ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has approved recommendations of a committee on the review of financing by securities’ brokers to clients, a press release said on Tuesday.

The SECP had constituted the committee to review the matter of in-house financing, identification of any issues, inefficiencies or hurdles in the existing leverage products like margin financing and margin trading and provide recommendations for viable solutions to meet the needs of market participants in relation to financing through brokers.

The committee had submitted its report to the SECP, which suggested that reforms should be introduced in the margin financing system (MFS) so that banks can provide funding to investors through brokers. The key recommendations of the committee included removing the requirement to collect 10 per cent financing participation ratio (FPR) in the form of cash and allowing deposit of entire FPR in the form of securities as is being done by banks.

The committee recommended that pledging of margin financed securities in favour of bank through a tripartite agreement between bank, broker and client should be allowed. For risk management mark-to-market (MTM) losses in the case of a decline in the price of financed securities should be collected in cash from the client (finance), it recommended. In the case of an increase in the price of financed securities’ margins andMTM losses should be collected from the broker’s proprietary account.

For transparency, monitoring and investor protection, special sub-accounts of clients should be opened for the purpose of benefiting from margin finance and pledging of financed securities, it recommended.

The commission reviewed the report and gave its go-ahead to make necessary changes to the regulatory framework and operational system at the Central Depository Company (CDC) and the National Clearing Company of Pakistan Limited (NCCPL). To make the product transparent and protect investors, following additional operational and disclosure requirements have been incorporated: all investors desirous of benefiting from margin financing should be required to submit margin finance agreement to the CDC prior to opening of sub-accounts.

Distinct pledge IDs for securities pledged for margin finance should be created by the CDC. It will ensure that in the case of margin finance pledge IDs, the pledge from a normal sub-account will only be allowed if there is an open margin finance position of such a client.

Subscription to the CDC Access and UIN Information System (UIS) of the NCCPL will be mandatory for clients opening the margin finance sub-account. It will also be mandatory that the CDC account setup report is signed in respect of the CDC sub-account of such a client. The client will be able to view the pledge position of its securities and the open margin finance position through web access and UIS.

Published in Dawn, March 29th, 2017