Thirteen international and eight domestic consultants are being used for the TA.
The team includes consultants having expertise in areas mentioned below:
• team leadership
• legal framework and regulations of capital market, insurance, pensions and nbfis
• corporate governance
• stock exchange models and operations
• non-bank financial market development
• risk management, with particular expertise in derivatives products
• market monitoring, surveillance and enforcement
• information technology, in particular electronic trading, clearing and settlement platforms
• training and skills development for financial markets
Implementation of FMGP
Program Management:
The Ministry of Finance (MOF) is the Executing Agency for the FMGP and seeks to facilitate its
overall implementation, administer the utilization of loan proceeds and monitor compliance with all
policy related conditions. The SEC is one of the Implementing Agencies, with responsibility for
implementation of all conditions and program components within its regulatory and development
mandate. The MOF will ensure effective coordination through existing mechanisms with
concerned agencies, including Ministry of Commerce, Ministry of Labor, Privatization
Commission, State Bank of Pakistan, SEC and the private sector as appropriate.
Monitoring:
To monitor implementation of the FMGP, the Government prepares quarterly progress reports as
well as an annual report on program implementation for submission to ADB. The SEC also
regularly updates the progress on reform measures pertaining to the capital market, NBFCs,
insurance and pension. Moreover, ADB sends regular review missions to evaluate compliance
with the conditions and advises the Government on actions required to keep program
implementation on course.
Management of FMGP at the SEC
Since the scope of the new program loan is much wider than the previous capital market
development program loan, a separate Project Management Unit (PMU) has been established for
oversight, effective coordination and implementation of various assignments. Based in the
Chairman’s Secretariat, the PMU is responsible for the following functions:
• Oversight of the overall program
• External coordination and communication
• Contract management in accordance with the Terms of Reference
• Financial management of the project
• Procurement of resources and facilities to implement the program
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•
•
Effecting controls when required
Regular reporting to the ADB and relevant agencies as required
Regular briefing to Chairman SEC in consultation with different Divisions of the SEC
Financial Market Governance Program
Organizational Chart for Project Management
Chairman
Director (CS)
Project Management Unit
Admin Support
Liaison Officer
Legal Support
Liaison Officer
JD PSPD
Capital Markets
Liaison Officer
JD SMD
Insurance and Pension
Liaison Officer
JD SCD
NBFI
Liaison Officer
JD SCD
Company Law
Liaison Officer
AD CL
Contacts of FMG Program Management Unit:
Ms. Jaweria Ather
Director (CS)
Email: jaweria.ather@secp.gov.pk
Ms. Sarah Parvez
Assistant Director (CS)
Email: sarah.parvez@secp.gov.pk
Consultants’
Team