A securities lending and borrowing (SLB) system will be introduced in all three stock exchanges of the country from March 21, according to National Clearing Company of Pakistan Limited (NCCPL) Chief Executive Officer Muhammad Lukman on Wednesday.
The newly formulated instrument is one of three leverage products being introduced in the market, after the promulgation of the Securities Act 2011.
Speaking to a gathering of journalists, Lukman reaffirmed that the margin trading system (MTS) and the margin financing system (MFS) will be launched on March 14, adding that “NCCPL acting as an authorised intermediary shall provide an automated portal to leveraged market participants to access markets through interface made available electronically.”
He explained that the functions necessary to access these products have been integrated into the currently functioning Karachi Automated Teller System (KATS).
Addressing queries regarding SLB, the CEO explained, “Our market has traditionally been skewed in favour of bulls, as successive leverage products did not facilitate short selling.”
He explained that under SLB, investors will be able to borrow shares from other players like banks and mutual funds that hold relatively long-term portfolios. The borrower may then sell these borrowed shares in the market, in essence, executing a short sell transaction.
“In the past, participants have often complained that the prices of certain equities are unreasonably inflated by one or more influential groups,” said Lukman. “If participants feel that the price of any stock has surged, they can use SLB to short sell in that item,” he added.
Lukman said that SLB will help create a better balance between ‘bulls and bears in the leveraged market’, and that this balance will limit the possibility of bubbles in equity prices.
Under SLB, borrowers will be able to borrow equities for a period of up to 22 days, at a rate to be determined by demand and supply. However, the rate will be around Kibor plus eight per cent.
“In the event that there is any sort of corporate action or payouts are announced by the company, those shares will be forced release to the original owner prior to the maturity of the contract under SLB,” he explained.
Cash margin will be collected from the borrower at 25 per cent or value at risk (VaR), whichever is higher, while daily mark-to-market losses will be collected and directly distributed to the lender under SLB.
Moreover, unlike previous financing systems, interest will only be charged on the outstanding amount, not on the initial amount financed or borrowed.
The introduction of short selling has been welcomed by participants and experts alike. “Short selling is an integral part of stock exchanges across the globe but it had so far been left out of the local markets for lack of understanding and regulation,” said InvestCap Head of Research Khurram Schehzad.
He opined, “SLB will improve price discovery and also add depth to participation in the market.” The expert explained that the new product is a form of short selling whereby participants can first borrow the equity they intend to sell and then offload it in the market.
“There are only about 100,000 active retail investors in the country’s stock exchanges,” said NCCPL chief Muhammad Lukman. He expressed hope that the new leverage products will help attract a greater number of participants to equity trade.
Published in The Express Tribune, March 10th, 2011.
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