Margin Trading System: individuals allowed to participate as financier and lender

February 01, 2012

RECORDER REPORT

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Individuals have been allowed to participate as financer and lender in Margin Trading System from February 6, 2012, while cash margin has been reduced to 15 percent from the current 25 percent. This is the first implementation of the government''s decisions announced by Finance Minister Dr Abdul Hafeez Shaikh during his visit to Karachi Stock Exchange on January 21, 2012.

The Finance Minister announced some incentives, including tax amnesty, for stock market players with a view to attracting more investors and increasing trading activity at the bourses. The National Clearing Company of Pakistan (NCCP) on Tuesday announced the modification in Margin Trading System (MTS) with reference to the amendments made in the Securities (Leveraged Markets and Pledging) Rules, 2011 as notified by the Securities and Exchange Commission of Pakistan (SECP).

According to NCCP notice, the Broker Trading Financiers have been allowed to provide financing in Margin Trading System (MTS) through their individual clients as well, subject to fulfillment of eligibility criteria. The Minimum Financing Participation Ratio (FPR) has been revised from 25 percent to 15 percent ie minimum equity participation of the Financee is 15 percent of Margin Trading (MT) Transaction Value. The Financees shall be required to deposit margins on their open position of MTS ie on the value of MT (R) transactions.

Accordingly, the NCCP has planned to implement the aforementioned changes in MTS as follows: The provision of Financing by Broker Trading Financiers through their Individual clients would be implemented from Monday, February 6, 2012 and Broker Trading Financiers will be allowed to provide financing in MTS through their individual and corporate clients. However, existing requirement of minimum FPR of 25 percent will remain applicable till February 17, 2012. The Broker Trading Financiers are required to submit an undertaking to NCCP to confirm that their individual clients fulfil the eligibility criteria.

Effective from Monday, February 20, 2012, the minimum FPR requirement would stand reduced to 15 percent in cash only. Financees would be required to deposit MT (R) Transaction Margins till settlement of MT Contract in the form of cash, MT eligible securities and/or bank guarantee. The MT (R) Transaction Margins shall be the differential of FPR and VaR estimate of the MT Financed Security. However, the aggregate value of FPR and MT (R) Transaction Margins shall always be higher of 25 percent or VaR estimate of that MT Financed Security. The NCCP will collect MT (R) Transaction Margin from Financees upon the settlement of MT Transactions.

The NCCP said that the aforementioned changes of FPR and MT (R) Transaction Margins shall only be applied on MT Contracts entered from Monday, February 20, 2012, onward. The existing terms and conditions of MTS shall remain applicable on MT contracts outstanding as on Friday, February 17, 2012.

The NCCP has also arranged ''Mock Sessions'' in co-ordination with the Karachi Stock Exchange for all MT participants from February 13, 2012 to February 17, 2012. The NCCP has asked all MT participants to familiarise themselves with the aforementioned changes in MTS and update their Back Office System accordingly.