Behold, margin financing is heading back to Pakistans equity bourses. New laws for the leverage product have been approved by the ministry of law, and now everyone involved with the market is waiting for the details.
When the market nose-dived in late-August 2008, leverage trading was scrapped and a price floor was imposed. When trading resumed four months later, daily turnover, which was hovering around 260-270 million shares before the crash, dropped to 150-160 million in the first half of CY10.
Despite crossing the psychological 10,000 point barrier earlier this year, brokers all around have been looking for leverage products to add depth to the market - making it liquid enough to attract capital formation.
Trading volume is set to rebound when leverage is formally reintroduced at the local bourse.
Year to date volumes have been languishing at 168 million on average. And though, experts caution against drastic expectations, they see volumes crossing the 200 million mark in daily share trading, once margin financing rules are put into action.
The new rules are based on the concept of counterparty credit risk, where the broker or bank, is to assess the risk capacity of their clients.
"Its a step in the right direction, towards internationally acceptable standards", says Khalid Iqbal Siddiqui of Invest and Finance Securities. Iqbal explains that the rules may not be acceptable to local investors at the moment, but with time thats going to change.
However, not everyone shares the same optimism on the new rules.
"The rules don mean much; people want details of the products, they want to know the rates, and the list of allowed scrips", said one fund manager who asked not to be named.
Asset managers have other reasons to complain as well, as they feel left out in the new rules.
In the previous regime, significant funding for margin financing used to flow into the market from mutual funds. Now, they are not invited to the party, as under SECPs new rules, margin financing can be only obtained from brokers or banks.
Others like Nasim Beg, who oversees Rs17 billion of funds at Arif Habib Investments, argue that SECP shouldn be deciding the limits of financing.
"Limits on margin financing in other parts of the world, particularly in the US are imposed by the Federal Reserve, or their respective central banks, and not the Securities and Exchange Commission," says Beg.
In accordance, such limits should be imposed by the State Bank and not the securities regulator. "The SECP would need to enhance its resource capabilities to accurately manage margin limits," said Beg.
But modalities aside, the real question is how will the market react to margin financing, when it is launched?
Having risen 35 percent since July 2009, the benchmark index has been behaving irritatingly in the last few weeks, with some quarters citing weakness ahead, on account of fragile economic situation. Playing on leveraged funds, in the new capital gains tax regime, would be a real test of nerves.
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