Market Booms and Busts,and their impact on Central Securities Depositories

MARKET BOOMS AND BUSTS, and their impact on Central Securities Depositories

By Muhammad Hanif , CEO – CDC Pakistan

• Chief Executive Officer of CDC Pakistan• Chartered Accountant by profession• Founding Member of the Central

Securities Depository and Clearing & Settlement Company in Pakistan

• Advocate of investor cultivation, awareness and protection in Pakistan

• Serving as a Director on the Boards of Pakistan Mercantile Exchange Limited and Institute of Capital Markets, Pakistan

About the Presenter

Pakistan is one of the Next Eleven Markets named byGoldman Sachs.

Incorporated in 1993, CDC is the only depository ofPakistan. Apart from depository operations and retailinvestor account services, the company’s portfolioincludes:

• Trustee & Custodial Services• Shares Registrar Services • IT Minds Limited

About CDC Pakistan

“One heavy blow is not enough to produce a market crash. It requires several different blows to bring a market to its knees.”

David Shwartz, stock market historian

The Roaring Twenties 1920-30 was a time of wealth and excess in the US.

SPECULATION & WARNING

Despite the dangers of speculation, many believed that the US stock market would continue to rise indefinitely.

The US stock market collapsed on October 29, 1929. It was the most devastating stock market crash in the history of both the US and the world.

STOCK MARKET HYSTERIA

On the day of the collapse, the share prices fell as low as 89 percent. The NY stock exchange lost $14 billion in value, ten times the annual budget of the federal government at that time.

GREAT DEPRESSION1929-1940

The subsequent 10-year long Great Depression effected all western industrialized countries. It effectively stifled high-risk investment in the U.S. until after World War II.

GREATEST FINANCIAL CRISIS EVER

The crash led to the biggest financial crisis of the 20th century, with mass foreclosures & falling prices, untold bankruptcies and business closures & repossessions.

MASSIVE UNEMPLOYMENT

A quarter of working people (13-15 million) were unemployed, with soup kitchens serving to hundreds and thousands at a time.

We all know that Stock Market is a RISKY business

• Volatility & Uncertainty• Highly dependable external factors like war,

political situation, security conditions, natural disasters, currency devaluation, tax implications, etc.

• Rumor Mongering• Domino Effect

Risks that involve…

• Revenue Management• Resource Management (IT & Human)• Difficult Strategic Planning

Impact on other Stock Market institutions

Just like any other stock market, the Pakistan Capital Market(including The Karachi Stock Exchange) is a volatile market.

However, despite challenges, it has progressedcontinuously and has had an upward index trend.

The Pakistan Capital Market

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The 2008 Global Financial Crisis and The Pakistan Capital Market

• Started Earlier then the Global crisis.

• Global crisis had a “Multiplier effect” on Pakistan’s Economy, where FTSE 100, Dow Jones and Hang Seng fell 31.33, 33.84 and 48.27 percent respectively in 08, KSE 100 index fell 58.34 percent in 08.

• Had more direct impact on Investors and stock brokers then Issuers.

How was the Pakistani Crisis different from the Global Crisis?

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• On 21 April 2008, KSE touched its pinnacle by reaching 15,739.

• Downward rally started in May 08, on rumors of new tax in the upcoming budget.

• SBP started raising interest rate also from May 08.

• Political/Law & Order situation in Pakistan further aggravated the crisis.

• Freezing of market for almost 100 days.

Causes

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The Outcome of KSE crash in 2008

Comparison between KSE Performance and CDC Profits

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

KSE 100 In-dex

3402.48 5279.18 7450.12 9959.2400000000

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13829.97 12212.81 7174.47 9739.77 12508.73 13812.75 21036.41

CDC Revenue

304.691 574.772 677.763 858.011 854.732 1130.358 878.918 950.45599999999

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921.517 975.748 1059.216

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• Started diversification in 2002• Cost Controlling• Spread tariff• Better management

But we survived... How?

Comparison of KSE Index, CDC Revenues (Depository and Other Services)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

KSE Index

3402.47 5279.18 7450.12 9989.41 13829.97 12212.81 7174.47 9739.77 12508.73 13812.75 21036.41

De-posi-tory Rev-enue

283.617 504.654 589.734 718.83 603.96 745.21 527.34 593.45 523.71 518.224 577

Other Rev-enue

21.074 70.118 88.022 139.181 250.772 385.148 351.578 357.006 397.807 457.524 482.216

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KSE index VS CDC Revenues

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Comparison of KSE Index, CDC Revenues (Depository and Other Services)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

KSE Index

3402.47 5279.18 7450.12 9989.41 13829.97 12212.81 7174.47 9739.77 12508.73 13812.75 21036.41

De-posi-tory Rev-enue

283.617 504.654 589.734 718.83 603.96 745.21 527.34 593.45 523.71 518.224 577

Other Rev-enue

21.074 70.118 88.022 139.181 250.772 385.148 351.578 357.006 397.807 457.524 482.216

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KSE index VS CDC Revenues

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1. Continued dividend payouts2. Continued tariff cuts3. Continued market support4. Continued diversification

Despite the Financial Crisis... We:

Lessons from CDC

To hedge the risk of boom and busts, CDC took some concrete steps which include:

• Business Diversification• Capital Adequacy • Depository Risk Insurance• Investor Protection• Compliance & Surveillance• Better Planning

Business Diversification Ensured Sustainability

CDC diversified its business in a number of areas and entered new sectors and industries, which include:

• Trustee and Custodial Services for mutual and pension funds

• Share Registrar Services for Issuer Companies

• ITMinds Limited (IT Consultancy & Implementation Services)

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Trustee & Custodial Services

Launched in 2002, this service offers safe keeping of assets, settlement of transactions made by Fund Managers and ensures compliance of constitutive documents and relevant legal frame work to safeguard the interest of the unit/certificate holder.

Today, CDC is the most preferred Trustee & Custodial Service provided to the Mutual Fund Industry in the country.

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Some facts about Trustee business (As of June 30, 2013)

Type Wise Operational FundsFund Type No. of Funds

Open end Funds 113Closed end Funds 08

Voluntary Pension Schemes 09Discretionary Portfolios 16

Term Finance Certificates 01

Total 148

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Share Registrar Services

CDC started Registrar Services in 2008. It offers a composite portfolio of maintenance, registration, verification, handling corporate actions and direct customer dealing for Issuers and their Shareholders.

RTA Statistics of Holding Securities Number of Securities

Listed / Unlisted Securities 82

(As of June 30, 2013)

LIMITED

Founded in 2009, ITMinds is provider ofinformation technology, consulting andbusiness-process services. Focus:• Microsoft and IBM based competencies

and technologiesServices: • Enterprise Technology consultancy and

implementation services• Training, Ongoing Sustenance and

Support services

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Investor Protection & Convenience

CDC took several initiatives to enhance investor protection and convenience. Some of these initiatives include:

• Business Continuity Planning• Free-of-Cost CDC Access • Simple Account Opening Form

Investor Account Services (IAS)

Launched in 1999, CDC’s Investor Account Services (IAS) is a unique service offered by CDC with minimal charges. Over the years it has become a brand reflecting safety, security, reliability and trust. The main focus of CDC, since launching this service, has been on providing quality service and increasing efficiency of the processes so as to ensure that there are no complaints of mishandling of securities.

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Value added services for investors

IVR – is a round-the-clock Interactive Voice Response system, supported by an state-of-the-art call centre.

Web – enables Account holders to access their account information via Web.

SMS – gives an added level of convenience to investors by providing them their account movement information on their mobile screens.

eStatement - provides Account Balance Statements in the clients email inbox on a monthly or quarterly basis.

eAlert - provides real-time email alerts about activities in the Investor Account in clients inbox

Future

CDC Pakistan is fully geared up for the following strategic actions in future:

• Bringing the Non-Depository related Revenues in excess of 50%.

• Launching more businesses / services in other industry sectors like insurance, banking, etc.

• A Centralized Information Sharing Solution for Insurance Industry is already in its launch phases.

• Government Securities

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Thank You!

To learn more about CDC Pakistan, please visit: www.cdcpakistan.com