KARACHI, March 12: A set of proposals aimed at improving the existing Risk Management System (RMS), were unveiled by the management of the Karachi Stock Exchange on Tuesday, which the managing director Noman Ahmed told the members (stock brokers) were under consideration of the KSE Board.

The MD invited members to forward their comments on the proposals within a week.

The existing capital adequacy requirements for members and circuit breaker rules, were stated to have been reviewed and “considered to be appropriate”. However, for the purpose of further strengthening risk management measures, the management recommended the following amendments to the procedure for payment of deposits against exposure and losses under the Regulations governing members’ exposure:

(a) At present deposits against exposure from members up to Rs200 million are allowed and acceptable on the following day before the opening of the market. It is suggested that this procedure should be changed and the members should be required to deposit exposure on the same day. “This will reduce the risk associated with open-trades by one day”, the proposal stated, adding that it will be subject to notice of demand issued by the Exchange at least two hours before the end of the CDC’s operational timings, which would be extended for this purpose.

(b) While the slabs for deposits against exposure are appropriate for trades settled on T+3 basis, there is risks associated with carryover trades which can be for an indefinite period. It is proposed that besides the requirement for deposit against exposure for normal trades, additional deposits may be collected on members’ outstanding purchase in (Carryover trades) COT for each scrip. “This will be based on the ranking of the scrips within the list of companies acceptable for deposit against exposure and losses which will be as follows”, the proposal noted and listed the “Ranking” and “Additional deposits on outstanding purchase in COT”, respectively, as follows: 1-25 at 5 per cent; 26-75 at 10 per cent; 76-125 at 15 per cent and 126 and above at 20 per cent.

The management’s proposal further stated that the experience of May 2000 market crisis had shown that it was possible to manipulate prices on certain scrips which when carried over, allowed profit arising out of price increases to be distributed to weak holders. “In order to reduce this risk, it is further proposed that additional deposits may be collected on members’ outstanding purchases in COT, calculated scrip-wise by taking the difference between the transaction price and the maximum value (15 times of earning per share after tax or Rs15 whichever is higher) as applicable in the list of companies acceptable for deposits against exposure and losses, where the transaction price is higher than the aforesaid maximum value. Calculation of the additional deposits, under the above proposals, have been explained through illustrations.