The Counsel

Banking & Finance
by Ali H. Shirazi
Director, Atlas Asset Management Limited
"Negligence and excess, in pursuit of high returns, have hurt the asset management industry the world over. This ought to serve as a warning to the local fund managers."

Asset management is a business of trust. And trust is the precondition for prosperity and economic well being of the industry. Unfortunately, the liquidity crisis of September 2008 created a gaping trust deficit from which the industry is still recovering. The crisis saw the Stock Exchange impose a floor for over hundred days.

Asset managers in turn due to lack of price discovery, resulting in drying up of the trading volume, suspended dealing in equity funds. The market finally removed the floor on December 15, 2008 though it took another fortnight, due to circuit rules, for the price to reach a level for buyers and sellers to actively trade. Subsequent to suspension of dealing in equity funds, nervous investors redeemed their holdings from debt funds.

And to top it all, in order to stop the hemorrhaging of redemptions, an arbitrary knock-down in Term Finance Certificate prices was imposed by Securities and Exchange Commission of Pakistan (SECP).

This debacle resulted in an alarming drop in assets under management (AUM) and more seriously, investors lost confidence in asset managers, intermediaries and the regulator. From a high of Rs 391 billion in April 2008, the industry AUM reached a low of Rs 177 billion in January 2009. As of November 2009, AUM has recovered slightly to Rs 235 billion.

This is, therefore, a time of introspection for the industry. All stakeholders now must play a decisive role in winning back investors' trust. Mutual funds play an integral role in the world of finance, a force that has powered middle class growth, provided depth to capital markets and added dynamism to the economy. Without necessary reforms, not only the industry but the economy at large will suffer. Read more here...

Banking & Finance
by Kamal K. Jabbar
Barrister-at-Law and an Advocate of the High Courts

Warren Buffet, the iconic American investor has referred to derivatives as "financial weapons of mass destruction," while Joseph Stiglitz, the recipient of the 2001 Nobel Peace Prize for economics has called for outright outlawing of their use by banks. Derivatives have been derided and impugned as the source of the recent financial crisis they continue to be used by over 95% of Fortune 500 companies for the purposes of hedging and risk management.

Simply put, a derivative is a financial contract the value of which is determined by reference to one or more underlying assets or indices; derivatives “derive” their value from other assets and come in various forms: futures, forwards, swaps and options.

Futures are perhaps the simplest form of a derivative and are agreements to trade commodities, securities or currencies at a set price at a given date in the future. Forwards are similar to futures but are privately negotiated and not traded on an exchange like futures. Swaps are agreements to exchange sequences of cash flows for a set period of time. An interest rate swap, for example, involves a counterparty agreeing to pay either a fixed or floating interest rate denominated in a particular currency to the other counterparty at specific times in the future. Options are contracts under which buyers have the right but not the obligation to sell or buy a particular asset at a particular price at or before a given date. Read more here...