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FINANCIAL MARKET DEVELOPMENT ACTIVITY QUARTERLY PROGRESS REPORT (JAN – MAR 2018) APRIL 30, 2018 This publication was produced for review by the United States Agency for International Development. It was prepared by USAID Financial Market Development Activity.
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Page 1: FINANCIAL MARKET DEVELOPMENT ACTIVITY

FINANCIAL MARKET DEVELOPMENT ACTIVITY

QUARTERLY PROGRESS REPORT (JAN – MAR 2018)

APRIL 30, 2018 This publication was produced for review by the United States Agency for International Development. It was prepared by USAID Financial Market Development Activity.

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FINANCIAL MARKET DEVELOPMENT ACTIVITY

QUARTERLY PROGRESS REPORT (JAN – MAR 2018)

Contracted under Order No. USAID order # SOL-391-15-000013

DISCLAIMER This report is made possible by the support of the American people through the United States Agency for International Development (USAID). The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government

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FMD Activity Quarterly Progress Report, Quarter (Jan-Mar 2018) iii

CONTENTS

Contents ......................................................................................................................................... iii List of Tables ................................................................................................................................................................ iii 

Acronyms ....................................................................................................................................... iv 

Quartlery Accomplishments ........................................................................................................ 5 

Project Highlights and Accomplishments ................................................................................... 6 Task 1: Supporting the GoP in creating an Enabling Environment for the Development of Capital Markets ............................................................................................................................................................. 6 

1.1  Framework for the Removal of Restrictions Impacting the Business Environment for Private Equity Funds ............................................................................................................................................. 6 

1.2  Developing Regulatory Framework and Structure for establishing eWRS in Pakistan........................... 8 1.3  Technical Support for the Punjab Debt Management Unit, Finance Department,

Government of Punjab ...................................................................................................................................... 10 Task 2: Assist the Government of Pakistan (GoP) in Improving Market Operations ............................... 11 

2.1  Collaboration with SBP to Design and Develop a Web Portal Promoting Access of Non-Bank Institutions and Retail Investors to Tradable Government Debt Securities ............................ 11 

2.2  Technical Assistance to National Clearing Company of Pakistan (NCCPL) ........................................... 12 2.3  Anti-Money Laundering .......................................................................................................................................... 13 

Training Activities ....................................................................................................................... 14 

Communications & Outreach .................................................................................................... 15 Media Outreach .......................................................................................................................................................... 15 

Trainings on Fixed Income and Investment Trading ................................................................................................. 15 

Annexes ........................................................................................................................................ 16 Annex I: Success Stories ........................................................................................................................................... 16 Annex II: Quarterly Financial Report .................................................................................................................... 20 

List of Tables

Table 1: TRAININGS FOR THE QUARTER (Jan-MAR 2018) ............................................................................. 14 

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FMD Activity Quarterly Progress Report, Quarter (Jan-Mar 2018) iv

ACRONYMS

CMC Collateral Management Company

CMWR Collateral Management (Companies and Warehouse) Regulations

DMU Debt Management Unit

DMMMD Domestic Markets and Monetary Management Department

eWRS Electronic Warehouse Receipt System

FBR Federal Board of Revenue

FABS Financial Accounts and Budget Systems

FATF Financial Action Task Force

GoPb Government of Punjab

IFMP Institute of Financial Markets Institute Pakistan

KP Khyber PukhtunKhwa

LOP Life of Project

LOE Level of Effort

PAC Pakistan Agricultural Coalition

PD Primary Dealer

PDMU Punjab Debt Management Unit

PMEX Pakistan Mercantile Exchange

PE Private Equity

SECP Securities and Exchange Commission of Pakistan

STTA Short-Term Technical Assistance

SBP State Bank of Pakistan

USAID United States Agency for International Development

USD United States Dollars

WHCM Warehousing Collateral Management

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QUARTLERY ACCOMPLISHMENTS

In the quarter under review, the Financial Markets Development (FMD) Activity team successfully closed out work for the Year 2 project workplan. A summary of quarterly accomplishments appears below:

As part of FMD’s premier training program on Fixed Income markets, FMD held five (5) fixed income trainings during the quarter. FMD, through its expat and local advisers of debt capital markets and government debt planning, trained over 200 industry professionals and students. These trainings will lead to more sophisticated portfolio management and risk analysis by market participants.

o The Debt Policy Coordination Office (Ministry of Finance), in their annual publication of “Debt Policy Statement 2017-18”, highlighted the systematic collaboration and ongoing partnership between FMD and IFMP.

In February 2018, USAID FMD completed key workshops and capacity building sessions for senior government officials at the Punjab Debt Management Unit (PDMU), Government of Punjab. This capacity building and technical assistance will enable the PDMU to issue first ever Sub National Bond after approval from Ministry Finance.

o Based on the feedback received about the USAID FMD technical support from the Punjab Finance Department, the Finance Department of the Khyber PukhtunKhwa province requested similar assistance tailored to the specific situation in Khyber PukhtunKhwa.

FMD provided critical technical and capacity building assistance to SECP for implementation of AML compliance of regulated entities. FMD’s support enabled SECP and its AML team to develop urgently required reporting and risk assessment financial thresholds to be included in Pakistan’s national AML response strategy for FATF mutual review.

As part of its eWRS scope of work, FMD drafted Pakistan’s first-ever comprehensive, legislative framework for the establishment, registration, and operationalization of Collateral Management Company’s. This legislation also gives the SECP necessary oversight authority over warehousing for eWRS. The standardized regulatory framework governing the accreditation and inspection of warehouses, the storage and safekeeping of agriculture produce, and the obligations of the warehouse owners, will further enable operationalization of eWRS in Pakistan.

FMD received a letter of appreciation from National Clearing Company Pakistan Limited (NCCPL) and accolades from the securities market regulator and stakeholders over the completion of its capacity building assistance to improve NCCPL methodologies for risk monitoring and reporting. FMD’s expat consultant provided extensive capacity building through trainings delivered to NCCPL staff and developed a GAP Implementation Plan to enable NCCPL to achieve compliance with the International Organization of Securities Commissions (IOSCO).

During the reported quarter, FMD successfully concluded its workplan for Year 2 and achieved the completion of all the deliverables stipulated in the workplan. Within this quarter, FMD developed a comprehensive workplan for Year 3, which will further component-specific successes of prior years and deliver new development impact in the areas of impact bonds for education and streamlining market operation through application of new technologies in check clearing.

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PROJECT HIGHLIGHTS AND ACCOMPLISHMENTS

Task 1: Supporting the GoP in creating an Enabling Environment for the Development of Capital Markets

Under this component, FMD is assisting Pakistan in improving the regulatory framework for capital markets and policy level interventions consistent with international best practices. FMD’s focuses on assisting relevant regulatory institutions in reforming key policies governing the financial sector in Pakistan which will have “medium to long term” impact on the business and investment environment.

1.1 Framework for the Removal of Restrictions Impacting the Business Environment for Private Equity Funds

Following the successful submission and acceptance of FMD’s regulatory reform proposal for Private Equity investments in Pakistan, USAID FMD team met with key decision makers at the Securities and Exchange Commission of Pakistan (SECP) to incorporate feedback and commentary from the FMD proposal. A senior-level meeting between FMD officials and the SECP’s PE regulatory oversight team was held on Thursday, February 08, 2018. The FMD team was encouraged by SECP’s collaborative approach towards the proposed regulatory reform. A thorough technical discussion was held on each of the reform recommendation. The SECP team provided the following specific comments:

1. Potential Amendments to Section 218 of Securities Act, 2017: SECP’s technical team raised the issue that investment allowability for provident and contributory pension funds is also covered under Securities Act 2017, Section 218. While FMD’s proposal contains detailed review and proposed amendment in other regulations (i.e. the Employees Provident Funds Rules, 2016; Voluntary Pension System Rules, 2005; Private Funds Regulations, 2015), review of Section 218 may be required.

a. SECP’s will consult their internal legal team and get back to FMD formally if such assistance for legal amendments to Section 218 of Securities Act, 2017 is required.

b. FMD’s legal consultant agreed to conduct a legal review to prepare for any necessary amendments that may need to be drafted.

2. Duration of Terms for Fiscal Incentives for PE Funds: SECP’s team pointed out that FMD’s regulatory reform proposal includes the need for fiscal incentives for PE funds to continue for a longer term but does not define a period for extension of such fiscal incentives to be approved through Federal Board of Revenue (FBR).

a. The SECP team proposed that in light of the comments received from the industry through consultative sessions, FMD should propose a definite term for extension, which may be 5, 7 or 10 years.

b. The FMD team acknowledged this point and incorporated a definite term for extension of tax exemption within its proposal. However, the FMD team pointed out to SECP that approval of such recommendation does not fall under the ambit of SECP and has been included in the proposal to reflect industry views only.

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3. Minimum Equity Capital Definition: The SECP team noted that FMD proposed lowering the minimum equity capital requirement for registration of PE funds from PKR 30 million to PKR 10 million.

a. SECP relayed that certain industry participants did not favor this amendment and rather advised for higher capital requirements for entrants to be maintained.

b. FMD’s technical team referred to the earliest discussions held with SECP’s previous PE oversight team. In those meetings specific reference to removing barriers to entry in this market segment were considered. FMD reminded the SECP team that this recommendation was submitted in the interest of increasing competitiveness within the PE industry and encouraging new entrants. FMD’s team also pointed out that the particular comments from industry, relating to minimum capital requirement for PE finds, were received from the existing locally registered PE funds. As such, the vested interests of existing funds may be reflected in these comments.

4. State Bank’s Incorporation of Fund Repatriation Amendments: Regarding the Prudential Regulations for Corporate and Commercial Banking and SBP’s Forex Manual, SECP reiterated its process for approving FMDs advice internally and then submitting to SBP through the SECP-SBP Joint Coordination Committee.

a. SECP proposed that FMD revisit the amendment to Clause 6 of SBP’s Forex Manual – Chapter XX, regarding an exemption for PE funds to repatriate of funds. SECP would like to see a specific definition of “PE funds” to appropriately limit the scope of the clause. SECP’s team explained this is a precautionary redefinition which should facilitate consideration of such amendment by SBP.

b. FMD’s team reviewed the concerned definition to further limit its scope as under SBP’s regulatory purview and available definitions by law.

SECP’s formal comments relating to the above discussion were received by FMD in February 2018 and were subsequently incorporated into FMD’s reform proposal. Additionally, it was agreed that the length of the PE fund license should be extended to a longer period than that which is currently stipulated. SECP requested that the extension of tax exemption for investment in PE funds (a critical stakeholder concern) would be supported by SECP if FMD produced the legislative drafting required within the Income Tax Ordinance 2001. Similarly, some of SECP’s comments were beyond the existing scope of FMD’s work within the PE component, extending legislative reform in regulatory ambits of Securities Act 2017, Income Tax Ordinance 2001, and Employees Provident Fund (Investment in Listed Securities) Rules 2016. Since the changes to these regulatory regimes are considered necessary and practical, the scope of the component has been accordingly widened in FMD’s Year 3 workplan.  

The approval and implementation of these regulatory reforms will be executed in close consultation with the SECP PE teams, requiring legislative drafting of the formal provisions for certain recommendations. In addition, removing some barriers to entry in the PE market by reducing the minimum capital and total equity requirement and the bar on the maximum number of eligible investors for a PE fund is an issue which still requires advocacy and stakeholder engagement. This work will be the focus of activities for the FMD team in the project’s final year.

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1.2 Developing Regulatory Framework and Structure for establishing eWRS in Pakistan

In the last quarter, FMD engaged legal counsel, Mr. Wasif Majeed, to develop and draft the legal deliverables of the eWRS scope of work and Dr. Andre Van der Vyver, an eWRS International Expert. In this quarter, FMD organized a coordination meeting on January 22, 2018 with relevant SECP staff to discuss work proposed by the expat eWRS expert, Dr. Van der Vyver. The meeting provided an opportunity to convene the new eWRS team within SECP, SECP lead officials, and Dr. Van der Vyver. SECP officials assured Dr. Van der Vyver and FMD of their support for Dr. Andre’s work on the cotton value chain analysis and cotton pilot project.

A second meeting, on February 2, 2018, was held with the SECP’s eWRS Internal Committee to discuss the regulatory purview of SECP to register and regulate the collateral management and warehousing components. The SECP eWRS Committee described it will send recommendations to SECP leadership on moving forward with the framework for regulating CMCs. SECP agreed to make every effort to ensure that the system can be operationalized with adequate legal and regulatory provisions and described that both provincial and federal governments support the project.  

Following these meetings, the FMD legal counsel submitted the primary standalone legislative Act which will award specific powers to SECP to regulate the agri-warehousing ecosystem. SECP’s request for comprehensive research on operational and legal impediments to a pilot for trading cotton futures was divided between legal and industry technical assistance. The report on legal impediments to cotton futures trading was assigned to the legal expert, which was finalized during the last quarter. The deliverables related to operational review of the cotton value chain and cotton pilot were completed by FMD’s expat eWRS expert in the quarter, and shared with the relevant regulatory body. Brief overviews of the deliverables follow.

1.2.1 Collateral Management and Warehousing Companies (Establishment and Regulation) Act, 2018

The objective to draft a stand-alone collateral management and warehousing act was to award specific powers to the Securities and Exchange Commission of Pakistan (SECP) to regulate the agri-warehousing ecosystem. In this regard, a comprehensive review of the existing warehouse and warehouse receipts legislations from various international jurisdictions was made, including: Indian Warehouse Receipts Act 2007, Tanzanian Warehouse Receipts Act 2005, Zimbabwean Warehouse Receipt Act 2007, Kenyan Warehouse Receipts Systems Bill 2015, and the US Warehouse Act 1916. In addition, review of the recent domestic legislations was also carried out including the Securities Act 2015, the Futures Act 2016 and the Companies Act 2017.

The draft was prepared keeping in mind the constitutional limitations in Pakistan. The draft was structured with regulation of companies as a primary objective, while regulating the agri-warehousing ecosystem represented a secondary/underlying object. Within this context, the overall intent of the act is primarily to regulate the structure of the collateral management companies (CMCs) through the SECP.

There are various provisions in the Act that empower the SECP to ensure that only financially stable companies obtain a license to operate as a CMC. The CMC in turn will be responsible to accredit the warehouses and to regulate the overall management of such warehouses under the aegis of standards approved by the SECP. The warehouse receipts issued by a CMC have been designated as

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a negotiable instrument keeping in view strong SECP’s desire to do so. The provisions of the Act have been extended to paper or electronic warehouse receipt.

In order to ensure compliance of the provisions of the Act, the SECP has been granted power to enforce and collect penalties. This has been done in accordance with the legal position that has been introduced through the Futures Act 2016. The SECP will also be empowered to inspect and investigate the warehouses, when required, as a measure of oversight over the functioning of the CMCs.

1.2.2 Cotton Value Chain Analysis

For the SECP and SBP to assess the relevance of the CMWR, 2016 and related subsidiary regulations, the industry was encouraged to conduct a series of product pilot projects. Pilot projects in three industries were already ongoing - namely: chilli, wheat and paddy (rice) - however, the SECP formally requested a similar pilot be conducted in the cotton industry, given its prominence in Pakistan.

FMD produced a comprehensive study that investigated price transformation in the cotton and textile industry, and the requirements for the successful introduction of a local cotton traded contract, spot, and futures. FMD’s eWRS expert conducted a comprehensive value chain analysis of the commodity, visiting the cotton production areas in central Punjab for firsthand knowledge and recording of the commodity’s production scale challenges.  

FMD’s comprehensive cotton value chain study provided a number of recommendations at the conclusion of the wide-ranging analysis, which included:

The introduction of a local exchange, PMEX traded cotton contract, will require considerable cooperation from industry stakeholders to review and enforce standards.

At grower level, cost of production data should be more effectively used. It still appears to be profitable to produce cotton. Proof that better inputs and grower practices lead to higher profitability should be disseminated. Pilot projects in improving practices and incentivizing value chain players would help in this regard.

The Government should implement a minimum five-year policy dedicated to improving standards, enforcement, and import/export duties and incentives. This will make possible the successful launch of local trade cotton contract, both spot and futures. A clear timetable should be set in this regard.

Given the size and importance of the cotton and textile industry, a combination of mega-projects should be considered.

Stable government policies, particularly with regards to marketing and trading, are needed. There is legislation, both at Federal and Provincial levels, allowing governments to intervene in the cotton price discovery process by inter alia procuring cotton and/or announcing minimum prices. Commodities contracts can hardly be traded under uncertainty about the import levies and export incentives. This applies to both cotton lint and downstream value-added products.

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1.2.3 Pakistan Cotton Pilot Project

The cotton pilot program was conceptualized by the SECP, which then formally requested technical assistance from USAID for design of a pilot. However, FMD’s extensive research evidenced that a cotton pilot project would prove difficult under the given industry specific circumstances. The realities for cotton are different to those of the other commodities envisaged under the Collateral Management (Companies and Warehouse) Regulations (CMWR). In the case of the latter, there is inadequate warehousing and a lack of financing. Warehouses had to be registered and banks had to accept warehouse receipts as a valid pledge against a loan. This is not the case for the cotton value chain where both warehousing and financing are adequate.  

Similar to other products highlighted in the report, quality certification is still a hurdle. A “standard grade” or contract specifications will need definition and agreement by industry stakeholders. It is broadly recognized that one of the key problems in the cotton industry is the low-quality cotton produced. A point of difference between the cotton industry and other agricultural commodities that require less processing is the importance of downstream players, such as ginners and spinners. How such entities in the value chain perceive the price and quality of the lint (cotton bale) is important to consider.

A pilot for cotton lint will have to take into account the selling practices related to cotton seed. Roughly 25% of the ginner turnover comes from selling the cotton seed. If cottonseed prices are good, there is less pressure on the ginner to push for the maximum price for cotton lint, and vice versa. Furthermore, improved growing conditions will lessen the impact on contamination (aflatoxin levels) of cotton seed. A number of other challenges related to cotton pilot in Pakistan were comprehensively covered within FMD’s report and duly provided to USAID and SECP.

Given the challenges facing a cotton pilot, the FMD consultant proposed a maize pilot where similar results could be achieved but where there are fewer political sensitivities. During the quarter, FMD worked in close consultation with the Pakistan Agriculture Coalition (PAC) to develop a maize pilot concept. PAC had already obtained written approval from SECP for a maize pilot and formal partnership of critical stakeholders in maize. These key stakeholders include: MCB Bank, United Bank Limited, Islamabad Feed Mills, and Telenor Microfinance Bank with its clients (smallholder farmers). FMD is sketching out the details of the maize pilot’s software requirements as well as eWRS insurance and microfinance products currently under development by industry players to better understand and propose where an FMD consultant could fit in for Year 3 support of a maize pilot.

1.3 Technical Support for the Punjab Debt Management Unit, Finance Department, Government of Punjab

In this reporting period, USAID FMD’s technical support to Debt Management Unit (DMU) Government of Punjab focused specifically on technical and advisory services and capacity building sessions for issuing bonds. This worked included assistance on specification and selection of software for both internal and external debt recording and comprehensive accounting solutions for debt records management. PDMU’s requirements for setting up a comprehensive recording, accounting, and reporting framework were discussed in detail in meetings between January and March, 2018. The outcomes of these discussions we submitted in a final report, “Technical Assistance to the Government of Punjab Debt Management Unit”, which was shared with Debt Management Specialist Mr. Abdul Rehman Warraich.

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Additionally, the FMD team held coordination meetings with senior officials from a number of departments of the Punjab Government. This included, the Accountant General Punjab Office (Lahore), Treasury Office Punjab (Lahore), and Accountant General Pakistan Revenues (Lahore). At the latter, the Financial Accounts and Budget Systems (FABS) were discussed at length with Mr. Ammar Naqvi, Director General FABS and team.

In a series of meetings held in Peshawar, the KPK Government and KPK DMU requested help on a series of reforms, including: a sound Public Debt Management Strategic Plan/Medium Term Debt Management Strategy; analysis of projects and investments based on financial models and cash flow-based financing; models to assist DMU KPK in tracking the repayment of investments and linking investment decision with revenue generation models and policies; as well as technical and advisory services for issuing subnational bonds specific to meet the financing needs of the KPK government. These activities will be carried out under FMD’s Year 3 workplan.

Task 2: Assist the Government of Pakistan (GoP) in Improving Market Operations

2.1 Collaboration with SBP to Design and Develop a Web Portal Promoting Access of Non-Bank Institutions and Retail Investors to Tradable Government Debt Securities The FMD team conducted a planning exercise with the State Bank of Pakistan (SBP) in Karachi on January 19, 2018, to discuss the way forward on the SBP web-portal. With the senior officials from the Domestic Markets and Monetary Management Department (DMMD), and the USAID’s representative from the Economic Growth program, Ms. Sarah Pervez, attending along with colleagues from FMD and NIFT, the importance of web-portal to the Non-Bank Finance Institutions (NBFI) sector - such as insurance companies; government agencies managing pensions; provident, gratuity and endowment funds; and retail investors – was emphasized.

SBP highlighted that the web portal must include all relevant information related to the bond market, which includes:

A separate section for investors on the SBP website;

Details about the securities available; How to open IPS account; Rules of primary dealers;

Eligibility for non-competitive bidding; How to place bids in auctions; Minimum size of auction bids; Auction dates and calendar; Cut-offs of previous auction results

At this meeting, chaired by chaired by Mr. Amin Lodhi, Head of the Domestic Markets and Monetary Management Department (DMMD), the SBP team agreed to extend their support to FMD. After the launch of the web portal, the SBP committed, in collaboration with FMD, to conduct seminars and awareness programs for small investors to highlight advantages of government bond investment over banks deposits.

During the meeting, FMD was able to further clarify that FMD will only provide technical assistance for developing the web-portal, and will not be responsible for hardware, software, and maintenance cost of the SBP web-portal. There was also agreement on the selected local consultant (Faysal Abdullah - NIFT

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Consultant) who would develop the business model of the proposed SBP web portal. The FMD team successfully submitted the business model on the proposed SBP web portal to Executive Director of the SBP, Mr. Muhammad Ali Malik, on March 28, 2018.

The business model provided a convening point to identify timelines for the web portal development. In addition to project timelines and stakeholder roles, the report reviewed cross country comparisons for retail distribution of secondary debt, a business plan for maintenance of the web portal with outlining of capex and opex requirements, as well as an eventual marketing and awareness raising campaign. The report also provided an overview of the design features of the web portal, with detailed data and process flow maps, in addition to information of cyber security maintenance and penetration testing.

2.2 Technical Assistance to National Clearing Company of Pakistan (NCCPL) During the quarter, FMD provided technical assistance to NCCPL by carrying out a detailed assessment of NCCPL’s enterprise and operational risk management framework, and recommending key institutional strengthening measures to upgrade compliance with international best practice standards. As NCCPL is the only securities settlement and clearing corporation in Pakistan, this support is important to both building public confidence in the securities markets and strengthening the investor base. As NCCPL is now responsible for the Settlement Guarantee Fund (SGF), as well as the pre-and post-trade risk management functions previously carried out directly by the Pakistan Stock Exchange (PSX), FMD’s support will enable NCCPL to not only to maintain an adequately capitalized SGF but will also help SECP to effectively monitor and assess backward and forward risk linkages associated with ongoing securities trading in the market.

This work is critical for NCCPL’s and SECP’s preparation for the assessment of Pakistan’s critical CCP functionality from key international agencies, including the International Organization of Securities Commissions (IOSCO), World Bank/IMF, and the European Securities Markets Agency (ESMA). These international agencies provide recognition to CCP operations on the basis of adoption and compliance with international best practices.

In this regard FMD helped NCCPL achieve the overall objective of strengthening their risk management functions by delivering the following activities. FMD received a written letter of appreciation from NCCPL management recognizing this support.

1. Evaluating the systematic risk framework, including forward and backward linkages, and recommending key measures/methodological approaches for improved monitoring/reporting and periodic stress testing;

2. Examination of critical risks being faced by NCCPL; including Investor/Unique Identification Number (UIN)/broker/scrip-related issues, as well as the risks flowing from bank settlement processes; and provision of systemic recommendations on how best to manage/mitigate these risks;

3. Validation of the methodologies (such as Value at Risk) used by NCCPL for different types of margins (initial, variation, additional, concentration, liquidity), as applied across different market segments (e.g. futures and derivatives markets);

4. Evaluation and recommendation of a framework for the transparent selection/notification of margin eligible securities, futures securities, margin trading securities, and margin financing securities; and

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5. Assessment of the adequacy of the size of the SGF, and recommendations for enhanced contributions from clearing members;

6. Capacity assessment detailing NCCPL’s readiness for equivalence/recognition of the CCP framework by major international agencies, and providing relevant follow-up recommendations as needed;

7. Provision of a detailed governance and procedural framework for the efficient functioning of the recently constituted Risk Committee of the NCCPL Board.

2.3 Anti-Money Laundering FMD provides ongoing technical assistance to SECP and its regulated entities for AML compliance, inline with the Companies Act 2017 and the Anti-Money Laundering Act, 2010. FMD’s expat AML expert continued his on-site engagement with the SECP and made site visits during January and February 2018. Building on work undertaken in December 2017, the consultant worked directly with SECP officials to successfully complete the following deliverables:

1. Analysis of exiting thresholds for notification (within this context, “threshold” means that which triggers an SECP-regulated entity’s duty to notify the SECP of a particular transaction or occurrence);

2. Comprehensive AML/ CFT Self-Compliance Toolkit for regulated entities;

3. Workplan/guidance regarding the purpose, structure, and conduct of a Mutual Evaluation Review.

The AML Specialist assisted and updated the pre-existing monitoring report forms for NBFC’s, Insurers, and Broker Dealers into a format that enhanced the ability to analyze and understand the data in a historical context. The consultant recommended that the SECP systematize collection and analysis of information provided by regulated entities, in order to improve the SECP’s capacity to effectively investigate and report suspicious activity.

FMD’s AML expert produced a risk-based risk assessment toolkit for SECP’s regulated entities to use in conducting risk based self-assessments (at least annually) with findings to be reported to the SECP for review and follow-up during regulatory examinations conducted by AML investigations staff. The assessment is not an audit, nor will it take the place of an actual official supervisory AML regulatory examination. The risk assessment as provided is fully customizable. The risk scoring will become very useful for our continued use in developing the SECP’s AML program infrastructure and procedures.

FMD’s consultant worked closely with SECP’s AML team in remediating the mutual evaluation recommendations prescribed by the FATF-APG in preparation for the 2018 follow-up review. The consultant prepared a draft action plan to help the SECP identify pending recommendations from the last review and necessary modifications to align current operations with international best practices.

SECP confirmed their satisfaction and appreciation for USAID’s timely assistance and has requested FMD continue capacity building for AML during Year 3 of FMD. USAID FMD’s work has assumed heightened significance in light of recent developments at the end of February 2018, when Pakistan was placed on the watchlist of Financial Action Task Force (FATF) until June 2018.

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TRAINING ACTIVITIES

The Fixed Income Investment and Trading Certification Course, designed and delivered in cooperation with the Institute for Financial Markets Pakistan (IFMP), has become a major point of recognition for USAID FMD. FMD is seen as a contributor to the long-term advancement of financial markets in Pakistan through capacity building of future industry professional. The trainings reach a diverse audience set across Pakistan. In addition to these regularly scheduled trainings, FMD is asked to develop capacity and raise awareness on specific topics in Pakistan’s financial market sector by a range of stakeholder. During the quarter, the FMD team delivered five trainings in Lahore and Karachi. A table detailing this quarter’s training activities follows. FMD also held two consultative workshops on capacity building for the Punjab Debt Management Unit and an awareness session with SBP on the new SBP web portal.

TABLE 1: TRAININGS FOR THE QUARTER (JAN-MAR 2018)

Training Date Location Component Counterpart Audience Resource Person

Fixed Income Investment & Trading Certification Course

Feb 14, 2018 Lahore

Workplan component “Support for Institute of Financial Markets (IFMP)”

IFMP

The NMUL University, Faculty Members and Senior Finance Students (T:85)

Werner Riecke, Abdul Qayyum, Aly Jafferani

Fixed Income Investment & Trading Certification Course

15-16 February, 2018

Lahore

Workplan component “Support for Institute of Financial Markets (IFMP)”

IFMP ABL AMC, Employees (T: 31)

Werner Riecke, Abdul Qayyum, Aly Jafferani

Fixed Income Investment & Trading Certification Course

21-22 February, 2018

Karachi

Workplan component “Support for Institute of Financial Markets (IFMP)”

IFMP ABL AMC, Employees (T: 26)

Werner Riecke, Abdul Qayyum, Aly Jafferani

Fixed Income Investment & Trading Certification Course

08-09 March, 2018

Karachi

Workplan component “Support for Institute of Financial Markets (IFMP)”

IFMP JS Bank, Employees (T: 21)

Abdul Qayyum, Aly Jafferani, External Trainer

Fixed Income Investment & Trading Certification Course

21-22 March, 2018

Karachi

Workplan component “Support for Institute of Financial Markets (IFMP)”

IFMP HBL AMC, Employees (T 21)

Abdul Qayyum, Aly Jafferani, External Trainer

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COMMUNICATIONS & OUTREACH

During the period in review, targeted media outreach activities continued. A press release was drafted and printed in online and print editions of local English language paper. In addition, three Success Stories were also developed in close coordination with the counterpart organizations as well senior technical experts from USAID FMD, which were also shared with the COR. Success stories for the quarter appear in Annex 1. Regular coordination and meetings took place with the USAID DOC office during this period. USAID FMD also participated in the Communications Working Group (CWG) meeting, organized at NUST’s U.S. Pakistan Center for Advanced Studies in Energy (USPCAS-E). In addition, a 3-day intensive and instructional training program for writing, direction, camera, and editing was organized by the USAID's Development Outreach and Communications Office (DOC) IP, M&C Saatchi. USAID FMD attended this training. During the annual work-planning process for Year 3, communications and outreach related needs were reviewed and mainstreamed in the workplan for the final year.  

Media Outreach

Training and capacity building activities conducted during the quarter by FMD were highlighted in print and online editions of key newspapers. Press releases for news stories were drafted in coordination with the USAID DOC office and the counterpart organizations, prior to the events.

Trainings on Fixed Income and Investment Trading

https://nation.com.pk/24-Feb-2018/news-brief

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ANNEXES

Annex I: Success Stories

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Building Capacities for Effective Debt Management in Pakistan

USAID supports Punjab Government in planning the first-ever issuance of provincial debt securities to raise funds for development projects

“Once completed, the Punjab Government will be able to maintain debt at a manageable level and introduce important integrity and cost-efficiency standards in the capital market borrowing activities. In the longer term this will also facilitate debt capital market development indirectly, provide greater options to investors, protect and strengthen the economy against financial shocks”.

Werner Riecke, Resident Advisor FMD.

Analysts frequently highlight that external debt servicing consumes a key portion of the national budget and due to this, Pakistan is unable to effectively raise resources to address the development priorities for a large marginalized population living in underserved regions. In 2015, the Government of Pakistan, allowed all provinces to issue subnational debt instruments or bonds, dedicated Debt Management Units (DMUs) in three provinces, Punjab, Khyber Pakhtunkhwa and Sindh. In an effort to support the Government of Pakistan in effective public debt management and greater financial stability, USAID’s Financial Market Development (FMD) Activity reached out to the newly established DMUs in all three province and offered technical support, institutional and on-the- job capacity building to enable these units to successfully plan the first-ever issuance of provincial debt securities and raise funds for development projects. At the end of the initial phase of work, capacity building workshops and intensive consultative sessions were conducted with the DMU of the Government of Punjab (GoPb), FMD’s team of international experts and advisors had become familiar faces for DMU Punjab and the Finance Department. Providing the much-needed support, the FMD team of international experts and advisors helped senior officials from the DMU Punjab and the Finance Department in designing financial sector reforms which will strengthen debt capital markets and improve the management of sovereign debt in Pakistan. The FMD team also helped design a comprehensive debt recording and accounting solution for domestic and external debt-initiatives. Recently exchanges with the DMU in Khyber Pakhtunkhwa has also resulted in the design of technical assistance package for this province too. Since its launch in 2016, USAID’s FMD Activity a 3-year technical and training collaboration program, has promoted the development of competitive, deepened and diversified debt capital markets in Pakistan, and worked with key regulatory bodies and government departments such as the Securities and Exchange Commission of Pakistan (SECP) and the State Bank of Pakistan to build capacities, advocating reforms and the liberalization of key regulations.

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U.S. Agency for International Development 1300 Pennsylvania Avenue, NW

Washington, DC 20523


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