KARACHI: The National Clearing Company of Pakistan Limited (NCCPL) on Friday released the concept paper on proposed ‘Margin Financing (MF) System’. The new leverage financing mechanism, crafted by the Consultative Group on Capital Market was a day earlier approved by the Securities and Exchange Commission of Pakistan (SECP).

Both the ‘Margin Financing’ system as well as the ‘Margin trading’ system – the latter derived after several brain storming sessions by a section of broker fraternity – were forwarded by the KSE Board to the apex regulator for its verdict.

Many analysts thought that the ‘Margin Trading’ system was a refined form of the previously prevalent and variously called, CFS; CFS-MKII and more famously the ‘badla’ which latter was to be thrown out by 103 brokers, many of whom cursed the ‘badla’ as the villain of the market crash of 2008.

However, when volumes dropped to a trickle, ‘badla’ yet again became the darling of many market participants.

‘But it was not the same that the broker ‘biradari’ had recommended to the SECP’, protested one participant, adding that the broker-recommended ‘Margin Trading’ system was shorn of its 21 defects and defaults.

‘Expectations were, therefore, running high that the apex regulator will allow introduction of both products in the market,’ said a sullen faced broker. Many believe that the approval and introduction of Margin Financing System was a ‘non-event’.

A director on the board said that it was a ‘counter-party facility’. And he added: ‘It will have no impact on the system, which is to say that neither the apex (SECP) nor the front-line (KSE) regulator will be involved in the transactions’. The broker would also be unqualified for the market’s ‘investor protection fund’. The deal would be between the banks-broker and his client.

The motivating factor in introduction of the leverage financing product was to create liquidity and buffer up volumes.

Many brokers were not enthused, saying that MF was unlikely to achieve either aim.

Another market participant who said he had not yet had the opportunity to glance at the NCCPL concept paper, remarked that MF could be a boon to big brokers and high net-worth clients.

‘The banks would finance the client for stock trading through stock brokers and the such heavy-weight clients countered no difficulty even at present to seek financing from banks,’ he said and asked: ‘Will the banks summon courage to lend to general investors, though through the broker.’

Another analyst thought that MF was ‘system-based’, or a product that gave the legal and corporate name to already prevalent ‘in-house badla’.

He observed that the demand of the market was a user-friendly, ready board leverage product, which could allow ‘price discovery’.

Besides, since MF was system based, he feared that the trading pattern of all brokers would be exposed, which might give unfair advantage to some brokers over others.

But there was also the section of brokers who thought that the regulator had at least heeded the cravings of market for a leverage product.

‘Its efficacy will be known only when the product enters the market,’ says one such market participant. For starters, ‘leverage product’ in simple language would mean a product that could allow investors to purchase shares on borrowed money.

While MF was not met with enthusiasm by many brokers who ask for ‘margin trading’, there was no dearth of others who burst into anger at the mention of ‘badla’— by  whatever name, CFS, CFS MKII and many believe now all dressed up in the guise of ‘Margin Trading’.