04 July 2004	Sunday	15 Jamadi-ul-Awwal 1425

ISLAMABAD, July 3: Securities and Exchange Commission of Pakistan and the State Bank of Pakistan here on Saturday announced the Margin Trading Rules 2004 and Regulations for Margin Financing by banks/DFIs that pave the way for replacement of the prevailing system of badla financing by the end of the year.

Unfolding the details at a joint press conference in the Commission Headquarter, the SECP chairman Dr Tariq Hassan and the SBP Governor Dr Ishrat Hussain were confident that the move would strengthen market integrity and reduce the chances of recurrent crises.

For six months, they said, the existing Badla system - a euphemism for Carry Over Transactions (COT) - and margin financing would run parallel to each other in the process of phasing out of the former.

COT, they pointed out, existed only in Pakistan and India and had been partly useful in adding liquidity to the market. It was an aberration, nevertheless, because it was at the roots of the financial market crises of recent years.

It exists only in Pakistan and India, while the rest of the world has followed the system of margin financing. The two pieces of legislation had been formulated in such a way as to enforce the international best practices.

The simultaneous issuance of Margin Trading Rules and Regulations for Margin Financing would help in smooth transition from badla financing to margin financing.

This system, Dr. Hassan and Dr. Hussain said, was expected to promote retail investment by increasing the purchasing power of investors through their being able to buy shares with a relatively small amount of cash upfront by using the assets currently held in their accounts as collateral.

Under the present system of COT financing, an investor first takes a position and then arranges the funds. In case, he fails to acquire financing, there may occur a market crisis. With the introduction of margin financing, however, the investor would undertake trading only after arranging the funds.

With the introduction of the Margin Trading Rules, 2004, the risk posed to the clearing house of the exchanges would be minimised and brokers would be responsible for carrying out due diligence of their clients before allowing margin financing.

Consequently, margin financing would effectively lead to monitoring of credit risk at two levels, i.e., the investor risk would be managed at broker level, while the clearing house risk would shift to the banks and financial institutions as theseinstitutions, as lenders to brokers, would be on counter party credit risk basis.

In reply to a question, the SECP Chairman said as badla-financing was a hybrid between spot and future trading, it was expected that the termination of the former would enable the futures trading to pick up.

Salient features of the Margin Trading Rules enforced by SEC are:

* Margin financing and trading can only be conducted by brokers registered with the SECP and having minimum net capital and meeting capital adequacy requirements as fixed by the SECP in consultation with the stock exchanges.

* A broker will enter into a margin agreement with any person who wishes to become its client. The agreement shall contain conditions regarding mortgage, pledge or hypothecation of the securities deposited or bought on behalf of client and, in addition, would authorize the broker to dispose of the collateral in a lawful manner to meet the prescribed margin requirements.

* Brokers have been prohibited from extending margin financing facilities to any of their partners, directors, agents, employees, etc., as well as to any firm where any of their partners is a director, partner, or holds any interest therein.