The 8th ACG Cross Training Seminar
Merits & De-Merits of
Direct & In-Direct Accounts
in the Pakistan Capital Market
by:
Shabnam Fahim
Syed Faisal Hashmi
Shariq Naseem
Agenda
 Pakistan Capital Markets.
 Central Depository Company of Pakistan
 Merits and Demerits of Direct and
Indirect account Method
Pakistani Capital Markets
 Market regulators
 Stock Exchanges
 Instruments Traded
 Trading Environment
 Clearing and Settlement
 Past Brief and Current Situation
Market Regulators
Securities & Exchange Commission of
Pakistan (SECP)
 Regulating stock exchanges, NBFCs, CDC and
Corporate Sector
 Functional Responsibility: framing of rules and
regulations
 Recent developments, REIT, VPS, NBFC rules, debt
market
State Bank of Pakistan (SBP)
 Regulating banking institutions
 Policy measures
 Monetary
 Credit
 Foreign exchange mechanism
Stock Exchanges
Three Stock Exchanges in Pakistan:
The Karachi Stock Exchange
Lahore Stock Exchange
Islamabad Stock Exchange
The Stock Exchanges:
Most active and Liquid- KSE
Self regulatory body
Instruments Traded
Equity
Ordinary Shares
Preference Shares
Bonds
 TFCs
 Other Debt Instruments- TBs, PIBs
Derivatives
 Stock Exchange offers equity futures
 Monthly contract- overlap of at least 2 trading days
b/w contracts
The Trading Environment
Equities
 All Stock exchanges have own trading platforms
 Automated Trading System:
 Processing based on bids & offers and
 Intimation of trades executed
 Circuit Breakers- 5%
Bond Market
 Primary Market
 PIBs Auctioned monthly & TBs fortnightly
 TFCs by Pakistani Companies
 Secondary Market
 PIBs and TBs traded freely
 Investors hold TFCs until maturity- low liquidity
Clearing and
Settlement
 Clearing
Government bonds through SBP
Others through National Clearing Corporation
 Scrip less
Settlement System T+3
Payment released-broker ascertains stock transfer- CDC A/c
 OTC
 No formal organized market
 Physical
 Less than 1% Settlement
KSE Current Situation
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Pakistan Included in MSCI Emerging Market index- May 2005
World Bank-Investment report 2005- one of top ten reformer countries
Market capitalization- $ 57 billion with 663 securities (April 17, 06)
4th year- one of the best performing markets- Business Week- US
newspaper, USA today
 Past four years compound annual growth rate-56%
 KSE100 share index- increased 53.6% July 05 - May 06 - 3rd highest
 Capital markets exceptional performance– Reasons
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Pakistan Economic Revival- GDP growth- 2002 onwards
Consistent and transparent economic policies
Successful privatisation process-PTCL/National refinery etc
Impressive Corporate Results
Sound Monetary Polices- SBP, & Capital Market reforms- SECP
CDC ...
… the Country’s only Securities’
Depository
Central Depository Company (CDC)
 Incorporated in 1993
 To manage and operate the Central Depository
System (CDS)
 Live Operations in 1997
Our services
 Depository Services
 Trustee and Custodial Services
 Registrar & Transfer Agent (in near future)
Legal Framework
 Companies Ordinance
 Central Depository Company Regulations
 Central Depositories Act
 Listing Regulations
Achievements
 Implementation of National Clearing & Settlement
System
 Launch of trustee and custodial services
 Launch of Investor Account Services
 Launch of enhanced version of CDS (eCDS)
 Induction of Open-end Mutual Funds in CDS
 Launch of CDC call centre
 CDC Access
Securities handled through CDS
 Ordinary Shares
 Preference shares
 Term Finance Certificates
Certificates of Open-ended mutual Funds
 Certificates of Closed-end Funds
 Modaraba Certificates
Transactions Supported through CDS
Deposit of Securities
Delivery (Transfer) of Securities
 Withdrawal of Securities
Pledge
Corporate Action
Merger / De-merger
Consolidation /Split
Conversion
IPO
Issuance and Redemption of Open End Mutual Fund Units
CDS Elements
CDS Elements
Issuers
Account Holder
Account Holder
Participant
Pledgee
Account Holders
 Account Holders
 Account holders have direct access to the CDS & are
allowed to keep their beneficially owned securities in
CDS.
 Participants
 Participants also have direct access to CDS and
are allowed to provide custody services to their clients
in addition to keeping their beneficially owned
securities.
Account Categories
 Main Account – Transitory Account
 House Account – Account Holder’s own account
 Sub Account – Client Account
 IAS Account – Client Account
Account Structure
Central Depository System (CDS)
Account Holder
Account Holder
Main A/C
Participants
Main A/C
Investor A/C.
House A/C
House A/C
Sub-A/C
Admission Criteria
Direct Account
Member Stock Exchanges
Financial Institutions
Qualified investors that meet:
 Technical requirements
 Business Integrity
requirements
 Capacity requirements
 having Data Processing &
Operational Capabilities
Indirect Account
Any person or corporate entity.
Merits & De-Merits
of
Direct & In-Direct Accounts
Benchmarking
 Forthcoming slides would provide you the behavior of Direct & Indirect Accounts, taking different important parameters of Capital
Markets as the Yardstick.
 We would analyze the merits & de-merits of both the type of
accounts, by placing each of them individually, in different dynamic
Capital Market motions.
 This exercise would allow us to determine the effectiveness of each
type of account in a more practical & realistic milieu.
Cost
Direct
In-Direct
Definitely DAs cost more than
IDAs. A significant difference is of
“Security Deposit” which is a
refundable amount and required at
the time of joining the CDC as a
DA. Another additional cost is
pertaining
to
the
“CDS
Connection Fee”.
Comparably IDAs do prove costeffective than their adversary,
however we might find cases
where Custodians charge and an
additional cost as “processing
and/or convenience charges”.
Efficiency
Direct
In-Direct
Capital Markets, anywhere in the
world, are dynamic & momentary in
nature. DAs always prove more
fruitful in such dynamic environments
as you have more control and less
dependency.
In the dynamic Capital Markets,
dependency Is always treated as
a Shortcoming. No matter how
efficient your Custodian is, you
remain dependent on them and
dependency is not advisable.
Confidentiality
Direct
In-Direct
Letting your cards known to others
is treated as a Cardinal Sin in
Capital Markets. DAs always
protect your confidentiality and
ensure that your portfolio remains
Adding a third party in sharing
your confidential information would
known to you ONLY.
always add risk.
Clearing
Direct
.
In-Direct
DAs allows investors to reach the
1st layer of Clearing &
settlement in some cases like via
IDS. In such cases sometimes you
may also get the chance of dealing
with the Virgin Transactions.
Clearing through IDAs always keep
you on the backseat. You may not be
able to avail the advantages of
reaching the 1st layer of clearing &
Settlement
Settlement
Direct
In-Direct
Where reaching to the 1st level of
Clearing & settlement can be
fruitful in many ways like getting
access to the virgin transactions,
sometimes (specially in cases of
Failed settlement from one of the
involved parties) you may place
yourself in a very Risky situation.
IDAs always remain away from
settlement cycle means also
remains away from the risk &
rewards associated to it.
Compliance & Audit
Direct
In-Direct
DAs are subject to number of
regulatory requirements. It also
requires compliance to number of
regulatory frameworks including
CDC Regulations. DAs are also
exposed to the CDC Participant
IDAs only involve minimal level of
Regulatory
and
compliance
related requirements.
Audit requirements.
Risk Management & Security
Direct
In-Direct
DAs are always more
secure
and
Risk
mitigating in nature. Having
your securities under your
own control is always
advisable.
IDAs are more prone to
risk then their counterparts.
Information
Direct
In-Direct
In CDC, DAs have an edge
mainly due to two reasons:
Although IDAs do not have
the access to the two main
sources of information which
DAs have, but having an IDA
with “Global Custodian”
 Access to complete set of
CDS reports.
 E-mail Integration process.
may also be very informative.
Global Operations
Direct
In-Direct
Investors having Global
Operations may find it
difficult to maintain Direct
Depository Account in every
location they operate.
IDA’s in this case have a
clear edge over their rival,
specially in case of “Global
Custodians”, you only have
to deal with a single party
for your complete Global
Operations.
Maintenance & Convenience
Direct
In-Direct
DAs are definitely convenient
in cases where you have huge
Operations and you do not
want to involve in lot of paper
transactions
IDA’s are more convenient
for
smaller
investors.
However, they also prove
very convenient in cases
like “Global Operations”
and cases where the
investor need to maintain
numerous accounts.
Registration
Direct
In-Direct
There are minimal chances
of Registration risk in DAs as
even in cases of leaving
securities in main account
do not have any Registration
threat.
IDA’s do have a imminent
registration threat, leaving
shares in Main account of
Custodian, because of any
reason, may create a
serious Registration threat.
Entitlements
Direct
In-Direct
Dealing with entitlements
and other corporate actions
is safer with DAs. You
remain on the top as far as
the announcements are
concern.
In IDAs, you add an
additional leg to your
entitlement cycle which is
not advisable.
Value Added Services
Direct
In-Direct
IDA’s are only exposed to
the value added services
extended by the depository
itself.
IDA’s
have
an
edge
specially in cases where
your account is with a
“Global Custodian” like
Cash Management, proxy
services, etc.
Thank You!

» Shabnam_fahim@cdcpak.com
» Faisal_hashmi@cdcpak.com
» Shariq_naseem@cdcpak.com