The 2004 Financial System Stability Assessment (FSSA) conducted by the International Monetary Fund for Pakistan concludes that the Securities and Exchange Commission of Pakistan (SECP) is an active and energetic securities regulator and has achieved a high degree of compliance with the International Organization of Securities Commissions Principles. The country also remains committed to achieve and maintain high regulatory standards as evidenced by the major reforms in the Pakistani financial sector and its regulation. However, the FSSA warns that the reforms are still in their nascent stage and therefore calls for continued supervisory vigilance and efforts to further strengthen the financial sector in light of its vulnerability to systemic risks. The FSSA also recommends providing more resources and capacity to the SECP to enable it to be an effective regulator and supervisor and conduct regular on-site inspections of market participants.

General Overview

According to the Financial System Stability Assessment (FSSA), conducted by the International Monetary Fund (IMF) in 2004, the Securities and Exchange Commission of Pakistan (SECP), the country's securities regulator, is "an active and energetic regulator" (p. 37) and "has achieved a high degree of compliance with the IOSCO [International Organization of Securities Commissions] Principles" (p. 37). Further, its powers as a supervisor of market institutions and practices are "extensive" (p. 37) and there exists a strong commitment to pursue and maintain high regulatory standards. A major review of the laws and regulatory policies governing financial sector institutions and their supervision was found to be underway under a capital market development program aided by the Asian Development Bank. The program aims at increasing the depth and diversity of financial intermediation, enhance transparency, governance and consumer protection to boost investor confidence, reduce vulnerabilities in the capital markets, and improve risk management and operational efficiency of market participants and intermediaries. However, the FSSA cautions the SECP on two counts with respect to its regulatory and supervisory authority. First, the SECP needs to be transparent in its decision-making to ensure that its policies and interpretations are not only de facto fair and open-minded, but also perceived as being so. Second, it must demonstrate to the stakeholders and the investing public that its use of powers is backed by good plans, necessary resources and capacity, and performance reviews. The SECP website mentions that the Securities Market Division, housed within the SECP and responsible for securities market supervision and development in Pakistan, is headed by an SECP Commissioner. The SECP is listed as a member on the IOSCO website.

The FSSA further notes that the major reforms in the Pakistani financial sector have led to "a more resilient and efficient financial system" (p. 5) with a better capacity to withstand systemic shocks. However, the FSSA warns that the reforms are still in their nascent stage and therefore calls for "continued supervisory vigilance and efforts to further strengthen the system" (p. 5), especially given that the securities markets are still prone to systemic risks. The FSSA observes that "efforts have been made to achieve compliance with international norms in the supervision of securities markets" (p. 5); however, more resources and capacity are required by the SECP to be an effective regulator and supervisor. The SECP also needs to regularize its on-site inspections, which in 2004 were limited to instances where there were indications of malpractices.

Another statutory body that impacts securities supervision in Pakistan is the Securities and Exchange Policy Board (Policy Board). Per the SECP website, the Policy Board is created by the Securities and Exchange Commission of Pakistan Act and its main objective "is to provide guidance to the Commission in all matters relating to its functions and to formulate policies in consultation with the Commission. The Policy Board is also responsible for advising the Government on matters falling within the purview of the Act and other corporate laws; and also to express its opinion on policy matters referred to it by the Government or the Commission." However, this creation has been effected "while ensuring full autonomy of the Commission [SECP]." The Act provided for nine members of the Policy Board, five from the government and public sector, and four from the private sector to be appointed by the Federal Government. However, in June 2007, the membership was expanded to ten, with six public sector officials and four private sector individuals, states the 2006-2007 SECP annual report. The six public sector members include ex-officio the Finance Minister (or the Advisor to the Prime Minister on Finance in her/his absence), Secretary of the Finance Division, Secretary of the Law and Justice Division, Secretary of the Commerce Division, Chairman of the SECP, Deputy Governor of the State Bank of Pakistan (SBP). The private sector members, per the annual report, are "well known for their integrity, expertise and experience in commerce and industry, corporate law, accountancy, financial services, investment, insurance, banking or academia" (p. 13).

The capital markets in Pakistan are "relatively small" (p. 8), notes the 2004 FSSA, and observes that "there remains considerable potential for their development" (p. 8). However, Pakistan does have an active stock market and a diversity of institutional investors and other non-bank financial institutions, including development finance institutions, investment banks, mutual funds, and insurance, leasing, housing finance, and Islamic finance companies. There are three registered stock exchanges: the Karachi Stock Exchange (KSE), the Lahore Stock Exchange (LSE), and the Islamabad Stock Exchange (ISE). The KSE is the country's oldest and largest exchange with market capitalization of about Pakistani Rupees (PKR) 4019 billion (US$66.3 billion) in the financial year (FY) 2007 (a gain of 43 percent over the previous year), states the 2006-2007 SECP annual report. The KSE 100 Shares Index (KSE-100 index) gained 38 percent over the year. All stock exchanges in Pakistan are mutualized, i.e. they are owned by market participants. They operate as self-regulatory organizations. Per information in the annual report, the SECP is actively pursuing the process of demutualization of the exchanges to keep up with the global trend. All exchanges have now agreed to the establishment of demutualized stock exchanges and to their corporatization and integration. The SECP is in the process of formulating enabling legislation and consulting stakeholders in the process. The National Clearing Company of Pakistan Limited (NCCPL) and the Central Depository Company (CDC) clear and settle almost all actively traded securities. As the 2004 FSSA finds, collective investment scheme (CIS) business "is modest though increasing" (p. 36). Securities market intermediaries (brokers and agents) are also regulated by the SECP. In FY 2007, there were 312 brokerage houses in Pakistan, per the 2006-2007 SECP annual report.

The Principles

1. The responsibilities of the regulator should be clear and objectively stated.

II

The 2004 IMF FSSA notes that the "responsibilities of SECP as regulator are clear and objectively stated, generally in the law" (p. 37). The FSSA makes no further recommendations for this principle. Nevertheless, no clear statement of compliance has been given by the FSSA.

As the 2006-2007 SECP annual report states the objective of the SECP's Securities Market Division is "to develop and promote a fair and modern capital market in Pakistan, protect investors through an efficiently regulated market and facilitate capital formation" (p. 65).

2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.

II

The 2004 IMF FSSA notes that the SECP is "operationally independent and accountable in the exercise of its functions and powers" (p. 37). Although there is a Policy Board, a statutory body that advices the government on securities related issues, approves the SECP budget and regulations, and oversees its overall performance, the FSSA concludes that it does not "[intrude] on the operational independence of SECP" (p. 37). The SECP website also states that "while ensuring full autonomy of the [SECP], the 1997 Act provides for establishment of a Securities and Exchange Policy Board." The FSSA does bring attention to the issue of accountability and recommends a review of the appointment procedures in relation to the SECP commissioners and PB members to make them more transparent and ensure that they comply with the Securities and Exchange Commission of Pakistan Act. Further, the SECP statement of accounts and annual report should be made publicly available and the use of the statutory fund formally accounted for. In response, the Pakistani authorities declare that (1) appointments are made by transparent procedures that meet legal requirements; (2) the SECP annual report is publicly available on the SECP website, whereas the statement of accounts are submitted to the Federal Government, which publishes it in the Gazette. The statement of accounts also contains information on the status of the statutory fund. The above description, however, fails to directly address Pakistan's compliance with this principle.

3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

II

As the 2004 IMF FSSA finds, the SECP has "extensive powers to monitor market institutions and market practice" (p. 37) and these powers are adequate to effectively discharge its functions. However, the FSSA could not determine whether its resources and capacity were adequate to fully discharge its responsibilities. It, therefore, recommends allocation of adequate resources to the SECP to enhance its capacity and become a more effective regulator/supervisor with formal plans to monitor market practice and establish standards of market behavior, disclosure of information, corporate governance and fair trading practices. To this, the authorities respond by stating that the SECP "has inspection, investigation, surveillance and enforcement systems in place and is constantly upgrading these to ensure compliance with the laws" (p. 43). Nevertheless, there is no direct reference to Pakistan's level of compliance with respect to this principle.

4. The regulator should adopt clear and consistent regulatory processes.

II

Without assigning Pakistan a clear level of compliance with respect to this principle, the 2004 IMF FSSA notes that "broadly speaking SECP adopts clear and consistent regulatory processes" (p. 37). However, there is room for improvement and the FSSA recommends the SECP to review its regulatory processes to make them clearer and more consistent, as also to issue useful guidance notes and policy statements to assist market participants in their interaction with the SECP. The Pakistani authorities state that "the regulatory processes are under constant review" (p. 43).

5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.

EN

The 2004 IMF FSSA notes that the "SECP staff are expected to observe high professional standards" (p. 37). By way of recommendation, the FSSA states that a formal procedure should be established to ensure staff's compliance with the laws and the Service Manual in their professional conduct. In this respect, the Pakistani authorities reply by stating that "a Code of Ethics and Conduct for employees of the Commission has been prepared and it lays down the professional standards that Principle No. 5 states" (p. 43).

6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.

II

In the words of the 2004 IMF FSSA, "the regulatory regime makes appropriate use of SROs (p. 37). However, it recommends the SROs to establish formal rules for monitoring, surveillance and investigation of entities they monitor as well as formal procedures to assess their performance and make the results publicly available. The SECP is also advised to sign publicly available memoranda of understanding (MoUs) with all SROs detailing the terms of their mutual cooperation and information-sharing arrangements. Further, the FSSA recommends that the statutory authority of the National Clearing Company as an SRO with regulation making powers be clarified. For the FSSA recommendation on MoUs between the SECP and the SROs, the Pakistani authorities state that exchange of information and cooperation between the two is already facilitated under the provisions of the Securities and Exchange Commission of Pakistan Act and the Securities and Exchange Ordinance as well as the Memorandum and Articles of Association of the stock exchanges. However, the recommendation will be duly considered as will the recommendation related to the National Clearing Company. The above information does not directly address Pakistan's compliance with this principle.

7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

II

Per the 2004 IMF FSSA, SROs "are subject to SECP oversight and observe standards of fairness and confidentiality" (p. 38). They should, however, be more formal and transparent with regard to their regulatory role, plans and reporting. There is little further information that directly addresses Pakistan's compliance with this principle.

8. The regulator should have comprehensive inspection, investigation and surveillance powers.

II

The 2004 IMF FSSA observes that the SECP "has comprehensive inspection, investigation and surveillance powers" (p. 38). However, the FSSA notes that "effective and credible use of these powers" (p. 38) has not been demonstrated by the SECP. The 2006-2007 SECP annual report mentions that the Market Monitoring and Surveillance Wing (MSW) of the SECP is charged with the responsibility of monitoring and ensuring that the stock exchanges detect unfair trading practices and ascertain observance of rules and applicable laws by their members. The MSW is staffed with dedicated officers who constantly monitor the exchanges and day-to-day trading to identify malpractices and conduct investigations. To bolster market monitoring by the MSW, the SECP is in the process of acquiring "a highly advanced surveillance software with sophisticated tools" (p. 78). The MSW has also "deployed its resources to ensure efficient design and effective implementation of this software" (p. 78). The above descriptive information, however, fails to directly address Pakistan's compliance with this principle.

9. The regulator should have comprehensive enforcement powers.

II

The 2004 IMF FSSA observes that the SECP "has comprehensive enforcement powers" (p. 38). However, the FSSA notes that "effective and credible use of these powers" (p. 38) has not been demonstrated by the SECP. There is little further information that directly addresses Pakistan's compliance with this principle.

10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

II

The 2004 IMF FSSA observes that the SECP "has comprehensive inspection, investigation and surveillance powers [and] ... comprehensive enforcement powers" (p. 38). However, the FSSA notes that "effective and credible use of these powers" (p. 38) has not been demonstrated by the SECP. The SECP's power to conduct on-site inspections of supervised entities was called into question by the FSSA, which noted that such inspections are only conducted when there are indications of malpractice. As such, the FSSA advises the SECP to undertake a formal review of its capacity to conduct regular on-site inspections, chalk out a formal plan for its monitoring and surveillance work, allocate appropriate staff for the function, and assess its performance on an annual basis. The above descriptive information, however, fails to directly address Pakistan's compliance with this principle.

11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

II

According to the 2004 IMF FSSA, the SECP "has wide powers to share both public and non-public information in its possession with domestic and foreign counterparts" (p. 38). However, the FSSA advises the SECP to formalize arrangements with domestic and foreign counterparts on information exchange and exchange of confidential bank client information where it is required to fulfill its responsibilities as a securities regulator. The 2006-2007 annual report of the SECP mentions that the SECP has signed MoUs with other domestic and foreign regulators for mutual cooperation. They include the State Bank of Pakistan (SBP) domestically, and among foreign regulators, they include the Australian Securities and Investments Commission, Maldives Monetary Authority, Securities and Exchange Commission of Sri Lanka, Royal Monetary Authority of Bhutan, and also with the International Finance Corporation on launching a corporate governance project. Further, the Pakistani authorities also divulge in the 2004 FSSA that though banks observe the principle of bank secrecy under the Banking Companies Ordinance of 1962, they may be instructed by designated persons under the Securities and Exchange Ordinance of 1969 to produce any relevant client information. The above descriptive information, however, fails to directly address Pakistan's compliance with this principle.

12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

II

As the 2004 IMF FSSA finds, although the SECP has wide-ranging powers to share information with its domestic and foreign counterparts, it "has not yet established the necessary mechanisms for sharing non-public information, at least with foreign counterparts, but it is working on this" (p. 38). There is little further information that directly addresses Pakistan's compliance with this principle.

13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

II

As noted by the 2004 IMF FSSA, the SECP does not have the authority to conduct specific inspections to gather information requested by its foreign counterparts, though it can share information in its possession from regular inspections. The FSSA, therefore, advises the SECP to formalize its information sharing arrangements with foreign regulators at the earliest, and also gain the necessary legal power to conduct inspections and investigations at the request of its foreign counterparts. To this recommendation, the Pakistani authorities respond by stating that the provisions in Pakistani law for information sharing, assistance and cooperation are similar to the IOSCO Multi-lateral Memorandum of Understanding (MMoU). The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU and provide effective cooperation to and coordinate with foreign regulators. There is little further information that directly addresses Pakistan's compliance with this principle.

14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.

II

"The law provides for full, accurate and timely disclosure of financial results and other information to shareholders of companies and interest holders in collective investment schemes" (p. 38), finds the 2004 IMF FSSA. However, this requirement does not extend to debt securities such as corporate bonds, and therefore the obligation of such issuers to their investors is "incomplete", per the FSSA. The FSSA further notes that some provisions of the financial reporting law appears outdated, and recommends its review and an update of its financial reporting requirements. Also, appointment of trustees for debt securities is called for along with the provision on disclosure of trustee information and the trust deed in the prospectus. The Pakistani authorities state in response to the FSSA that the Companies Ordinance has been amended in 2002 to further strengthen financial reporting requirements; disclosures are timely; and defaults attract penalties by the SECP. There is little further information that directly addresses Pakistan's compliance with this principle.

15. Holders of securities in a company should be treated in a fair and equitable manner.

II

The 2005 Report on the Observance of Standards and Codes (ROSC) on Corporate Governance by the World Bank states that the SECP introduced a Code of Corporate Governance in 2002 thereby establishing a framework of good Corporate Governance practices for listed companies in line with international best practices. It further notes that overall, the legal framework for basic shareholder rights is well established in Pakistan, and relatively minor changes are needed in this area. The 2004 IMF FSSA reiterates that Pakistan's regulations in the area of corporate governance are "extensive and comprehensive" and the Code of Corporate Governance is broadly in line with Organization for Economic Co-operation and Development (OECD) Principles. Nonetheless, weaknesses persist and the World Bank ROSC recommends that compliance with regard to disclosure of beneficial ownership, control by shareholders and companies, reporting or related party transactions and Annual General Meeting (AGM) be improved.

Further, the ROSC finds that ownership is concentrated thereby limiting the influence of minority shareholders. Other areas requiring improvement, per the ROSC, include introduction of distance voting for the AGM, by post or electronic means, prohibiting significant shareholders from voting when a conflict of interest is present and lowering the thresholds for shareholder action against companies and directors. The FSSA points out that though the law stipulates fair and equitable treatment of all shareholders, in practice the minority shareholders may not be able to duly exercise their rights, especially in context of the presence of shareholding concentrations, cross-shareholdings and inter-company debt.

The 2006 paper by Hamid and Kozhich explains that the definition of "independent" covered in the Code does not address minority shareholder rights. The paper adds that the voluntary nature of this provision is indicative of the fact that "minority shareholder protection is not yet valued highly in Pakistani corporate sector" (p. 26). Moreover, the paper points out that there are no penal provisions in the Code to act as a deterrent. The above descriptive information, however, fails to directly address Pakistan's compliance with this principle.

16. Accounting and auditing standards should be of a high and internationally acceptable quality.

EN

Per the 2004 IMF FSSA, "accounting and auditing standards are of a high and internationally acceptable quality" (p. 38). According to a 2007 Institute of Chartered Accountants of Pakistan (ICAP) presentation, accounting standards adopted by the ICAP would be applicable in accordance with the three tiers of corporate entities. Tier one companies comprising public interest entities must comply with International Financial Reporting Standards (IFRSs) by 2009. They include listed companies, public utilities, and large companies that meet certain size criteria. Further, the ICAP has adopted all but IFRS 1 and IFRS 4. A few other international standards although adopted are pending approval of the SECP. Earlier, in a 2005 ROSC on accounting and auditing in Pakistan, the World Bank commended Pakistan for making progress in aligning national accounting requirements with IFRSs. It noted that the Companies Ordinance sets primary requirements for financial reporting of all companies incorporated in Pakistan. Nonetheless, the ROSC as well as the ICAP presentation identify certain hindrances to the full adoption of international standards. For instance, IAS 39 and IAS 40 have been held in abeyance by the SBP due to resistance to adoption. Other shortcomings observed by the ROSC include inadequacies in the technical capabilities of regulators, lack of implementation guidance for accounting and auditing practices and weak professional training and education.

As regards auditing standards, a 2006 ICAP self-assessment notes that Pakistan adopts pronouncements issued by the International Auditing and Assurance Standards Board (IAASB) without any modifications. It also routinely updates the adoption status of IAASB pronouncements on its website. According to the self-assessment, all International Standards on Auditing (ISAs) except for ISA 701 have been adopted. However, it was unclear whether these were in line with the latest, revised and amended IAASB versions. The 2005 World Bank ROSC confirmed that Pakistan had achieved progress in narrowing the gap between national and international requirements. Nonetheless, many weaknesses still persisted and the ROSC pointed out that there were varying compliance gaps in auditing practices. Inadequate technical capabilities of the regulators, lack of implementation guidance, weaknesses in professional education and training and the absence of independent oversight of the auditing profession were identified as the main shortcomings in the Pakistani auditing framework, similar to the country's accounting framework. The ROSC therefore, recommended strengthening the monitoring and enforcement mechanism, introducing independent oversight of the auditing profession and improving the capacity of ICAP.

17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.

II

In the words of the 2004 IMF FSSA, "the regulatory system sets standards for the eligibility and regulation of those who wish to market or operate a CIS" (p. 39). No recommendations for this principle are made by the FSSA. There is little further information that directly addresses Pakistan's compliance with this principle.

18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

II

As the 2004 IMF FSSA notes, "there are rules governing the legal form and structure of CISs and the segregation and protection of client assets" (p. 39). The FSSA makes no recommendations for this principle. There is little further information that directly addresses Pakistan's compliance with this principle.

19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

II

Per the 2004 IMF FSSA, the CIS are subject to disclosure rules to enable clients to evaluate the suitability of a scheme to their investment interests and to learn the value of the interests. The FSSA makes no recommendations for this principle. There is little further information that directly addresses Pakistan's compliance with this principle.

20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

II

There are rules for the CISs that "ensure a disclosed basis for asset valuation and the pricing and redemption of units" (p. 39), per the 2004 IMF FSSA. However, the FSSA calls for a review of such rules and market practices, as it feels that the pricing structure under the existing rules may not fully reflect the underlying assets of a CIS. There is little further information that directly addresses Pakistan's compliance with this principle.

21. Regulation should provide for minimum entry standards for market intermediaries.

II

"Regulation provides for minimum entry standards for market intermediaries" (p. 39), states the 2004 IMF FSSA. The SECP registers brokers and agents under the Brokers and Agents Registration Rules of 2001, states the 2006-2007 SECP annual report. However, it calls for a review of the law regulating non-corporate providers of investment services. On this, the Pakistani authorities report that no individual or firm is allowed to provide investment services without being incorporated and licensed by the SECP. However, information in the 2006-2007 SECP annual report cites reports and complaints received by the SECP of unauthorized brokers/agents operating in violation of the Securities and Exchange Ordinance of 1969. The SECP has subsequently launched a massive campaign to protect investor interests and confidence in the markets. This include awareness campaigns to the authorized brokers, appropriate directions to the Exchanges, and increased vigilance of the Securities Market Division of the SECP, and prompt investigation and action on the complaints against illegal brokers/agents. There is little further information that directly addresses Pakistan's compliance with this principle.

22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

II

"There are initial and ongoing capital and other prudential requirements" (p. 39) for intermediaries, finds the 2004 IMF FSSA. The FSSA makes no recommendations for this principle. The 2006-2007 SECP annual report mentions that the SECP ensures compliance with the Brokers and Agents Registration Rules of 2001 on an ongoing basis and takes appropriate punitive measures to deal with violations. There is little further information that directly addresses Pakistan's compliance with this principle.

23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.

II

As the 2004 IMF FSSA finds, "market intermediaries must comply with standards for internal organization and operational conduct to protect the interests of clients and ensure proper management of risk" (p. 39). However, the SECP does not have a "mature system for planning its monitoring and surveillance work and assessing its performance at the end of the planning period" (p. 39). Therefore, the FSSA asks the SECP to consider improving the protection accorded to client money and assets held by intermediaries through a review of the laws. Responding to this recommendation, the Pakistani authorities state that elaborate arrangements to segregate client assets from those of the intermediaries are in place. The 2006-2007 SECP annual report updates this information by stating that Exchanges' General Regulations were amended by the SECP in September 2006 to require brokers to maintain a separate bank account for their clients' cash assets and ensure that margin in the form of securities is maintained in a separate investor account or sub-account. This step has been taken, per the report, "in order to provide for segregation of client's cash assets in line with international best practices and to ensure that client's assets are not misused" (p. 69). Further a Code of Conduct has also been adopted by the SECP for brokers and fund managers and the stakeholders are being consulted before its final implementation. There is little further information that directly addresses Pakistan's compliance with this principle.

24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

NC

The 2004 IMF FSSA observes that the regulatory framework does not have "adequate procedures for dealing with the failure of a market intermediary" (p. 39), especially those that are not members of a stock exchange. Therefore, the SECP is advised to review the available procedures to deal with failed intermediaries.

25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

II

Per the 2004 IMF FSSA, "the establishment of trading systems is subject to regulatory authorization and oversight" (p. 39). However, the FSSA could not opine on the adequacy of resources devoted to such oversight. There is little further information that directly addresses Pakistan's compliance with this principle.

26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

II

In the words of the 2004 IMF FSSA, "there is ongoing supervision which aims to ensure that the integrity of trading is maintained" (p. 39). However, the FSSA could not opine on the adequacy of resources devoted to such supervision. The 2006-2007 SECP annual report mentions that in FY 2007, the SECP made comprehensive regulatory audits of stock exchanges mandatory. These audits will assess the operational and regulatory efficiency of the exchanges and ensure their regulatory compliance as SROs. Auditors conducting such audits will be appointed under the Terms of Reference, a standardized set of requirements, to ensure the reliability of audits. There is little further information that directly addresses Pakistan's compliance with this principle.

27. Regulation should promote transparency of trading.

II

According to the 2004 IMF FSSA, "regulation promotes transparency of trading" (p. 39). However, the FSSA could not opine on the adequacy of resources devoted to such oversight. There is little further information that directly addresses Pakistan's compliance with this principle.

28. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

II

As the 2004 IMF FSSA finds, "regulation is designed to detect and deter manipulation and other unfair trading practices" (p. 39). However, the FSSA could not opine on the adequacy of resources devoted to such surveillance. It also is not certain that the law on insider trading is adequate and comprehensive enough to nab abettors of insider trading. The FSSA therefore calls for more effective enforcement against insider trading. The Pakistani authorities declare that they are in the process of reviewing the laws on insider trading and securities disclosure. The 2006-2007 SECP annual report mentions that the Market Monitoring and Surveillance Wing (MSW) of the SECP is charged with the responsibility of monitoring and ensuring that the stock exchanges detect unfair trading practices and ascertain observance of rules and applicable laws by their members. The MSW is staffed with dedicated officers who constantly monitor the exchanges and day-to-day trading to identify malpractices and conduct investigations. To bolster market monitoring by the MSW, the SECP is in the process of acquiring "a highly advanced surveillance software with sophisticated tools" (p. 78). The MSW has also "deployed its resources to ensure efficient design and effective implementation of this software" (p. 78). There is little further information that directly addresses Pakistan's compliance with this principle.

29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

II

As the 2004 IMF FSSA finds, "regulation is designed to detect and deter manipulation and other unfair trading practices" (p. 39). However, the FSSA could not opine on the adequacy of resources devoted to such surveillance. It also is not certain that the law on insider trading is adequate and comprehensive enough to nab abettors of insider trading. The FSSA therefore calls for more effective enforcement against insider trading. The Pakistani authorities declare that they are in the process of reviewing the laws on insider trading and securities disclosure. The 2006-2007 SECP annual report mentions that the Market Monitoring and Surveillance Wing (MSW) of the SECP is charged with the responsibility of monitoring and ensuring that the stock exchanges detect unfair trading practices and ascertain observance of rules and applicable laws by their members. The MSW is staffed with dedicated officers who constantly monitor the exchanges and day-to-day trading to identify malpractices and conduct investigations. To bolster market monitoring by the MSW, the SECP is in the process of acquiring "a highly advanced surveillance software with sophisticated tools" (p. 78). The MSW has also "deployed its resources to ensure efficient design and effective implementation of this software" (p. 78). There is little further information that directly addresses Pakistan's compliance with this principle.

30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.

II

The 2004 IMF FSSA advises the SECP to encourage the authorization of the National Clearing Company as a self-regulatory authority with the power to make and enforce regulations with SECP approval. The SECP is also recommended to review the status of issuers that do not belong to the national clearing and settlement system. In this context, the 2005 IMF report attests that the SECP has been instrumental in operationalizing the NCCPL in 2004, and that the NCCPL "has improved the efficiency of settlement process" (p. 61) by providing an integrated system of settling trades for all stock exchanges, except those that settle in each exchange's CDS. The 2005 report also mentions a plan to execute MoUs between the stock exchanges and the NCCPL to ensure coordination in the event of settlement defaults. The 2006-2007 SECP annual report notes that "in line with international best practices" (p. 82), the basic infrastructure of the NCCPL has been further strengthened to transfer risk management functions from the exchanges to the NCCPL. However, the above information does not directly address Pakistan's compliance with this principle.