KARACHI (January 17 2007): In order to facilitate better understanding and necessary rectification in the software-application and procedures thereof, in the risk management system of the Futures Market, by the Karachi Stock Exchange (KSE), the Securities and Exchange Commission (SECP) has made further clarifications.

In a letter sent to the KSE, the SECP said that the matter has also been discussed and agreed with KSE management team led by Chief Manager IT and Chief Manager Operations and now would enable KSE to carry out the rectification exercise.

The SECP, while referring to KSE letter No KSE/SECP-9001 dated December 27, 2006 whereby certain clarifications were sought in relations to calculation methodology/mechanics designed by KSE for determination and collection of Special Margin demands in Futures Deliverable Market and CFS Market, under the new Risk Management Regime said that special margins shall be payable on a daily basis only where the weighted average transaction cost of a scrip in the CFS or Futures Deliverable Markets with respect to a member, is different from 26 weeks moving average price of that scrip in the Ready Market.

In case the difference between weighted average transaction cost of a member in a scrip and the 26 weeks moving average price of that scrip in the Ready-Market, either side, ie upward or downward is up to 10 percent from the 25 weeks moving average price, special margin shall not be applicable.

However, where such difference is greater than 10 percent than the following shall apply:

1. Where the unidirectional price movement is upwards ie in excess of the 26 weeks moving average price of the scrip in the Ready Market, each member who is a net buyer, in terms of number of shares, of that scrip shall be required to pay a special margin ie margin equivalent to difference between weighted average transaction cost of the gross buy position of that member and the 26 weeks moving average price of that scrip in the Ready Market.

This margin shall be calculated and collected daily at the end of day. Mark to market losses shall continue to be collected from the buyer as per current practice.

2. Where the unidirectional price movement is downwards ie, less than the 26 weeks moving average price of the scrip in the Ready Market, each member who is a net seller, in terms of number of shares, of that scrip shall be required to pay the special margin ie, margin equivalents to difference between weighted average transaction cost of the gross sale position of that member and the 26 weeks moving average price of that scrip in the Ready Market.

This margin shall be calculated and collected daily at the end of day. Mark to market losses shall continue to be collected from the seller as per current practice.

From February 01, 2007 when Client-level Netting Regime shall be introduced in place of Member-level netting, the following shall be applicable: Special margin shall be payable on a daily basis only where the weighted average transaction cost of a scrip in the CFS or Futures Deliverable Markets with respect to a client of a member, is different from 26 weeks moving average price of that scrip in the Ready Market.

Copyright Business Recorder, 2007