KARACHI, Sept 11: The Securities and Exchange Commission of Pakistan has raised the Continuous Funding System (CFS) limit to Rs55 billion for Karachi Stock Exchange, from Rs25 billion effective from Oct 2, which market participants think would help ease the liquidity issue at the bourse.
CFS, which replaces the earlier ‘badla’ system, is peculiar to the Pakistani markets, where investors can buy shares on borrowed or ‘leveraged’ money.
The SECP announcement was made on Monday following a meeting with the managements of the country’s three stock exchanges. The CFS limit for Lahore Stock Exchange has been increased to Rs10 billion and Rs5 billion for the Islamabad Stock Exchange. The apex regulator, at the same time, banned ‘in-house badla’ from Oct 2, observing that it was non-transparent, and scrips financed under that system were more risky and prone to market manipulation besides having excessive rates of financing. The ‘in-house badla’ refers to unrecorded amount of leveraged financing by brokers.
The SECP also announced enhancement in number of stocks eligible for selection of CFS from prevailing 30 to 40-45 and defined the eligibility criteria for selection of those stocks.
Other measures suggested at the SECP parleys with stock market managements on Monday included: Capping of the CFS premium rate at 18 per cent at the three stock exchanges with effect from Oct 2; interim risk management regime as proposed by the SECP vide letter dated Aug 30 to be applicable with effect from Oct 2; margining regime and valuation of securities deposited for exposure purposes based on Value-at-Risk (VaR) to be applied in all markets with effect from Nov 1, and lastly client-level meeting to be applicable from Jan 1, 2007.
The chief regulator observed that the measures were the product of elaborate discussions with the KSE board to review the existing CFS system and interim risk management measures proposed by the SECP on Aug 2.
The SECP noted that the above steps were to be taken for an ‘interim period’ and that multiple products for supporting leveraged trading were expected to be introduced ‘in a very short time’. The regulator noted: “In this connection, guidelines for CFS Mk-II have already been issued and work was in progress. Also, draft regulations for cash-settled futures were to be introduced and wider acceptability of margin financing was being promoted.”
