SECP unveils rules for collective investment in equity securities

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) on Friday unveiled new regulations for collective investment in equity securities after a recent introduction of exchange traded fund that combines share returns with a mutual fund’s diversity.

SECP said all categories of collective investment schemes (CIS), which are allowed to invest in equity securities or equity spread transactions might take exposure through future contract – deliverable futures contracts, single stock cash settled futures and / or stock index futures contracts – subject to enabling provisions in their respective offering document.

“A CIS may take exposure through equity future contracts for meeting the investment objective of the CIS or for the purpose of hedging,” it said. “A CIS may purchase deliverable equity future or cash settled equity future and for this purpose the difference between the contract price and upfront margin shall be invested in cash and near cash instruments.” A CIS cannot blank sale in deliverable equity future contract. A scheme might sell deliverable equity futures contracts against its existing deliverable future purchase position in the same security till such time that such position is settled. The scheme might sell cash settled equity futures contract against its existing cash settled equity future purchase position in the same security till such time that such position is settled. “However, such exposure shall be covered by underlying cash or near cash instruments.” The SECP asked asset management company (AMC) to ensure that net long or short exposure in equity futures should not, at any time, exceed net assets of the CIS. “An AMC along with the trustee shall at all times ensure to fulfill its obligations with respect to equity future contracts, whether in the form of payment or delivery,” it said.

AMC was also asked to ensure compliance with exposure limits under the Non-banking Financial Companies Regulations. “AMCs taking exposure through equity futures contracts shall ensure that necessary risk management measures are in place to enable the AMC to monitor, measure, and manage the risks of the CIS position in equity futures contracts and their contribution to the overall risk profile of the CIS,” the SECP said. The commission further asked AMCs to make appropriate disclosures in the offering document that includes introduction of equity futures contracts, their period of maturity and how equity future contracts can facilitate in hedging or attaining the investment objective of the same, equity and manner of participation of the schemes, risk factors of exposure explained by suitable numerical examples, a statement as to whether future contracts are used for the purpose of hedging or meeting the investment objective of the scheme and a description of risk management and compliance procedures.

The SECP said exposure to futures contracts should be marked-to-market on a daily basis as per requirement of the Pakistan Stock Exchange.