KARACHI, March 7: Over the week-end (Friday, March 4), the Securities and Exchange Commission of Pakistan (SECP) issued a long list of directives to the three stock exchanges , asking for implementation of certain measures aimed at tightening surveillance of brokers and clients. The idea is to improve Risk Management Systems (RMS).
Most people who can understand the directives believe that the measures could help to bring some sanity to the strong headed bull. But traders thought that the impact could come when those restrictive rules come into force at latter dates. For the moment, investors seemed to shrug away anything that did not go well with the tide. The KSE-100 index touched the historic level of 9,000 points during the early hours of trade on Monday.
"These directives will in affect reduce the volumes in the future contract trades", commented some brokers and analysts. Opinions and understanding of some of the analysts are noted below:
The significant highlights of the directives include: At present in the event that the share price exceeds 30pc of the opening prices of the contracts, profits are distributed up to 30pc on weekly basis every Friday while the rest of the profits are retained till the final settlement of the contract as per the Regulations for Futures Trading at the KSE. The SECP has asked the bourses to revise this margin downwards.
The rule would be implemented from the opening of the April 2005. In the Futures Contracts, the stock markets have been directed to put in place the internationally recognized three position limits for the opening of May 2005 Futures Contract.
These include an overall limit on a broker in relation to the total futures contracts in a particular share; an overall limit on a particular client in relation to the total futures position taken by the broker in a particular share and limiting the number of Futures Contract in a share to the free-float of the share.
The Exchanges have been disallowed any netting-off across T+3 and futures position to determine exposure of a member for the purpose of capital adequacy from April 3, 2005.
The bourses have been directed to put in place the pre-trade verification system by the first week of April 2005. The stock markets have been asked that mark to market should be collected on an hourly basis in the Futures Market.
The rule would be implemented from April 15, 2005. The clearing company/ exchanges should develop a system of taking margin on IDS (Instant Delivery System) transaction from April 30, 2005.
Analysts said that the following additional risk management measures must be implemented from April 15, 2005: A certain percentage of the initial margin must be collected in the form of cash to reduce risk in the market.
The Central Depository Company must develop a time bound action plan for the implementation of Unique/Global Client Identification System. Brokers have been asked to maintain separate bank accounts for all cash deposits of their clients to help segregate client's assets from brokers' assets.
Netting may be allowed at individual client positions in the same scrip and the margin must be collected on gross positions. It has been made mandatory that a concentration margin over and above the existing margins should be collected from the broker. The implementation of Value at Risk Model (VaR) or SPAN has been made mandatory to address the issue of individual volatility and liquidity of shares.
Analysts are looking at some negative short-term impact in the market as stock brokers are likely to get affected in terms of requiring greater financial power for operations.
The mark to market collection in Futures would be done hourly as against the present practice of doing it at day end by April 15, 2005. That would limit client positions in Futures and could reduce volume in the Futures market and also put additional exposure pressure on brokers.
In COT, brokers do not have to deposit exposure if their long positions are offset against badla position of some institution. SECP has directed that Associate Members (AM) institutions should deposit exposure with the Exchange and till such time that such a system is implemented, the stock exchanges should develop a mechanism of taking margins on Instant Delivery System from April 30, 2005.
This measure would again enhance exposure requirements by brokers as they would not be able to make use of opposite positions of their institutional client. However, with the end of Badla expected in June anyway, difficulties for brokers would only be for 2-3 months.
The directive that exchanges should ensure that brokers segregate client assets by having a separate client bank account for keeping cash deposit of clients (with a break up), while client securities should also be kept in separate CDC sub-accounts or investor accounts. This would generally help in safeguarding investor assets and prevent misuse by brokers. Netting of purchase and sale position is allowed. However, the SECP wants that netting should only be allowed at the client level and not at the broker level and margins should be collected on gross positions. This would be negative for brokers as exposure requirements would rise and could be negative for the market in the adjustment phase.
SECP directive that the introduction of concentration margins i.e. an additional margin should be collected from brokers if position is concentrated in a particular scrip would serve to reduce the phenomenon of "cornering" of a share and also curb excessive speculation in a particular scrip.