KARACHI, June 2: Stock brokers have agreed to the new product for leveraging (CFS Mk II), and the reservations expressed by some participants would be addressed by a committee to be formed for the purpose, chairman Securities and Exchange Commission of Pakistan (SECP) Razi-ur-Rehman Khan told Dawn on Friday.

An informal meeting was held at the Karachi Stock Exchange between the SECP chairman and the broker community on Friday afternoon, which sources said, after the usual hue and cry settled to sober discussions. “My impression is that the product was generally accepted by the members”, said the apex regulator, observing that stock brokers could give a better view.

No one counted but around 65 of the 200-strong broker fraternity were believed to have participated in the meeting. When contacted some of the leading market participants conceded that majority view was favourably tilted towards the introduction of the new financing product.

CFS Mk II is being formed by the SECP which would channel the unofficial ‘in-house badla’ into an official system of financing. The SECP draft circulated earlier via the Karachi Stock Exchange, mentioned the estimated size of unofficial lending for shares (being referred to as a ’grey market’) at a massive Rs90 billion. The new system would replace the existing one but would run parallel to the margin financing system (which has already been introduced in concept) and the futures’ market.

“The most striking feature of CFS MK II”, says Syed Shahnawaz Nadir Shah of Noman Abid & Company, “is the absence of any limit on the financing (against the Rs24.5 billion limit and 18 per cent cap at present)”. No time-frame for the implementation of the new system has been given.

There were certain aspects of the criteria of the ‘Authorised Financier (AF)’, which came up under discussion. Foremost among them being that an AF must be willing to commit a minimum of Rs2 billion towards the new CFS; minimum equity requirement was Rs500 million and if a mutual Fund, AF must have at least Rs2 billion under management.

One of the reservations expressed by some members was that the initial commitment of Rs2 billion appeared to be too high, as it could exclude several potential financiers, with smaller means. Thus, initially there might actually be a liquidity crunch if only a few financial institutions were willing to contribute. Market watchers in the know how of the new product suspected that some of the broker reservations’ stemmed from their jealously to guard the membership card, which at this moment bears the price tag of Rs90 to 100 million.

“The new system suggests that the right to provide CFS financing could be exercised by any financier who was willing to pay Rs1 million as fees and Rs0.5 million as annual subscription”, said a market source, adding that those brokers considered it unfair for others to have the same rights as financiers as those of card holders. “Overwhelming majority values the product because this would enlarge the canvas of financiers and would pre-empt the sudden withdrawal by individual members and mutual funds”, says Yasin Lakhani, a former chairman of the KSE. Market observers said that the best part of the new proposed system was the gradual removal of the Rs24.5 to Rs25 billion cap on CFS and the removal of upper cap on lending rate. The removal of upper cap would mean that borrowers would automatically be discouraged from leveraged buying in case of abnormally high rates.