Margin Trading System: SBP for taking risk management measures

The State Bank of Pakistan on Saturday directed banks and DFIs to take adequate risk management measures for new capital market financing module "Margin Trading System". The SBP has also asked banks and DFIs to be well aware of the features of the product before making MTS financing.
Recently a new financing scheme - MTS - as alternative to the CFS MK-II, was launched through National Clearing Company Limited (NCCPL) to support the country's capital markets. Under the new financing scheme banks and DFIs are allowed to invest in the three equity markets at a maximum rate of KIBOR+8 percent. The new financing scheme is expected to solve the liquidity problems of capital markets.
Sources said that banks and DFIs see a better investment opportunity in the new financing scheme for the capital market because of high liquidity and were already prepared to invest under MTS in a bid to improve their credit ratings and enhance profitability. As under the MTS, the tax rate is at 10 percent against the normal corporate rate of 35 percent. However, on Saturday, in order to reduce credit risk, the State Bank asked the banks and DFIs to take maximum risk management measures, as it does not envisage counter-party risk assessment.
"It is expected that banks and DFIs will invest in the equity market on larger base, therefore, to avoid risks, the SBP has asked financial institutions to take maximum risk measures," they said. According to SBP circular BPRD No 05, sent to Presidents and Chief Executive Officers of all Banks and DFIs, since CFS MK-II has been discontinued and MTS Financing has been introduced in the capital market, it needs some strict risks management instrument.
"The SBP in the circular has advised that because of its peculiar nature, MTS does not envisage counter-party risk assessment and thus needs enhanced risk management measures," the circular said. In order to mitigate the inherent risks associated with the product, the banks/DFIs as authorised financiers (AFs) should take adequate risk management measures and be well aware of the features of the product before making MTS financing, it said.