Naureen Aqueel

The Strategic CIO: Innovation and integrity

Posted on: July 7, 2009

Published in CIO Pakistan magazine July 2009.

With the ongoing global financial crisis reducing investor confidence in the capital markets, the need for secure depository services that can support an effective capital market system becomes ever more pronounced. Such services play a role in attracting institutional and retail level investors from within the country as well as abroad by ensuring confidence in the country’s ability to support an effective capital market system.

Central Depository Company (CDC) plays this role within Pakistan. Being Pakistan’s only depository company, CDC is the sole entity handling the paperless electronic settlement of transactions carried out at all three stock exchanges of the country. CDC provides services to a wide range of capital market participants in the country including Brokers, Asset Management Companies, Banks, Corporate and General RetailInvestors. It also provides the service of linking up the Issuers and Registrars of Securities for the purpose of executing corporate actions such as the disbursement of bonuses, dividends, new issues and right shares and carrying out mergers and splits.

The CIO of CDC Pakistan, Syed Asif  Shah, who has been working with the company in various capacities for the last 12 years, describes CDC as a technology-driven business. “The very idea of CDC is based on technology,” says Asif. “It runs an electronic book entry service to facilitate the conversion of paper shares into electronic entries, recording of ownership, transfers, pledge and various corporate actions. Of course, without an electronic depository, the phenomenal growth of the Pakistani capital market in the last decade simply would not have been possible.” A process of shares transfer which used to take up to 45 days, has been brought down to a matter of seconds by the CDC, not only increasing efficiency, but also the volume of shares that can be traded on the stock exchanges across the country.

The very nature of the CDC perhaps makes it a strong technology company sitting at the heart of Pakistan’s financial ecosystem.

Enabling the efficient transaction of a commodity which eventually fuels the economic progress, the CDC has a critical role to play in the speed at which it works. After all, settling 98% of all trade transactions across the three main stock exchanges of Pakistan is a serious business!

“There was a time when trading in the stock market had to be closed for days because of settlement of a few million shares. With the depository in place, we have seen settlement of over a billion shares in a single day without affecting trading at all. The risk management system of stock exchanges heavily utilizes the instant transfer of shares in the depository from brokers to exchanges to serve as collateral for trading thus allowing huge volumes to be traded on a daily basis. The corporate action benefits such as bonus etc are passed on to the investors instantly. There is no longer the issue of fake or duplicate shares for all those securities which are now in book entry form.”

With the implementation of the Central Depository System (CDS), all issues relating to the physical handling of the securities were successfully eliminated. These included delays in transfer, capacity issues, forgeries and other discrepancies.

Track Back
CDC initiated its operations in 1997 when the then parliament passed the CDC Act. The Board of Directors and the management of the CDC working along with an IBM-led consortium successfully managed to develop the CDS. “We started with just one security right in the beginning. Over the period, with the increased confidence of the users and the management, we kept on adding securities to the system and today, 98% of all the settlements of the Stock Exchanges in Karachi, Lahore and Islamabad, take place through the depository system. The technology they used initially was based on a third generation relational database management system and application server. Later, the CDC in-house rewrote and transformed the entire system into a more broad-based technology.” The CDC project was part of an overall capital market reform program funded by the Asian Development Bank.

The capital markets in Pakistan have seen both good and bad days, like anywhere else in the world. Today, according to Asif Shah, world stock markets, with a few notable exceptions, are down by average 30% or more as compared to the previous year. “In Pakistan, we have seen the worst situation, perhaps after May 1998 nuclear tests where the KSE-100 index was as  low as 880 in June  1998; and the best in April 2008, where the KSE-100 index was at 15,676 points.

Now as of March 30, 2009 the market capitalization at KSE stood at 26.04 billion USDs while a little over a year back on Feb 29, 2008 it was 73.9 billion USDs. The good news is that in 2009 MSCI Emerging Markets indexes Pakistan is on top of the list of Best Performing Markets as of Feb 27, 2009.”

Asif Shah is of the opinion that the last decade has been the best in the country in terms of capital market institutional development. Referring to various developments taken at the SECP, CDC, NCC and the Mutual Fund Industry, he talks about human and technological capabilities which have advanced enormously leading to much mature systems with a high degree of Straight Through Processing. The CDC has helped not only protect, but also improve the performance of Pakistan’s capital markets. The computerization of the system with the set up of the CDC helped to improve the integrity of stock trading by reducing forgeries, duplicate shares and other pitfalls of a manual system.

“Prior to CDC, there was only a paper-shares settlement system which, besides having various risks including fake and duplicate shares, was also inefficient as a manual system catering to large volumes could be. Today, a safe and secure transfer takes place at a mouse click. The concept of an electronic depository was nothing new in the world but having it implemented in an environment where physical possession means a lot, was a great achievement. With complete transparency, the initiative has been a major success not only in terms of an innovative business model, but it has also established a great deal of trust in technology itself.” Besides a depository system, the CDC was also very instrumental in establishing the National Clearing & Settlement system as it not only developed it but also ran it successfully for seven years when it was smoothly transferred to a separate entity called National Clearing Company.

It goes without saying that technology would be the lifeline of any such depository company. CDC’s very existence is based on technology. It has been there from the very beginning and has been steadily advancing in its operations, both driving and being driven by the company. “Over the years CDC has invested heavily in various different technology areas be it security, application server platforms, RDBMS, servers, storage, two factor authentication, enterprise IT management system and above all in its staff skill development,” informs Asif Shah. “CDC is among the very few companies in Pakistan to invest very early in establishing a complete DR facility which has progressively been transformed into a very mature Business Continuity Program. CDC is no longer a depository only company rather its one of the largest private sector Trustee & Custodial Services provider to the Mutual Fund industry of Pakistan.

It has recently started the Shares Registrar & Transfer Agent Services and is attracting prestigious clients.”

Driving Innovation

So how has CDC been a driver of technological advancements? Experience and consistency. It has not only been a customer to large IT companies for hardware and infrastructure software, but it has also been using its own in-house software team, who have been instrumental in developing its core business  applications right from the scratch. “CDC has 30+ people in its software team which is the average size of a typical software house in Pakistan,” says Asif Shah. “I think it is a very big achievement that we are keeping that aspect of IT along with the IT Operations and Information Security functions. We are also one of the largest customers of two-factor authentication in Pakistan. As we always take security very seriously.”

“The core systems used by CDC have all been developed in house. Among the major milestones are very early full-fledged DR facility initiative and its transformation into a formal business continuity program, complete platform migration of CDS, development &  implementation of NCSS and successful execution of its IT operations for seven years, setup of information security program, implementation of enterprise IT management system etc.”

If you want to bring about a real change, you have to alter the core operation. Just talking about change will not allow your organization to experience any tangible progress. But if you introduce a practice or efficiency at the core, it is possible to have the practice replicated throughout the vertical. The only way to bring in efficiency in the economy, is to ensure that there transfer of funds is fluid enough to match the pace of advancing businesses. And where you have operational efficiency, you also need to have adequate system of checks-and-balances is also in place, which ultimately yields transparency and accountability.

Ensuring the integrity of shares is a top concern of any depository company. The CDC tries to ensure this integrity by means of a variety of security measures. “CDC has taken a variety of different measures to ensure maximum security and stringent verification steps,” says the CIO.

“Besides various technology and physical security elements including encryption, firewall, intrusion prevention, two factor authentication, surveillance, fire suppression, access control systems; special attention has also been paid to segregation of duties and logging & review of administrative activities, a strong and continuous IT audit program, a dedicated information security team, staff trainings, replica DR setup and a very strong Business Continuity Program.”  So not only is the CDC taking measures any other financial institution takes, it also makes special effort to ensure maximum security of financial assets.

Elaborating on this Asif Shah says, “What we are doing over and above what other good companies are doing is that we have a continuous IT audit program which is run independently by the audit department, and the chief internal auditor as part of good governance, reports directly to the audit committee of the board. Besides penetration tests etc, there is an annual systems review done by a reputed third part audit firm and the complete report is presented to the SECP. The board of directors thru the audit committee keeps a strict watch over us, and the audit department has IT trained people to help them do that. Additionally, we have an Information Security program that is separate from the core IT Operations and Application Development functions. This function is headed by a CISO who along with his team works hand in hand to improve the overall Information Security posture. We have implemented a very strong Business Continuity Program. I must say that we were one of the few companies who have established a complete DR capacity that is regularly tested for its effectiveness.”

With the implementation of an enterprise IT management system especially the Security Operations Centre which has helped the collection, correlation and review of the various administrative activity logs at a single location without any tempering CDC has been able to automate a system that would have otherwise been impossible to review manually.

As CIO at CDC, Asif Shah has a range of responsibilities. “The CIO title is a recent phenomenon in Pakistan,” he comments. “Earlier in a lot of places a somewhat similar role was performed by Head of IT which you can now call a CTO. So, for all practical purposes, CDC always had a CIO. One of the biggest advantages in working for CDC is that under the guidance of its board of directors the entire senior management including CEO and other executives are very much IT savvy and they take active part in all major decision-making affecting the business. I have never had to face a situation that is typically witnessed in other places in the financial industry where business and IT appear to be overshadowing each other resulting in the overall loss to the institution itself.”
Aligning the goals of the department to the larger picture is critical to the success of any organization. Asif Shah reiterates this. “We are a very small company with coherent teams working side by side with the business.” The buy in, as so many CIOs share, is critical to the momentum and long term sustainability of the business.

Speaking about the challenges he and his company have faced, Asif Shah says, “One of the challenges has been to ensure the successful continuation of CDC operations while we continue to lose some of the best IT talent to global markets, even in the periods of economic recession. However, I believe the biggest challenge is to ensure that we continue to maintain the trust of business by proving that the sole purpose of technology is to create more value to them and to build a strong IT team that takes pride in this value creation process. Speaking about the progress in technology Asif was of the view that “As such, the fundamentals don’t change; it’s the means that keep on improving. With each technology improvement there must be more business value for its stake holders. As long as the technology business value relationship remains at par, I see progress.”

Regarding the role of a CIO, Asif Shah was of the opinion that a CIO should be a strategic business leader, with outstanding working relationships, accountability and authority over all aspects of IT within the company. He/she should have a technology background along with business experience and he/she should be measured according to the contribution that IT makes towards achieving the company’s strategic goals. Though he also pointed that to some extent being a CIO continues to be a hands-on job.

And that one should be ready to roll up his sleeves and dig into problems.

On innovation, he was of view that though it is a pretty subjective word and can be twisted to any shape or form, broadly speaking, any improvement that delivers a business benefit fits its definition. He strongly pointed that, “Nothing ruins your credibility faster than a business idea full of holes.” So always do your homework. Get some feedback before you start shopping your innovative ideas around.

Value Add
Every CIO has a collection of advice and tips that he has saved in the reservoir of his experience. Here is Asif’s list of thoughts on innovation based on his own experience and practices being prevalent at some of the most successful companies:

˜Innovation has less to do with the latest technology and more with those capabilities of the IT  organization that makes it agile  enough to respond to changing  business needs quickly and efficiently.

˜Most innovation begin not start by  asking “Here’s a technology, what we can do with it?” Rather it should  say, I’ve got a big problem I have to solve it.”

˜Innovation should be small, manageable  and a core part of the IT  organization.

˜Innovation should be outside-in  as they say “You can’t read the label when you are sitting inside the jar.” Go out with your customers and parallel industry to seek new andbetter ways of doing things.

˜Rather than depending only on the  corporate R&D function, small but cross functional teams are  becoming key to driving industry- changing products and services.

˜Social Media is increasingly rising  as an effective innovation tool. So there is much more than just collecting friends on Facebook or  followers on Twitter as online  communities can often act as a  perfect place to find and test new ideas.

˜Trust breeds innovation and communication breeds trust. So  establishing a formal     communication program to build credibility helps a lot.

˜Constraint is also a very good catalyst for innovation. So when money and resources are constrained, new and creative ideas to solve problems start flowing.


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