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SECP approves draft of Margin Financing

By Tanveer Ahmed

KARACHI: The Securities and Exchange Commission of Pakistan has approved the Draft of Margin Financing (MF).

After reviewing the draft, apex regulator gave nod to it and sent it back to the stock exchanges incorporating the comments of the stakeholders and asked the bourses to prepare the regulations governing MF, so that the product could be introduced as earlier as possible.

The task to work up the margin financing product was assigned to the Consultative Group on Capital Market.

According to sources, the important feature of the new system is that it eliminates the ‘systemic risk’, as the new system limits extended funding in one scrip, besides the system (clearing and settlement) is not responsible for the default of financee.

Earlier, the financee had no information about the financier and vice versa, and the clearing and settlement system had to be responsible for the default of financee, which impacted the entire system. This product will facilitate banks to provide direct credit facilities to clients for obtaining financing against securities. The client will directly approach the bank for credit line to obtain finance against securities.

According to the concept paper the brokerage houses and financiers would use third party funding to finance the ready market purchases, both proprietary and clients, besides the financiers would use own funds to finance the ready market purchases of its clients.

The new product would allow the financier to partially finance the purchase, thereby ensuring some equity participation by the financee himself. While in the existing MF system, 100percent settlement obligation was shifted to financier.

The list of securities eligible for the existing margin financing was pre-defined, while in the new system, the financier decides, which securities to finance.

It would impose limits on the financiers as well to limit excessive funding in particular scrip, which was not there in the existing system.

By the introduction of the MF system, information regarding entire credit given to the brokerage houses will be available, while in the proposed system the individual contract will have no pre-defined maturity.

In proposed MF model, release transaction can be initiated by both financier and financee. Moreover, financee has an option to release MF transaction on the basis of ready market sell or on the basis of arrangement of fund. Besides, only corporate brokers with minimum capital requirement, would be eligible to act as a financier with a limit on how much can be extended through MF. This MF facility will only be available against ready market purchase for that day. Eligible financiers will include banks, DFIs, investment banks and brokerage houses for their clients only.

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