Enhancing the cap of Rs 12 billion to Rs 20-25 billion for the next 30 days and restraining the stock exchanges from taking margins on trades funded by banks under the margin financing scheme are the two key recommendations made by the Shaukat Tarin committee to resolve the liquidity problem afflicting the bourses.
"Send your recommendations to us and we shall endeavour to implement them as fast as possible," said the Advisor to the PM on Finance, Dr Salman Shah, here on Friday.
Flanked by Minister of State (Finance) Omar Ayub Khan and State Bank of Pakistan Governor Dr Ishrat Husain, the government team received the detailed presentation from the President of Pakistan Banks Association, Shaukat Tarin; Chairman Arif Habib Securities Arif Habib and Managing Director AKD Securities Nadeem Naqvi on a variety of financial products that need to be made available, keeping in view the bourses' needs and amendments needed in the rules and regulations bringing more transparency in their operations and curbing unhealthy practices.
The SBP Governor had reservations regarding the statistical data provided in the Nadeem Naqvi presentation. He differed with the methodology adopted to calculate the market needs and projections of next 24 months based on 18 PSEs planned to be listed during this period.
The SBP chief said that the market mechanism had to be allowed to work, and the profitability in each sector would determine the flow of funds. He was, however, informed that the directive to work out the question of financing needed by the exchanges had come from the government side, and that the presentation was based on historical data and was for reference purpose only.
It was obvious that the demand for funding would vary with the opportunities provided to investors compared with other areas in the economy.
MARGIN FINANCING: Six financing sources were identified by Arif Habib. They are: Running Finance, Repo and reverse Repo; Futures-Deliverable; Futures non-deliverable, Margin Finance and trading and COT.
Comparison was made with regard to supply, availability of funds from formal and informal sector and margin percentage needed in each financial instrument.
It was said that the demand for margin financing was low due to non-availability of automated systems, double margin requirements by stock exchanges and the banks, as well as some cumbersome regulations.
THE TECHNICAL SUB-COMMITTEE PROPOSED: avoidance of double margin requirements by stock exchanges and banks, and permission to be given by bourses for a consolidated margin account on the same pattern as required by financing banks; and development of standard back office software by exchanges for margin trading.
The request for lowering interest on margin financing and simplification of documentation requirements was turned down by bankers on the grounds that documentation was similar to other loan agreements and rates charged depended on the market demand.
It was emphasised that in order to make the COT phase-out possible, the volume of trade in 'futures' needed to be increased. Hence it is essential that the three exchanges must accept bank guarantees in lieu of cash and not against acceptable securities. Further, non-brokers (banks & DFIs) should be allowed to settle their transactions directly with National Clearing Company and provide margin requirements for these trades.
COT TO CFS: The Tarin Committee proposed continuation of COT for another 30 days at an enhanced level of Rs 25 billion (instead of Rs 12 billion) till such time as a new product--Continuous Funding System--gets established.
It was clearly emphasised that everybody was on board with SECP's endeavour to phase out COT. "We are only pointing out the reasons for the illiquid market when asked by the authorities," said Arif Habib. "It is the market which is not accepting. We are part of your team", he added.
Further, he said, "in order to remove the suspicion of manipulation in COT let us make available replacement funds in the same quantity and place higher risk parameters".
The committee proposed that under CFS, funding would be provided during the trading hours instead of after market close, and also proposed separate risk management parameters for T+3 settlement.
FUTURES MARKET: The participants pressed for developing derivatives, deliverable and non-deliverable futures. The SBP Governor, however, asked for time to assess the CFS proposal.
LENDER OF LAST RESORT: Tarin expressed dismay on receipt of a four-page letter from SECP--one day before the presentation--expressing doubts about the recommendations of the committee. "It was uncalled for. They should have waited for a day, and participated in the committee deliberations."
Further, he said there were no sacred cows. "We are giving an independent view; it is for the decision makers to accept or reject our proposals after close scrutiny
Quoting former SECP chairman Khalid Mirza's interview in a local magazine on 'Badla', Tarin said the former SECP boss was of the following view: "Under no circumstances must Badla be stopped until the futures market and the availability of margin financing develop sufficiently to render them feasible. If done prematurely the result would be substantial loss of liquidity or the possibility of Badla going underground ... outside the regulatory ambit but would clearly have an impact on the official market and thus was likely to be systemically risky.
It would, therefore, be best if proactive steps are taken to develop the futures market plus margin financing and let these instrumentality's operate vigorously alongside Badla on a level playing field basis for a considerable period of time."
SECP Commissioner Shahid Ghaffar feared that if COT screen was allowed to operate simultaneously with share trading, rate changes would take place throughout the day which could lead to higher risk. But the bankers responded that there was nothing wrong with it. After all, in the interbank rates the KIBOR fluctuates throughout the day. The brokers also said that the risk was minimised in COT as the exchange was taking note of market margins on hourly basis.
Tarin proposed to have an arrangement where banks, DFIs, insurance companies and high net worth individuals provide funding to CDC where a treasury would be created in six months. "They will act as a lender of last resort to the capital market," he said.
On Tarin's proposal to make CDC as the lender of last resort for the market on the same basis as Turkcell or Euro clear, J S Mutual Fund MD Najam Ali expressed reservation about CDC being both a custodian of shares and a finance provider. But it was countered that banks also operate with custodial services for shares under a different licence and are loan providers under a different regime.
The ministerial team wondered why the management of the exchanges could not resolve issues such as: Double margin requirements, accept bank guarantees in place of cash, take consolidated margin from brokers and reduce the cost of operating in futures market. They asked the KSE M D Moin Fudda to amend the double margin requirement rule within 48 hours after due approval from SECP.
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