PSX: Amended financing product introduced

The SECP and NCCPL last week made some changes to the margin financing product, which went live on Monday. The new changes were made by taking recommendations from the broker community.

The SECP back in February started a crackdown on the unofficial in-house financing of stocks, popularly known as ‘badla’. Since this initiative, the market has been missing the liquidity and in turn the overall volumes have also dropped. The main argument of the regulator was that brokers were providing financing to clients off the books, which made it extremely difficult to assess the risk situation of the market.

The amended product not only allows the broker to use his own source of funding but also allows them get bank funding for the clients through a tripartite agreement. Pledging of client securities to the bank has also been allowed, which was previously missing.

As far as cash margin is concerned, the requirement for 10 percent equity contribution has been removed and for the time being has been reduced to one percent till necessary changes to the Leveraged Markets and Pledging Rules 2011 are made.

To monitor these financing activities, the brokers would need to open separate sub-accounts of its clients. In this way both the clearing house and regulator would be able to determine the underlying risk in the market on a daily basis.Previously, only estimates could be made as to how much ‘badla’ is active in the market, which not only exposed the market to significant pressure during a downturn but also allowed those brokers with bad intentions to go un-noticed.

A robust financing product is essential for a stock market. Without additional liquidity the volumes dry up and it is very hard to develop momentum. After the strategic sales of the stock exchange, increasing the exchange volume would be the top most priority of the new buyers to get return on their investment. These amendments are small steps towards that goal.