May 2, 2003	Friday	Safar 29, 1424

ISLAMABAD, May 1: Securities and Exchange Commission of Pakistan (SECP) has finalized the draft for Margin Trading Rules to phase out carry-over trading/badla financing which was at the root of the stock market crisis in recent years.

The draft, an SECP source stated, was being sent to the three stock exchanges for seeking their input and views.

The SECP intends to give the draft Rules a final shape after reviewing the comments of the market participants and to introduce the same very shortly. This would further enhance the retail investor base and help in minimising the systemic risk posed to the market, he added.

This is the first step of the road map that was prepared by SECP in November, 2002, for phasing out badla financing.

In Pakistan, unlike other countries, financing against shares is not easily available to small investors through banks and other financial institutions, said the source. This gave rise to the system of Carry-over-Transactions (COT) and badla market.

While the system of badla financing has played some role in injecting liquidity to the market, it has come under criticism for sparking uncertainty and volatility, often unwarranted, into trading on the stock market.

The brokers have also been using badla financing to fleece small investors of their savings by inducing them to indulge in speculation, taking undue advantage of their ignorance. Their modus operandi is that they first offer unsolicited financing to unwary investors but then start squeezing them once the stocks start sliding and the face value of their investment erodes.

By the time they find out that it was a dangerous mode of trading, they discover that they have not only lost all their capital but have also come under heavy debt liability to the broker. That was how when the equities market slumped from about 3000 points at the Karachi Stock Exchange to 2500 points in a very short period of time, many such investors suffered huge losses and became paupers.

The role of brokers in ensuring that the small investors bore the brunt of the catastrophe using badla as their tool cannot be over-emphasized.

While bringing about significant reforms in the COT/badla market to minimise systemic risk to the market, the SEC has been working for a long time on the development and implementation of margin financing in line with international standards.

The proposed Margin Trade Rules, the source stated, would promote retail investment by increasing purchasing power of investors in the country and would significantly reduce systemic risk associated with badla financing.

Margin accounts allow investors to buy shares with a relatively small amount of cash upfront by using the assets with a relatively small amount of collateral. Margin financing and the already functioning futures market would successfully replace COT/ badla financing system, the source remarked.