LAHORE, Jan 5: The Lahore Stock Exchange (LSE) will start futures trading under its newly framed regulations to govern the futures contracts market from February 1.

“The Securities and Exchange Commission of Pakistan (SECP) has already approved the new regulations and we are in the process of changing our software to begin futures trading,” LSE managing director Samir Ahmed told Dawn here on Friday.

“We are pretty much hopeful that trading in futures would start at the LSE under the new regulations from the beginning of next month,” Ahmed added.

The Karachi stock Exchange has already launched futures trading.

The regulations allow a member to execute and trade in futures contract(s) if such a member notifies the exchange in writing of the same and makes an initial cash deposit of Rs150,000. The deposit will be used by the Clearing House only to meet the obligations of a member in the futures market.

The members dealing in the futures contract(s) will need to comply with deposit against exposures requirement as prescribed in the regulations governing the members exposure (that will apply mutatis mutandi in these regulations). The deposits shall be paid in advance in the form of cash and approved securities including T-bills, FIBs, dollar bonds with zero margin. Such deposits will comprise at least 50 per cent in cash and the remaining in the securities.

In cases where the exposure is due to sale of securities of a particular company, the securities of such company, up to the extent of net sale, can be deposited as exposure instead of 50 per cent cash deposit.

No member, however, will be allowed to have a sale position regarding the futures contract(s) in a particular security for more than Rs40 million unless the actual securities, sold over and above the aforesaid limit, are deposited with the exchange, or the member concerned gives documentary evidence, in the form and substance acceptable to the exchange, that the securities are lying in the Central Depository Company, with a banking company, a DFI/NBFI or with the Clearing House. While calculating the sale position in particular scrip, the purchase and sale position of both futures and T+3 will be taken together.

The listed corporate brokerage houses will not be allowed to deposit their own shares or the shares of their holding and/or subsidiary companies/undertaking as exposure/loss deposit.

For an exposure limit up to Rs30 million, the members will be required to pay 7-12 per cent of the exposure amount. For the limit over Rs30 million and up to Rs60 million, they will have to make payment of Rs2.25 million plus 10 per cent of the amount exceeding Rs30 million. Similarly, for the exposure limit of over Rs60 million and up to Rs100 million, the deposit payable will be Rs5.25 million plus 15 per cent of the amount exceeding Rs60 million. For the exposure of over Rs100 million, the members will be required to pay deposit of Rs14.25 million plus 20 per cent of the amount exceeding Rs100 million. The terminal of any member who fails to make such margin/ deposit or exceed the limit will immediately be switched off by the Clearing House.

In case a member delays any payment to the exchange beyond specified time thrice in a calender year, his initial deposit payable will be doubled for three months. If a member defaults four times during one year, the initial exposure deposit will be 100 per cent of the exposure taken for six months.

Under the regulations, the contract size for trading in the futures market will be determined by the LSE board, subject to prior approval from the SECP from time to time before opening of the contract, provided the contract size is greater than the market lot for securities being traded in the ready market.

The members will be allowed to make payments up to Rs2.5 million for clearing or deposit by cheque to the Clearing House. However, payments by them in excess of Rs2.5 million shall be made vide pay orders.

The variation margin (market-to-market difference/loss) shall be calculated at the end of each trading at the closing rate of the day, and all the losses in the accounts of the members shall be settled in cash.

In case of losses, members shall be required to pay the Clearing House 100 per cent of the amount of losses in cash with basic exemption of Rs100,000. Further in case of sale, losses arising out of fluctuations in a particular scrip exceeding 30 per cent of the opening rate of contract, members may deposit shares actually sold. Losses at the end of each trading session/day shall be paid to the Clearing House in cash before the opening of the market on the next session/day. In case of failure of any member to deposit margin in cash against losses, he will not be allowed to take any fresh position in the next session/day. However, he will be allowed to reduce his position under the supervision of the exchange.

There shall be weekly clearing on every Friday at the closing rate of the day, and all the profits and losses in the accounts of the members shall be settled in cash. However, the distribution of profits arising from fluctuations, in a particular scrip, exceeding 30 per cent of the opening rate of the contract shall be withheld by the exchange until the settlement of the contracts. The distribution of profit up to 30 per cent will be paid on weekly basis every Friday.

The regulations impose a circuit breaker in case of price fluctuation of 7.5 per cent or Rs1.50 whichever is higher from the closing price of the previous day. No trade in the futures contract(s) market will be allowed beyond this price fluctuation.

The management of the LSE is empowered to announce special clearing in particular scrips. In such a case, trading in those scrips shall be suspended until the outstanding profits and losses are settled in cash and the market shall open after the differences have been settled.

Under the regulations, it will be obligatory upon the members involved in the futures trading to take margins from their clients in accordance with the rates prescribed by the exchange. The exchange will ensure compliance with this requirement through appropriate procedure of auditing and inspection of records of the members. The members will also be needed to identify clients for effective risk management by the exchange.