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AWARENESS PRESENTATION ON KATS-TRADING

REGULATIONS OF KSE & ITS COMPLIANCE

Presented by:

Mr. Junaid Mirza (GM)

Mr. Adeel Shamshad (M)

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Preamble

1. Regulations for Short Selling under Ready Market, 2002

2. Regulations governing Deliverable Futures Contract & Cash-Settled Futures Contract

3. General Regulations1. Types of Manipulation2. Segregation of Clients’ Assets by the Brokers

4. Regulations for Proprietary Trading, 20045. Karachi Automated Trading System (KATS)

Regulations6. Inter-Exchange Trades

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Regulations for Short Selling Under Ready Market, 2002

(1) SHORT SALE/ BLANK SALE(2) Short Sale PREREQUISITES

(1) Eligible Listed Securities,(2) Prior Contractual Borrowing Arrangement (3) F-8 Window

(3) Prohibition on BLANK SALES(4) Pre-existing interest

(1) Shares available in CDC sub-account,(2) Shares available in Investor account(3) Early purchase in the share(4) Shares available in CDC accounts, which are jointly held(5) Bonus shares, which have been delivered to the respective

account prior to execution of sale

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Contd.(1) Ensure

(1) Shares are available in CDC sub-account,(2) The client has submitted Transfer Order “TO” if the shares are lying in investor

account,(3) CDC Reason Code “A025” for transfer of shares prior to execution of sale

order(4) Under prior contractual borrowing arrangement

(1) Borrowing Arrangement has been submitted prior to the trade(2) CDC statement of Lender(3) Shares available are not pledged

(2) Account opening Form(1) Nominee(2) Authority to trade

(3) Parallel Inquiries initiated by (1) Front Line Regulator or (2) Apex Regulator

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Contd.NON-COMPLIANCE of REGULATIONS for Short Selling under Ready Market, 2002

(1) At Client Level First violation- 5% or Rs.50,000/-, whichever is higher

- plus confiscation of profits made. Second violation within one year of first violation

-10% or Rs.100,000/-,whichever is higher, - plus confiscation of profits made

(2) At Proprietary Level First violation

- 10% or Rs.100,000/-, whichever is higher, - plus confiscation of profits made.

-switching off all terminals, except one, up to a maximum period of 03 days Second violation within one year of first violation- 20% or Rs.200,000/-, whichever is higher,

- plus confiscation of profits made and - switching off all terminals, except one, up to a maximum period of 07 days.

Subsequent violation- the amount of penalty shall be twice the amount of last imposed penalty

Note: Members have the right to file appeal with the Exchange within fourteen days of receiving of Order - MoA (Memorandum of Appeal) - Highlight Para wise Deficiencies or - Highlight Para wise Error

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Regulations governing Deliverable Futures Contract

(6) BLANK SELLING AND COMPLIANCE(i) Member on his Proprietary or Clients’ Accounts on UIN basis threshold:

- up to 0.5% of the Free Float of a scrip or Rs.50 million, whichever is higher, - maximum blank sale of 3.0% of the Free Float of a scrip by such Member for his all accounts

including Proprietary and Clients’ accounts, - in accumulation at any given time during a

Contract Period.

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Contd.

(ii) No Member on his Proprietary or Client's Account shall make Blank Sale unless the trade is declared as a Blank Sale at the time of placement of order through KATS in a special Blank Sale Order Window designed in the system for the purpose.

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Contd.(iii) Sale beyond threshold will only be allowed in the Deliverable Futures Market to a member on his Proprietary or Client’s Account on UIN basis, if there is a Pre-Existing Interest in the share as defined below:

“Pre-Existing Interest" means- An Earlier purchase on the same Exchange in the same Future Contract or - an earlier Future Contract which will settle prior to the settlement of the sale.- An earlier purchase on the same Exchange in the Ready Market which will settle prior to the settlement of the sale- unencumbered holding available in the CDS Account in the investor's own or joint account.

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Contd.

Note:• Pre-Existing Interest in order to remain qualified

for this purpose should continue to exist until the sale position in the Deliverable Futures Market is squared off or settled at the conclusion of the contract.

• Ensure Pre-existing interest prior to execution of sale– In Arbitrage Business– In Hedging Business

• Prior Contractual Borrowing Arrangement is not allowed

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Contd.NON-COMPLIANCE WITH THE REGULATIONS governing Deliverable Futures Contract

(1) At Client Level First violation- 5% or Rs.50,000/-, whichever is higher

- plus confiscation of profits made. Second violation within one year of first violation

-10% or Rs.100,000/-,whichever is higher, - plus confiscation of profits made

(2) At Proprietary Level First violation

- 10% or Rs.100,000/-, whichever is higher, - plus confiscation of profits made.

-switching off all terminals, except one, up to a maximum period of 03 days Second violation within one year of first violation- 20% or Rs.200,000/-, whichever is higher,

- plus confiscation of profits made and - switching off all terminals, except one, up to a maximum period of 07 days.

Subsequent violation- the amount of penalty shall be twice the amount of last imposed penalty

Note: Members have the right to file appeal with the Exchange within fourteen days of receiving of Order - MoA (Memorandum of Appeal) - Highlight Para wise Deficiencies or - Highlight Para wise Error

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DFC & CSF Contracts

• POSITION LIMITS– All position limits shall be monitored by the

Exchange through a preventive automated mechanism, whereby trading activity beyond such prescribed limits shall not be allowed.

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Contd.

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Example

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General Regulations

• Fraudulent Conduct– 5 (b) The said Board may by a resolution

expel, suspend and or fine a member of the Exchange who:

• May refuse or fail to comply with any resolution or decision of the said Board;

• May contravene any rule of the Exchange or any decision of the said Board;

• May be guilty in the opinion of the said Board, of dishonorable or disgraceful conduct or willfully obstructs the business of the Exchange.

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Contd.

• “Market Manipulation” shall mean a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a Listed Security

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Contd.

• Types of Manipulation– Wash Trades– Cancelation of sale orders without having pre-existing interest– Improper Matched Orders– Insider Trading– Front Running– Piggy Backing– Cornering– Churning– Pools – Pump and Dump– Hype and Dump– Painting the Tape

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Contd.(75) SEGREGATION OF CLIENTS’ ASSETS BY THE BROKERS

The Brokers shall ensure that the assets belonging to their clients are kept separated from the assets of the broker. For this purpose Brokers shall maintain a separate bank account which will include all the funds deposits of their clients along with record/breakdown of client position. Further, margins deposited by the clients of a broker in the form of securities, shall be maintained in the respective sub-accounts of such clients at CDC. The clients’ funds and margin securities shall not be used by the broker for any purpose other than as authorized by the client in writing. The Broker shall be obliged to furnish documentary evidence in support of implementation of the above regulation as and when required by the Exchange.

Penalty:The Exchange in its sole discretion may impose a penalty of up to Rs. 100,000/- on the Members for any single breach/violation of this Regulation including the Code of Conduct by the Members or their employees.

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Contd.

• Note– Prior to executing trades for clients

• Client Code has been assigned • UIN has been registered with NCCPL• The client is maintaining one of the following

accounts– CDC sub-account or– CDC Investor account

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Regulations for Proprietary Trading, 2004

(5) No aggregation of ordersA broker shall not aggregate an order for a customer with orders for other customers, or with own account orders.

(7) Market Integrity(i) Insider dealing: No broker shall, directly or indirectly, deal in any listed security or cause any other person to deal in securities of such company if he has information which:-a) is not generally available; andb) would, if it were so available, be likely to materially affect the price of those securities

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Contd.

(ii) Broker, agent or an associated person to keep accounts: Every broker shall maintain separate books of accounts for:a) Money received from or on account of and money paid to or on account of each of his clients; andb) The money received and the money paid on a broker, agent or an associated person's own account

(iii) Separate account for proprietary trading: Every broker who engages in proprietary trading shall have a separate account. The account shall be in the name of the broker, agent or an associated person and the title of the account must contain the word "proprietary". The account(s) shall be used for all transactions involving proprietary trade.

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Contd.

(8) Penalty(a) to pay a penalty up to a maximum of Rs.100,000/- per contravention.

(b) suspension of membership for a period prescribed by the Board from time to time.

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Karachi Automated Trading System (KATS) Regulations

(8) INSERTION OF CLIENT'S CODE IN EVERY BID AND OFFER THROUGH KATS

(a) Every Member while inserting a bid and offer through KATS for each of his clients, shall insert unique Client Codes for those clients which are maintained by them in their back office system and registered with NCCPL. These Client Codes are linked / mapped to UIN through the interface of National Clearing Company of Pakistan Limited. These Client Codes should not be re-assigned to another client of the member even after the closure of the account.

(b) Every Member shall ensure that the shares purchased or sold against a Client Code are posted to/ from the respective Sub-Account / Investor Account of that particular client with CDC upon settlement of trades through the Exchange.

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Contd.

(20) PENALTY- The Exchange, shall impose penalties at its sole discretion, which may be financial i.e. maximum penalty of Rs.500,000 and/or

- which may include suspension of trading upto a period of 3 months and

- on second or third violation suspension of trading may be extended to 1-2 years”.

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Inter-Exchange Trades

• Incase of inquiry arising against the executing member of the respective Exchange wherein trades are identified as Inter-Exchange Trades, – the executing member shall be deemed responsible for providing

information, pertaining to their Inter-Exchange Clients i.e. initiating broker(s) or their client(s), to the inquiring Exchange.

• Incase of clients – CDC sub-account or Investor account statements,– General Ledger Details etc

• Punitive Actions.

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Thank You

Q & A Session