ISLAMABAD (November 17 2006): The Securities and Exchange Commission of Pakistan (SECP) and the Karachi Stock Exchange (KSE) have agreed that risk management measures including "no netting across settlement" and "no netting across client" would be introduced in a phased manner.

A meeting of the SECP with the management representatives of Karachi and Lahore Stock Exchanges was held here on Thursday at the SECP head office, wherein the KSE and LSE representatives presented results of mock trial runs. Various issues relating to the implementation of risk management measures, particularly technical issues of netting at the stock exchanges, were discussed in detail.

The SECP and KSE have decided that the practice of netting CFS position against the brokers' ready position shall be eliminated from November 23, 2006. Based on the results of mock trials it became apparent that 99 brokers, representing 65 percent of the broker population of the KSE, are currently paying margin based on a slab rate of 5-15 percent.

The figures show that they will be bearing the heaviest burden of the proposed risk management measures with increased exposure in excess of 300-400 percent primarily due to the excessive netting regime prevalent.

Consequently, in order to provide relief to this section of the brokerage community and without compromising upon the risk management of the exchanges, the SECP has taken the following decisions taken in the best interest of the stock market.

In order to ensure smooth and speedy implementation of risk management measures such as "no netting across settlement" and "no netting across client", it has been decided that the same will be introduced in a phased manner:

NETTING ACROSS SETTLEMENT: The increase in exposure margins at broker level due to elimination of netting across settlement with effect from December 4, 2006 will be collected by the exchanges in the proposed phased manner as follows:

Thirty percent of the said margin shall be applicable with effect from December 4, 2006; 60 percent of the said margin shall be applicable with effect from April 30, 2007 and 100 percent of the said margin shall be applicable with effect from October 1, 2007.

CLIENT LEVEL NETTING: The increase in margins at broker level due to elimination of client level netting with effect from February 1, 2007 will be collected by the exchanges in the proposed phased manner as follows;

Twenty-five percent of the said margin shall be applicable with effect from February 1, 2007; 50 percent of the said margin shall be applicable with effect from July 2, 2007 and 100 percent of the said margin shall be applicable with effect from December 3, 2007.

NETTING BETWEEN READY AND CFS MARKETS: This measure was originally scheduled to be implemented with effect from August 22, 2005 when the CFS regulations came into force. However, implementation of this measure was delayed. It was then proposed to be implemented by the exchanges on January 16, 2006 but was deferred again by the KSE.

Due to revamping of the entire risk management regime it was subsequently decided to implement the same along with other risk management measures as a complete package on November 6, 2006.

However with the deferral of implementation of risk management measures from November 6 to December 4, 2006, and increase in CFS limits and number of scrips, without eliminating netting between Ready and CFS market the systemic risk to the exchanges has increased enormously.

It has, therefore, been decided that the practice of netting CFS position against the brokers' ready position shall be eliminated with effect from November 23.

Copyright Business Recorder, 2006