KARACHI, March 19: A meeting of the Securities and Exchange Commission of Pakistan (SECP) and the Board of Directors of the Karachi Stock Exchange (KSE) is scheduled to be held on March 25 to discuss the CFS Mk II, a source familiar with the matter said.

CFS Mk II would replace the prevailing Continuous Funding System (CFS) mode of leveraged buying. The implementation date has been announced as April 7.

But many market participants, including brokers and investors, have aired reservations on the new product. The principal concern revolves around the requirement to deposit ‘cash’ in place of ‘securities’ in respect of margin exposure, which some participants argue would greatly enhance their financial costs.

“Our aim should be to facilitate the market and trading,” says Abid Ali Habib, a director on the KSE board.

Brokers seem to worry that the volumes would dwindle when 25 per cent of the margin exposure would have to be deposited in cash under the CFS Mk II, against all of 50 per cent as ‘securities’ accepted under the current CFS system.

The CFS Mk II has been under consideration for the last 18 months, so why were the objections not raised earlier?

The KSE director said that most of the disconcerting issues came in the forefront during the question and answer sessions that were started only a week ago. Some other market makers said that the Risk Management System at the bourses was firmly in place and margins under three categories were already being collected for a risk free system. Those included mark-to-market on a daily basis and special margins.

The irony in it all was that the market had been clamouring for removal of the cap on CFS which currently is at Rs55 billion and almost totally utilized. There is no cap in case of CFS Mk II, but market watchers believe that asking clients for 50 per cent of cash margins on exposure would raise their borrowing costs and hence could prove to be a disincentive for investment in equities.

SECP Chairman Razi-ur-Rehman Khan could not be reached for his comments. He was said to be on vacations in New York, but would be returning to chair the March 25 meeting.

Some of the stern detractors of the CSF Mk II had blamed the fear of introduction of the new product as a contributing factor in the steep decline of 316 points in KSE-100 index on March 18. But all things being the same on the market product front, they were at a loss to explain why the Index rebounded by 238 points on Wednesday.

Speculations ran high on whether the CSF Mk II might be pushed further to a distant date until all concerns of market had been addressed.

But analysts were divided on whether that was or wasn’t a possibility.