Brokers offered relief in netting regime

17 Nov 2006

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ISLAMABAD, Nov 16: The Securities and Exchange Commission of Pakistan (SECP) has announced further relief to brokers in the netting regime following excessive threat to the implementation of the already delayed proposed risk management measures.

The SECP has announced the relief what it has called “in the best interest of the market” after a lengthy meeting with the management of Karachi and Lahore stock exchanges here on Thursday.

The commission said that from the results of mock trials it became apparent that 99 brokers representing 65 per cent of the broker population of the Karachi Stock Exchange (KSE) were currently paying margin based on a slab rate of 5-15 per cent.

The figures showed that they would be bearing the heaviest burden of the proposed risk management measure with increased exposure in excess of 300 per cent to 400 per cent primarily due to the excessive netting regime prevalent at this time.

“Consequently, in order to provide relief to this section of the brokerage community and without compromising upon the risk management of the exchanges, the commission has taken this decision,” stated an announcement issued from the office of SECP Chairman Razi-ur-Rehman.

In order to ensure smooth and speedy implementation of risk management measures such as “no netting across settlement” and “no netting across client”, it has been decided that the same will be introduced in a phased manner as detailed below:

Netting Across Settlement: The increase in exposure margins at broker level due to elimination of netting across settlement with effect from December 4, 2006 will be collected by the exchanges in the proposed phased manner as follows: 30pc of the said margin shall be applicable with effect from December 4, 2006; 60pc of the said margin shall be applicable with effect from April 30, 2007; 100pc of the said margin shall be applicable with effect from October 01, 2007.

Client Level Netting: The increase in margins at broker level due to elimination of client level netting with effect from February 1, 2007 will be collected by the exchange in the proposed phased manner as follows: 25pc of the said margin shall be applicable with effect from February 1, 2007; 50pc of the said margin shall be applicable with effect from July 2, 2007; 100pc of the said margin shall be applicable with effect from December 3, 2007.

Netting between Ready and CFS markets: This measure was originally scheduled to be implemented with effect from August 22, 2005 when the CFS Regulations came into force. However, implementation of this measure was delayed. It was then proposed to be implemented by the exchanges on January 16, 2006 but was deferred again by KSE.

Due to revamping of the entire risk management regime it was subsequently decided to implement it along with other risk management measures as a complete package on November 6, 2006.

However, with the deferral of implementation of risk management measures to December 4, 2006, and increase in CFS limits and number of scrips, without eliminating netting between Ready and CFS markets, the systemic risk to the bourses has increased enormously. It has, therefore, been decided that the practice of netting CFS position against the brokers ready position shall be eliminated with effect from November 23, 2006.