04 July 2004	Sunday	15 Jamadi-ul-Awwal 1425

KARACHI, July 3: The State Bank on Saturday introduced a set of regulations for financing to brokers by banks and Development Finance Institutions or DFIs. The central bank has introduced these guidelines primarily to facilitate the transition from Badla to margin-financing in the stock exchange.

Margin financing means lending by banks/DFIs to brokers for their clients for purchase of approved shares with the retention of minimum margins prescribed by the State Bank.

A circular issued by Banking Policy Department of the SBP says that the guidelines would also encourage participation of banks and DFIs in this area, unlock investment in equities and enable investors to leverage their stock holdings. "While the banks/ DFIs will continue to provide financing against shares to their retail investors under...Prudential Regulations for Corporate/Commercial Banking," the newly introduced regulations "will apply for extending financing facilities (including margin financing) to brokers," says the circular.

Under these regulations, banks will encourage the brokers seeking margin financing to obtain credit rating from a credit rating agency on the approved panel of the State Bank. But this will not be mandatory on them.

"The purpose is to emphasize the importance of credit rating and encourage the brokers to provide this important information to the lending bank/DFI for their decision-making," says the circular. Following are some other key conditions that the banks/DFIs will have to follow while extending margin financing:

(1) The margin financing shall be provided only against approved securities provided that the approved shares should be in dematerialized form in the Central Depository.

(2) The brokers availing of the margin-financing would be prohibited from lending the funds obtained from banks/DFIs or their own funds, directly or indirectly to lending bank's/ DFI's connected entities, directors or major shareholders and relatives of directors or major shareholders.

(3) Margin financing shall be provided by banks/DFIs from designated branches only. The details of the existing designated branches will be provided to Banking Inspection Department of the SBP within 15 days of the issuance of the circular. Details of the branches designated after the issuance of the circular will be provided within 15 days of their designation.

Risk Management:

(1) Before undertaking margin financing, the banks/DFIs will prepare comprehensive policies and procedure for this purpose. The board of directors will duly approve the policies, in this respect, if not already covered appropriately in the current credit policy.

(2) The banks/DFIs will obtain legal opinions to ensure that the manner in which they are accepting shares as collateral is legally sound, the documentation is sufficient to create an effective pledge over the collateral and they are fulfilling all legal requirements. In this context, Pakistan Banks Association may encourage banks/DFIs to prepare uniform legal documents for the purpose of extending margin financing to brokers.

(3) Banks/DFIs will put in place an effective system for monitoring margins and their exposures on the shares of various companies and brokers, keeping in view the quantum of their margin financing.

(4) Banks/DFIs would review, on an ongoing basis, their exposures in margin financing with a view to assessing the risks due to volatility in assets prices.

(5) The bank/DFI should be mindful of their exposure towards stock markets and should make necessary arrangements to monitor their exposure on continuous basis. In this regard, Risk Management Guidelines issued by the SBP may be meticulously followed.

Margin Requirements: (1) The banks/DFIs will maintain at least minimum margins as prescribed by the SBP, from time to time. Banks/DFIs will monitor the margin on at least daily basis and will take appropriate steps for top-up and sell-out on the basis of their approved policy in this respect and agreements with their customers (brokers). For the purpose of this regulation, value of the shares held, as collateral shall be based on the last closing price of the share on the preceding market day.

(2) The financing to brokers against their receivable will, however, be subject to a minimum margin of 30 per cent. Such receivables should appropriately be assigned to the lending bank/DFI and should be verified from the respective clients of the brokers.

Per Party Limit: (1) Banks/DFIs must make efforts to avoid concentration of margin financing to a few brokers. In this respect, they may prescribe internal limit for margin financing to a single broker. It is expected that the margin financing would be spread out by a bank/DFI amongst a reasonable number of brokers.

(2) A bank/DFI shall not extend financing to any broker in excess of its per party limit under Regulation R-1 of Prudential Regulations for Corporate and Commercial Banking. The total margin financing portfolio, at any given point in time, should not exceed the equity of the bank/DFI.

(3) The total financing, including margin financing, availed by a broker from the financial institutions should not exceed the limits prescribed in Regulation R-5 of Prudential Regulations for Corporate and Commercial Banking.

(4) The financing extended to the directors or major shareholders of a broker shall be considered a part of the over all financing allowed to the broker for the purposes of these regulations.

(5) The limits mentioned above are overall financing limits and total financing facilities to brokers should not exceed the limits prescribed above. Further, for the purposes of monitoring and better controls, banks will keep separate records of the following facilities:

(a) Financing against the shares of clients of brokers. (b) Financing against own shares of brokers. (c) Financing against receivables of brokers. (d) Working capital finance against any other security. (e) Any other financing facility to brokers.

The areas not covered under these regulations will be governed by Prudential Regulations for Corporate and Commercial Banking.