Margin Financing approved by law ministry

Margin Financing approved by law ministry

KARACHI: The Ministry of Law had vetted the draft of ‘Margin Financing’ rules and delivered them to the Securities and Exchange Commission of Pakistan on Wednesday, SECP chairman Salman Ali Sheikh confirmed to Dawn.

Brokers said that the draft of Margin Financing (MF) rules—a leverage product for trading in stocks– had shuttled between the Ministry of Law and that of Finance, since they first took off from the Karachi Stock Exchange on Aug 22, 2009. Those were now finally close to implementation.

The approval of Ministry of Finance was probably on its way on Wednesday, following which the SECP was expected to put up rules on its website for 15 days and seek public comments.

The apex regulator might also hold consultations with stakeholders, including the bourses, market players, financial institutions, banks and mutual funds. The chief regulator was expected to issue a notification on MF on Thursday or the day after.

Mr Salman Ali Sheikh, in answer to query, said that ‘Margin Trading’ product (a variant of the old ‘CFS MK II or ‘badla’) was not simultaneously under consideration.

After days of dismal trade at the KSE, the market on Monday witnessed a huge rise of 205 points in Index, one of the contributing factor, traders said, was the rumour that did the rounds of revival of MF.

Several brokers said that they would be able to comment on the rules after a closer look at the draft, but in essence MF- would facilitate purchase of shares on borrowed money—through the bank-broker-client chain. Mr Salman Ali Sheikh observed that he expected banks to give MF a warm welcome for it had the potential of becoming another lucrative ‘consumer product’.

Many market participants were, however, not seen to be overjoyed at the prospect of the new leverage product on the line. Hasnain Asghar Ali, sales and research head at Aziz Fida Hussain & Co. commented that the approval of MF was simply a legal cover for the already ‘prevalent in-house badla’.

It would now require notifying or ‘underlining’ by the broker to the National Clearing Company of Pakistan (NCCPL) about the details of the transactions with clients.

A vociferous campaigner of the revival of another leverage product “Margin Trading” (MT), Hasnain said that at best MF could be considered a ‘tool’, but not a ‘trigger’ that could put market back on the rails.

At about the same time in August 2009, when the SECP had unveiled the MF rules, numerous brokers at the KSE had demanded the rejuvenation of CFS MK-II, popularly referred to as “badla”. The age-old leverage product was ditched by the KSE brokers after the KSE crash of 2008 as being the major culprit. But a demand for relaunch of the product, shorn of 21 defects, had soon started to take hold.

A vociferous campaigner for the revival of the ‘badla’, Hasnain Asghar Ali, stressed that it was the only way to attract speculators, day traders and other investors, who could swell the volume of trade at the KSE.

Mohammad Sohail, CEO at Topline Securities, pointed out that the volume of business at the KSE in the month of May had dipped to an eight-year low. He said that one of the major reasons was low participation by big brokers who were given to trade on easy financing through the now banned ‘badla’. Absence of a leverage product was another reason for low activity. “There are several derivative products in the market but due to cash margin requirement, there is scarcely any activity in those products,” Sohail wrote in a report on Wednesday.

In the trading hall of the KSE, another veteran broker merely shrugged his shoulders when asked if he thought the introduction of MF would help boost volumes.

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