November 03, 2006	Friday	Shawwal 10, 1427

ISLAMABAD, Nov 2: Faced with extreme pressure from Karachi Stock Exchange (KSE) and brokers and fear of another market crash, the Securities and Exchange Commission of Pakistan (SECP) on Thursday decided to delay the implementation of the new Risk Management System (RMS) till Dec 4.

The Wednesday decline of over Rs80 billion in market capital when the KSE lost 317.49 points in a single day and tough resistance from the brokers and KSE management, the SECP appeared to be in no position to make the stock markets implement the risk management system from next week (Nov 6).

Market experts are terming the SECP move as a U-turn as small investors seem to have lost their confidence in the powers of the country’s sole corporate sector regulator. But, the commission has said that the stock markets have agreed that they would seek no further extension in the new deadline and that its decision should not be taken as roll-back.

The SECP announced its decision late in evening after holding an extensive meeting with the management of the three stock exchanges and brokers.

Now the CFS limit to be enhanced to Rs55 billion for KSE, Rs10 billion for LSE and Rs5 billion for ISE with effect from November 6, 2006. It was agreed that the SECP would review sympathetically whether this limit be exceeded.

The existing timeline for the abolition of in-house badla and its conversion to CFS to be completed by November 30, 2006 as already notified and the shares shall be transferred to CDC blocked account of the members by the said date.

The exchanges would come-up with the mechanism for this by Friday (November 10). As result of the conversion of in-house badla to CFS and the consequential impact on the capital adequacy of the members, it was agreed that any excess limit shall be brought within approved limits by November 30, 2006 by each respective members.

Mock trials runs in respect of separation of CFS and ready market, introduction of CFS market margins, new netting regime for all the markets, removal of across settlement netting from the ready market, new VAR (value at risk) based margins and haircut regime, and introduction of special margins for CFS and deliverable futures to start at the earliest and shall continue by end November 2006.

In case of any problems/observations, the exchanges shall revert back to the SECP latest by November 25, 2006.

The SECP has proposed, and is working with mutual funds and banks/financial institutions, to exempt the ready market trade on behalf of banks/mutual funds/financial institutions from payment of margins, provided that financial institutions meet certain conditions.

With regard to trades by financial institutions on CFS/futures market, the margins shall be paid directly by the institutions to the exchanges, if any, it was decided.

Cent per cent VAR based margins applicable on illiquid scrips as determined by the commission to be reduced to 60 per cent and implemented from Dec 4, 2006.

The maximum cap on CFS financing rate to be 10 per cent plus one month Kibor. The rate will be determined on the last Friday/working day of the month and will be applicable from the next trading day.

All scrips that meet with the following criteria will be eligible for CFS: Companies that have average daily impact cost of less than one per cent, based on previous three months daily impact cost and on an order size of Rs500,000; Companies should have traded on more than 90 per cent of the trading days during last three months; Companies with free float of more than 20 per cent of issued capital or 45 million free float shares.

Mutual Funds units/securities are not eligible for CFS financing. The deposit against exposure i.e. 50 per cent in cash for the deliverable futures contract to be implemented with effect from November 2006 futures contract. The exchanges agreed to pay appropriate return to the members against the deposited cash margins after deducting one per cent service charges.

The SECP in an announcement stated that it wished that the reform process was not being derailed or rolled back. All major risk management measures which were being proposed from early 2006 had now been adopted unanimously by the stock exchanges. The implementation had been slightly delayed in order to smoothen the transition and to take all market participants along.

It is pertinent to point out that excessive netting which distorted market exposure has now been abolished completely under the new regime. Client level netting would be abolished from 1st February 2006.

Value at risk based margining system has been introduced, which has been under discussion since early 2005. In-house badla has been the bane of a transparent and orderly market and this has been abolished, it stated.

This non-transparent method of financing weak-holders thus stood abolished. Margin financing is being promoted, rather than curtailed, as in-house badla is no longer possible and market participants would be forced to go the margin financing route, the commission has observed.

The SECP said it believed that various funding mechanism should be made available to the market place and the market should decide and adopt the best option available to it.

Furthermore, special margin (old COT II) has been reinstated not only in CFS market but for the futures market as well. The COT II was abolished arbitrarily by KSE in June 2005. This is an important instrument for the market to correct itself from unidirectional movements.

The most significant reform from the market’s point of view is that UIN has been successfully implemented, which is an important measure to ensure transparency and good governance in the market place.

The KSE 30 Free Float Index has also been introduced to provide a more realistic benchmark to the market. Furthermore, Cash Settled Future product has been developed and provided to the KSE on August 24, 2006. It shall hopefully be implemented by KSE management shortly. National Commodity Exchange is now in the final stages of going live.