ISLAMABAD, Feb 5: The Securities and Exchange Commission of Pakistan said on Wednesday it aimed to replace traditional carry-over trade (COT) financing, which accounts for almost all trading, with margin financing by July.

Khalid Mirza, Chairman of the Securities and Exchange Commission of Pakistan (SECP), said the regulator would work steadily to remove what is called “badla financing,” where share purchases are funded by loans which can be carried forward from one settlement period to the next by paying an interest charge.

The century-old system accounts for about 80 percent of trades on the country’s main Karachi Stock Exchange, where about 250-300 million shares worth about Rs10 billion ($20 million) are exchanged daily.

The benchmark Karachi index was the world’s best performer in 2002, more than doubling in value.

“Our aim is that by end-July we should have done this,” Mirza told Reuters in an interview, referring to replacing badla.

Under the new margin system, banks and other financial institutions would be able to lend money to finance trades, provided investors also supply some of the funds themselves, Mirza said.

Analysts say the move will ensure a smoother supply of liquidity to finance trades and reduce market volatility. Distortions were created by the old system because some of the big brokers also supply “badla” financing, they say.

Late last month, the KSE’s benchmark 100-share index fell over 11 per cent in five days after a shortage of liquidity among the COT financiers pushed carryover rates to as high as 40 per cent, prompting panic selling by retail investors.

Mirza said the regulator had devised “a well-considered” programme to make a slow transition to the new system.

“We are actually making margin rules to enable margin financing to be provided by corporate brokerage houses, investment banks, etc.,” he said.

“It would be ideal if margin financing, together with the futures market, were to essentially replace badla which carries systemic risks,” he added.

Mirza said capital market reforms, initiated three years ago when he joined SECP as chairman, would continue under a second phase of a programme sponsored by the Asian Development Bank (ADB).

In December, the ADB approved a $266 million loan to support Pakistan’s financial sector reforms, particularly the development of capital markets, and Mirza said the first tranche of the loan would soon be disbursed.

In the first phase of the reforms, the market regulator, the Corporate Law Authority, was restructured and renamed SECP.

A Central Depository Company was also established for the capital market, and share trading was computerized.

The board of Pakistan’s main Karachi Stock Exchange was reorganized and an independent managing director put in place to help create greater transparency and efficiency.

Mirza said governance at Pakistan’s three stock exchanges, in Karachi, Lahore and Islamabad, had improved substantially, but said they had yet to market themselves internationally.

“The governance of the exchanges has improved a lot... but the commercial teeth have yet to come in,” he said.

“It is a matter of a little bit of concern to me that our exchanges have not been able to attract companies from the Middle East to list here,” Mirza added.

—Reuters