MTS to be available for 20 eligible stocks: leverage cost six-month Kibor+8 percent

The new leverage product - Margin Trading System (MTS) to be launch at stock markets soon would be available for approximately 20 eligible stocks with the leverage cost (MTS rate) of 6-month KIBOR+8 percent and the rate will be determined by the market forces.
According to the document available here, the National Clearing Company of Pakistan Limited (NCCPL) will provide MTS in the capacity of an "Authorised Intermediary" to its participants to avail/provide financing in an undisclosed manner. On the settlement date, Finance (borrower) will be required to pay his "Equity Participation Ratio" (EPR) which is 25 percent or VaR (which ever is higher) of the value of trades while Financier will be required to pay his EPR ie the remaining amount of the trade on the settlement day.
The NCCPL will collect mark-to-market losses in the form of cash from Financees and pay to respective Trading Financiers on a daily basis after the settlement of MT Transactions. The 100 percent Financed Securities will be moved to blocked house-account or sub-accounts maintained by Trading Financier in a separate CDC Account. The leverage buy orders will be inserted through separate key and the MTS funding will be for a maximum of two months (max duration one month). Every fortnight 25 percent of the funding will be released automatically. Finance can release (sell) his leverage position at any time.
For better risk management, MTS imposes member wise and client wise position limits for eligible scrip based on free float. For member, maximum exposure limits for particular scrip is 20 percent of its free float or Rs 1 billion in value whereas for any UIN it cannot have 0.5 percent of free float or Rs 250 million.
There are also market wide limits in MTS - the total financing cannot exceed 20 percent of free float or Rs 8 billion in value in single MTS eligible scrip. On first default NCCL will suspend UIN and a penalty of @2 percent of the defaulted amount of such UIN on broker and restriction in derivative markets for period of three months. In case of second default, penalty will be 4 percent and restriction for leverage market for a period of six months on the broker. However, in case of subsequent default there is permanent restriction as well on the broker.
Farhan Mahmood, senior analyst at Topline Securities said that the draft regulatory amendments to cater for the introduction of MTS were approved by the KSE board with minor changes. "It is now expected that with this approval the new product will be available soon that may provide the much-needed depth to the local market," he added.
He said after banning the home-grown leverage product, popularly known as badla, after the devastation it caused in 2008 crisis, the regulator seems keen to reintroduce the leverage product with some improvements called Margin Trading System (MTS). With 10-year record low volumes witnessed last year, on popular demand a new leveraged product is now being re-introduced after the recommendations made by the SECP constituted committee of independent professionals.