KARACHI: The Securities and Exchange Commission of Pakistan (SECP) has found that the National Clearing Company of Pakistan Limited (NCCPL) has been failed to calculate correct Value at Risk (VaR) estimates, correct hair cuts applicability, collect Capital Gain Tax (CGT) and imposing penalties due to lack of high quality human resources.
NCCPL is a significant institution of Pakistan’s Capital Market providing clearing and settlement services to the Pakistan Stock Exchange Limited.
According to an order issued by the SECP on Tuesday, the NCCPL failed to comply with the requirements of clause 12.5.2 (a) of NCCPL Regulations.
VaR is a measure of the risk of investments. It estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day.
During the routine on-site inspection of the NCPL, the inspection team of SECP found that the NCCPL has been calculating incorrect VaR estimates in respect of twenty (20) securities.
NCCPL has been applying lower than the applicable scaled up factors to the Raw VaR and resultantly calculating low final VaR at the end of the day.
Recalculations of the VaR Estimates in accordance with criteria mentioned in the NCCPL Regulations revealed that NCCPL was calculating 3% to 22% less estimates.
Due to incorrect calculation of VaR Estimates, the NCCPL was collecting lower Exposure Margins. Therefore, a portion of the exposure remained uncovered. For instance, on October 25, 2017, total exposure of 20 scrips was Rs 90.687 million against which NCCPL collected exposure demand of Rs 10.941 million while as per the recalculation said demand should have been Rs 16.283 million.
The SECP also found that due to miscalculation of VaR, haircuts at which the Margin Eligible Securities are discounted for valuation purpose was also miscalculated.
Haircut is used interchangeably with the term margin. It is the amount of capital required by a broker to maintain the positions currently in a trading account.
The SECP took cognizance of the aforementioned alleged violations and held hearing in the matter.
In a response to the allegations, Muhammad Lukman CEO at NCCPL said the incorrect calculation of VaR Estimates was due to an error in one of the functions performed by the computerized risk management system which incorrectly assigns scaled up factor fora few stocks. The issue has been rectified. The incorrect Hair Cut applicability was due to incorrect calculation of VaR. With reference to non-collection of capital gain tax and failure to impose penalties, restriction/suspension, for certain instances theNCCPL explained that there were cogent grounds to withhold action under its regulations.
SECP was requested by NCCPL to take a lenient view with respect to matter where the NCCPL has not collected CGT or imposed penalty or restriction on account of practical grounds.
In its order the SECP commissioner Zafar Abdullah said that these non-compliances by the NCCPL were unintentional errors which in most cases have been rectified by the NCCPL. The primary reason for such errors appears to be lack of high quality human resources employed by the NCCPL.
To ensure ongoing compliance and strengthening of the NCCPL, which is a major capital market institution, the NCCPL is directed by SECP to ensure the following within a reasonable time:
Employ high quality technical resource suited to its evolving functions, it must ensure that the transition from its existing risk management system is smooth, uninterrupted, does not compromise effective and continuous monitoring of risk and keeps investorprotection as top priority; and it must set aside adequate amount of revenue for the same and accordingly carry out changes in its tariff structure.
The NCCPL must continuously strive towards introducing state-of-the- art automated business systems for its stakeholders, which will go a long way in strengthening investor confidence, SECP added.
