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WEEKLY
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| KSE develops new leverage product |
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Wednesday, October 07, 2009
By Salman Siddiqui
KARACHI: The Board of Directors of Karachi Stock Exchange (KSE) has developed a new leverage product, called Margin Trading System (MTS), and has sent its concept paper to the apex regulator, the Securities & Exchange Commission of Pakistan (SECP), for approval.
This product is very much similar to the recently scrapped Continuous Funding System Mark-II (CFS MK-II), which was in great demand in the market, The News learnt.
The new product in the making would run parallel to the Margin Financing System (MFS). The concept paper of MFS had already been with the SECP, but it had not received formal approval of the Commission since long, as this system was facing some financing constraints from banks (the only eligible financier in the system) and stakeholders also have some reservations about the introduction of Margin Financing System in the market.
“To end the tug of war that a leverage product similar to CFS should be re-introduced in the market or a new leverage tool the Margin Financing System should be launched, the KSE has come up with the idea of running two separate products in market on parallel tracks,” a board of director told the News.
The KSE wants to introduce a leverage product in the market to address liquidity issue, according to a handout the KSE issued here on Tuesday following its Board meeting held yesterday.
The Concept Paper on Margin Trading System has been developed by the Management and Board of KSE in consultation with market participants including potential financiers and financees, the statement added.
The Margin Trading System that is similar to CFS MK-II, will be run by KSE itself and financers in this system could be any one of financially sound companies or individuals. Financers may include Non-Banking Financial Companies (NBFCs), banks, mutual funds, brokers themselves, any financially sound individuals and et cetera.
The two major differences between formerly suspended CFS MK-II and newly developed Margin Trading System are that (1) in the newly proposed product to SECP, the borrower would pay 25 per cent of the total value of the shares purchased (called margin) and rest of 75 per cent financing would be provided to borrower through Margin Trading System. While in CFS MK-II, no margins were collected from the buyers, (2) In new system, the liquidity would be arranged first and then the shares would be purchased to pledge while in CFS MK-II shares were first purchased and then the financing was arranged for, a Director of KSE explained.
The KSE Board looks forward to working with SECP for the MTS implementation, as it requires significant technology and regulatory development, the KSE statement added.
However, there was no timeline set for introducing either products in the market and now ball is in SECP court.
The Margin Financing System (MFS) developed by the consultative group of SECP, would be run by National Clearing Company of Pakistan Limited (NCCPL) and it will come into force through the State Bank of Pakistan (SECP).
The criticism that the Margin Financing System received is that this system has a limited scope of financing as banks would provide financing to only sound borrowers. While risk in this system is very low, contrary to highly risk prone product like CFS MK-II, it was learnt.
The CFS had been blamed for the market crash during the 2008 crisis, when the bourse plunged by 58 per cent in the whole year.
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ISSN 1563-9479 
