KSE: Margin financing may be launched next week

[Naveed Yaseen]

AHMED MALIK
KARACHI (August 21 2009): Margin Financing, an alternate leverage product of CFS Mk-II or traditional badla to cater to the financing needs of the brokerage houses and their clients, is most likely to be launched at the Karachi Stock Exchange next week, it is learnt. The Trading Affairs Committee of KSE, in its meeting to be held here on Friday (today) would review the final concept paper on Margin Financing and sources said that the committee is most likely to approve the concept paper with some amendments.

MD KSE had already said that the committee's approval would be final for launching of this product. The product is being launched to provide funding access to retail investors and to introduce financing mechanism based on the principles of counterparty credit risk, whereby the lending terms are defined by the respective parties involved.

It would monitor and regulate the overall credit extended to and by the brokerage houses. The working mechanism in the final concept paper says that all the brokers will be required to provide the credit lines provided to them by non-broker financiers and the same shall be confirmed by the financiers. All broker financiers will be required to provide the details of financing to clients against own funds.

The exchange would prescribe with the prior approval of the Commission a list of eligible securities on the basis of pre-defined criteria. The list would be reviewed on a six monthly basis. A 30 days notice shall be given in advance before making changes to the list.

The eligible financiers would include banks, DFIs, Investment Banks and brokerage houses from their own funds for their clients. A member of one stock exchange can provide funding to member of another stock exchange as its clients. The VaR (value at risk) based margins will initially apply on the financee on the ready market purchase.

This product will facilitate banks to provide direct credit facilities to clients for obtaining financing against securities. The client will directly approach the bank for credit line to obtain finance against securities. A comprehensive disclosure framework would be developed to provide information to the investors/regulators in a fair and transparent manner.

The SECP and stock exchanges will specify the minimum net capital, which a brokerage house must have to be eligible for providing margin financing facilities. The concept paper on MF was designed by the 'Consultative Group on Capital Markets' constituted by SECP under the chairmanship of Aftab Ahmed Diwan, Chief Operating Officer Central Depository Company of Pakistan Limited (CDC).

The concept paper submitted by the Consultative Group, was forwarded to all relevant stakeholders including State Bank of Pakistan (SBP), Mutual Funds Association of Pakistan (MUFAP), Pakistan Banks Association (PBA), Investment Banks Association of Pakistan (IBAP), Leasing Association of Pakistan (LAP), Modaraba Association of Pakistan (MAP), stock exchanges and the National Clearing Company of Pakistan Limited (NCCPL) for their feedback and comments on June 09, 2009. After receiving feedback from all stakeholders the final concept paper was sent to KSE Trading Affairs Committee for approval.

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