KARACHI, Dec 20: When the stock market opens on Monday, brokers are likely to look less at their trading terminals and more at the resolutions that come out of the Board room where the 10- member body is scheduled to hold, what promises to be a heated meeting.

The matter of interest to the broker fraternity is whether the Board does or does not reverse or modify its decision of asking for “additional deposit on members’ outstanding positions in the badla or Carry Over Trade (COT).”

At an earlier meeting on September 10, the Board had resolved to ask COT borrowers for more. A notice circulated to members on December 1, stated that the Board had in its September 10 meeting decided to “include the parameters of preceding 52 weeks average prices in computation of additional deposits on net outstanding purchases in COT.” The notice said that under the modified calculation mechanism, the lower of EPS and preceding 52 weeks average price of individual scrip would be considered as its Maximum Value and accordingly, “scrip-wise additional deposit shall be collected on members’ net outstanding purchases in COT by taking the difference between transaction price and the Maximum Value, where the transaction price is higher than the aforesaid Maximum Value.” The revised valuation policy was resolved to be implemented from December 15, after necessary changes in the application software had been made.

From 2003, Board of directors of the stock exchange had been reconstituted to reduce the total number of members from 18 to 10. Five of them would be stock brokers and according to rules those were entitled to elect chairman of the board. So, if the members representing stock brokers on the board had gone along with the September 10 decision of the board, they clearly were now having second thoughts.

In response to a request signed by 19 brokers, the KSE management on Friday evening explained the modalities of the new rules and why it was important for the exchange to collect additional deposits on net outstanding purchases in COT. The key word was: risk management. Sources close to management say that a minor crisis had occurred in January and a slightly bigger in September when two members (Munir Khalid and Invest Tec) had defaulted. “We can not afford to let COT players overstretch their position and risk making market hostage to another COT related crisis,” is the management’s contention.

The stock brokers evidently disagree. Nearly half of around 150 active brokers had put their signature to a petition filed with the chairman, asking the Board to review its decision at its meeting on Monday. Their consensus word for the measures was that those were “harsh”.

Some 10-15 stock market members were believed to be among the top badla players. They appeared to be equally divided between financiers and borrowers. The additional deposit regulations had gone on to directly impact the borrowers, who would have to deposit additional sums against their exposures. But since that would mean drying up in demand for finances and shrinkage of volume and commissions, the financiers too were sore about the rules.

Independent analysts also suspected that unity with the majority could also have to do with the stock brokers’ elections to the Board for the year 2004, due to be held on Tuesday. “No major broker even if in agreement with the new rules, would want to be seen as a pariah and loose votes,” said one member.

A major player who is one of the 12 contestants for the 5-member seats on the board, brushed that aside as a mere fallacy. He contended that if the new rules were put into force, 16 of the 30 scrips that the SECP had declared COT eligible securities, would not be affected. But in the remaining 14, the deposit margin requirement would shoot up from the current average of 35 per cent to as high as between 56 and 176 per cent.

Everyone knows that highest margin relates to one scrip in which most players have taken excessively huge positions: Maple Leaf Cement. “If the financier was required to deposit Rs6 previously, he would now have to deposit Rs 13,” complained one player, adding that on transaction price of Rs33, that is unbearably huge sum. But a source close to management said, all of it was due to the badla players own doing. In the face of little or no change in the company fundamentals, the players had artificially inflated the price from Rs8.10 in January to Rs31.45 this Friday. The financiers who had taken huge position in the scrip and were resorting to “pyramid building”, had been stuck up with a stock that no one was now willing to touch with a long pole. The rules were to prevent excessive buying on the back of COT. He said that ready trading was protected by capital adequacy and exposure margins, but not the COT. The opponents argue that circuit breakers and the 18 per cent cap on badla rate are effective tools to manage risks.

The players opposing the new regulations say that the function of the Clearing House was only as much as to ensure that any transaction that was executed must be settled. “Price determination”, they argued “should be left to the market forces.” They insist that the Exchange is trying to be ‘over protective’.

The management was understood to have put another option before the badla financiers: to pledge their securities with the stock exchange. “If the COT financiers are charging maximum of 18 per cent premium, the exchange must have something in its hands to save itself from loss if a default occurs”, said a senior manager at the stock market. But a major player who asked not to be named said that it was “too risky” to place the stocks with the Exchange.

He suggested the alternative to opening of separate accounts in the CDC for badla shares. He also argued that in case of default, the Exchange had several layers of security: deposit; the assets such as membership card of the broker and the clearing house protection fund.

He stated that per party risk cover was Rs50 million, while the Clearing House funds had ballooned to Rs500 million. He also did not agree that the Clearing House would go broken in case there were several defaults, contending that in the history of the Exchange only once was Clearing House tapped for Rs48 million in the famous Hanif Moosa (Danka) crisis of 2000. Management sources also disagree on the money that is now parked in Clearing House Protection Fund saying that it is just Rs 100 million, the rest having been utilised for infrastructure building.

One analyst said that the regulations looked to discourage leveraged buying of shares. But since badla is slated to be phased out from January, to be replaced by margin financing, a gradual change such as these rules would benefit the market. He also agreed that since KSE is a mutualised body, small investors’ interest need to be protected from misdoings of larger players. It has to be seen if the Board concedes to the members demands in its meeting on Monday. But the trouble is that if the Board reverses its own decision it is unlikely to escape the blame that either the first decision was made in haste or the second has been made under duress. There are many things on stake here in this game of high finance. But above them all is perhaps the credibility of the Board itself.