IFMP Financial Advisors Certification (FAC), Pakistan cheat sheet

Regulatory map: SECP administers the Securities Act 2015, the Companies Act 2017, the Futures Trading Act 2016 and the NBFC & NE Regulations 2008; SBP regulates banks and the money market; the FMU (AML Act 2010) is the financial intelligence unit; PMEX covers commodity futures.

Market infrastructure roles: PSX is the licensed exchange, CDC is the central depository holding securities in book-entry form, and NCCPL is the clearing house and central counterparty running the National Clearing and Settlement System.

Settlement cycle: equity trades on PSX settle on T+2 through NCCPL; securities move by book entry at CDC, so a valid CDC sub-account (or investor account) is a precondition for delivery and for receiving entitlements.

Broker licensing: securities brokers are licensed under the Securities Brokers (Licensing and Operations) Regulations 2016; they must maintain the prescribed minimum paid-up capital, a positive Net Capital Balance (NCB) and periodic regulatory reporting.

Client asset protection: customer securities must sit in CDC sub-accounts and customer cash in a segregated client account; commingling with house funds is prohibited, and broker default is handled through the customer asset protection arrangements administered by NCCPL.

Public offer route: a prospectus under the Companies Act 2017 with SECP approval, book building under the Public Offering Regulations 2017, and a PSX listing that generally requires at least 25% of issued shares in public hands plus continuing disclosure obligations.

Market abuse: insider trading, front running, market manipulation and false or misleading statements are offences under the Securities Act 2015; directors and substantial shareholders must report dealings, and PSX surveillance refers breaches to SECP.

Collective investment schemes: AMCs are licensed under the NBFC Regulations 2008; every fund needs SECP approval, a trustee, a custodian and, for Islamic funds, a Shariah advisor; NAV is struck daily and units are issued or redeemed at NAV plus any applicable load.

Fiduciary hierarchy: client interest ranks above employer, profession and self; conflicts must be disclosed in writing and managed with informed consent, and inducements that impair independence must be refused.

Suitability rule: capture KYC including source of funds and source of wealth, investment objective, risk tolerance, time horizon and financial situation, then recommend only products consistent with the documented IPS.

Pakistan AML framework: AML Act 2010 (as amended), SECP AML/CFT Regulations 2020 and SBP AML/CFT Regulations; suspicious transaction reports and currency transaction reports are filed with the FMU through the goAML portal.

CDD minimum: identify and verify the customer and the beneficial owner, establish purpose and intended nature of the relationship, screen against the UNSC consolidated list and NACTA proscribed list, and monitor transactions on an ongoing basis.

Enhanced due diligence triggers: politically exposed persons, high-risk jurisdictions, complex ownership structures, unusual cash volumes and correspondent relationships; EDD requires senior-management approval and closer transaction scrutiny.

Reporting and freezing: STRs are filed without any monetary threshold and without delay; designated persons' assets are frozen immediately; tipping off the subject of a report is an offence under the AML Act 2010.

Record retention: CDD records, transaction records and STR-related documentation must be kept for at least five years after the end of the relationship or completion of the transaction, and produced to the regulator on request.

Market conduct: no front running, no misuse of inside information, no guaranteed-return promises for market-linked products, no falsified KYC or deal tickets; gifts and entertainment only within a nominal, disclosed and approved limit.

Government securities: T-bills are 3-, 6- and 12-month zero-coupon instruments sold at a discount to face value; PIBs pay semi-annual coupons in 3-, 5-, 10-, 20- and 30-year tenors; Sukuk (Ijara, Musharakah) pay rentals rather than interest.

Bond pricing: P = Σ C/(1+y)^t + F/(1+y)^n; current yield = annual coupon ÷ market price; yield to maturity is the discount rate equating price to cash flows; price and yield move inversely.

Zero-coupon pricing: price = face value ÷ (1 + yield × days/365); discount-rate quotes understate true yield because they use face value rather than purchase price as the base.

Equity valuation: Gordon growth P0 = D1/(r − g) with g = retention ratio × ROE; relative valuation uses P/E, P/B and EV/EBITDA against peers or history; free cash flow to equity is discounted at the cost of equity.

Mutual fund mechanics: NAV = (total assets − liabilities) ÷ units outstanding; a front-end load reduces the amount actually invested, a back-end load is charged on redemption, and the expense ratio is deducted from fund assets.

Duration and convexity: Macaulay duration = Σ t·PV(CF) ÷ price; modified duration = Macaulay ÷ (1 + y/m); ΔP/P ≈ −D_mod × Δy + ½ × convexity × (Δy)².

Shariah screening: exclude prohibited sectors (conventional banking and interest-based finance, alcohol, gambling, tobacco); non-compliant income is typically capped near 5% of revenue and interest-bearing debt near one-third of total assets.

Alternatives and retail schemes: REITs under the SECP REIT Regulations 2015 distribute rental income to unit holders; PMEX offers commodity and currency futures; NSS products (DSC, SSC, BSC, RIC, PBA) are government-backed retail savings certificates.

IPS anatomy: return objective (absolute or relative to a benchmark), risk tolerance combining ability and willingness, and five constraints - liquidity, time horizon, tax, legal/regulatory and unique circumstances.

Portfolio statistics: E(Rp) = Σ w_i E(R_i); variance = ΣΣ w_i w_j σ_i σ_j ρ_ij; for two assets, any correlation below +1 produces portfolio risk below the weighted-average standard deviation.

Risk-adjusted measures: Sharpe = (Rp − Rf)/σp; Treynor = (Rp − Rf)/βp; Jensen's alpha = Rp − [Rf + βp(Rm − Rf)]; information ratio = (Rp − Rb)/tracking error.

Return conversions: real return = (1 + nominal)/(1 + inflation) − 1, approximated by nominal − inflation; required return to reach a goal = (FV/PV)^(1/n) − 1.

Goal funding formulas: lump sum FV = PV(1 + r)^n; annuity FV = PMT × [(1 + r)^n − 1]/r; education and retirement projections should be run in inflation-adjusted terms and reviewed at least annually.

Allocation versus selection: the policy asset allocation explains most of the variability of portfolio returns over time; drift is corrected by calendar rebalancing or threshold bands (commonly ±5% absolute or ±25% relative).

Client capacity indicators: emergency fund of 3–6 months' expenses, debt-service ratio below roughly 35–40% of gross income, stable income, adequate insurance cover and a positive savings rate.

Pakistan tax touchpoints: dividend withholding tax and capital gains tax on listed securities depend on Active Taxpayer List status and holding period; Zakat at 2.5% applies to zakatable assets above nisab; voluntary pension schemes have separate tax treatment.

Risk taxonomy: systematic risk (market, interest rate, inflation, currency) cannot be diversified away; unsystematic risk (credit, business, liquidity, operational, legal) can be reduced through diversification.

Beta = Cov(Ri, Rm)/Var(Rm) = ρ_im × σ_i/σ_m; portfolio beta = Σ w_i β_i; beta measures sensitivity to market moves, not total volatility.

Parametric VaR (1-day) = z × σ_daily × portfolio value, with z = 1.645 at 95% and 2.326 at 99%; scale to a longer horizon by √t; VaR is a loss not expected to be exceeded with the stated probability over the horizon.

Interest rate sensitivity: ΔP/P ≈ −D_mod × Δy; longer maturity and lower coupon imply higher duration and larger price moves for a given yield change.

Hedging arithmetic: futures hedge ratio = β × (portfolio value ÷ futures contract value); option delta hedge = portfolio delta ÷ option delta; residual basis risk remains in every hedge.

Liquidity metrics: bid-ask spread, days-to-liquidate = position size ÷ average daily traded volume, and issuer/sector concentration limits; stress scenarios should assume wider spreads and thinner volumes.

Operational controls: segregation of duties, maker-checker authorisation, daily reconciliation of client and house accounts, business continuity and cyber testing, and incident reporting to SECP.

Model risk: backtest VaR by comparing exceptions with the expected number at the chosen confidence level, supplement with scenario analysis and stress tests for tail events, and document all assumptions.

Regulatory frame: Insurance Ordinance 2000, Insurance Rules 2002 and Takaful Rules 2005 (revised 2012), administered by SECP's Insurance Division; agents, brokers and surveyors must be licensed and disclose commissions.

Core principles: insurable interest, utmost good faith (uberrimae fidei), indemnity for non-life covers, proximate cause, subrogation, contribution between insurers and the average clause for under-insurance.

Takaful structure: participants pay contributions (tabarru') into a participants' fund; the operator earns a wakala fee and/or mudaraba profit share; claims and surplus are borne by the fund; a qard-e-hasana covers deficits.

Life versus non-life: life covers (term, whole life, endowment, universal/ULIP, annuity) pay a sum assured on death or maturity; non-life covers (fire, marine, motor, health) indemnify actual loss up to the sum insured.

Premium build-up: risk premium reflects mortality or morbidity cost, expense loading and, for savings plans, a savings component; policy reserves are calculated actuarially and certified annually by the appointed actuary.

Solvency and retention: insurers must hold the margin of solvency prescribed by SECP, reinsure or retakaful amounts above board-approved retention limits, and value assets and liabilities under the applicable valuation regulations.

Claims handling: prompt notification, document submission, appointment of a surveyor for non-life losses and settlement within regulatory timelines; exclusions, deductibles and co-insurance determine the net payout.

Mandatory and common covers in Pakistan: motor third-party liability is compulsory; employers contribute to provincial social security and EOBI; group life, group health and bancassurance are widely used distribution channels.