Pakistan is the only country in the world where stock markets are operating without any leverage products. This was not the case some two-and-a-half years back when the Continuous Financing Scheme Mark-II (CFS Mk-II), an old form of ‘Badla’ or Carry-Over Trade (COT), was catering to the needs of day-to-day trading.
But the situation changed after a floor was imposed at the Karachi Stock Exchange (KSE) in August 2008, leaving many market players with a risk of default as they faced massive losses. Following the debacle, the CFS Mk-II was laid to rest for good.
The Securities and Exchange Commission of Pakistan (SECP) and KSE authorities, however, are yet to finalise a new leverage product that could put a lid on the issue once and for all. Over the past 28 or so months, stakeholders have met several times to come up with a solution to the problem. Two factions have emerged.
One school of thought is of the view that the so-called mafia dominant in the market utilises leverage products to make huge bucks by depriving small investors.
The other side believes that leverage products are important to rev up the level of interest of small traders, which in turn can multiply market volumes. They believe that the missing leverage product is behind drying liquidity in the market.
Despite all the deliberations and preparation of drafts, a final decision is what has been lacking thus far.
Things started to look promising towards the second half of 2010, when the SECP decided to approve a margin trading system (MTS) with an additional risk countering measure, due to replace the CFK Mk-II.
But once again, it was put aside by the authorities and even certain SECP officials were quoted by the local media as saying: “I do not really know how long it will take to launch MTS in the market. The ministry may approve and give a nod to the product in a day, in a month, in a year or more than a year.”
If one talks to stock analysts about the issue, most of them favour the leverage product. “How can you run a stock market without even a single leverage product?” questioned one analyst.
On the flip side, the opposition of leverage products terms CFS Mk-II the main culprit behind the ‘flooring’ of the stock market in August 2008. Many believe, though, that CFS Mk-II was never the reason behind the crash of 2008 at the KSE and instead attribute the fall to the ‘floor’ itself.
Although the stock market has performed well during the outgoing year with the benchmark KSE-100 index offering returns of around 27 per cent, volumes have gone down considerably.
About 121.2 million shares were traded daily in 2010 on average, down 29 per cent from the preceding year and about 47 per cent from the 10-year average of 221.2 million.
SMH Financial Solution Director Syed Faran Rizvi highlights that volumes have been shrinking to miserable levels and liquidity has dried out, causing havoc to market depth. “There is no price discovery here.”
The Pakistani market is performing well on continuous foreign interest on account of it being cheaper by at least 40-45 per cent against regional peers, he noted. Local participation has contracted significantly, mainly owing to lack of leverage at the KSE, he added.
“Leverage product holds the key to revive market volumes that have gone down to the level of just a couple of brokerage houses in rupee terms and resurrect the confidence of local small investors in the market,” summed up Rizvi.
The issues of reformed general sales tax (RGST) and capital gains tax (CGT) have also put brakes on the launch of the leverage product but top market players say MTS emerged as the most suitable option after analysing many other products.
With Pakistan and its economy likely to face tougher times ahead, the Karachi bourse is the one place that offers some cause for optimism to citizens. Therefore, the authorities should ‘leverage’ the leverage products to revive investor confidence since the stock markets are the true reflectors of the economy of any country.
The writer is Karachi Stock Exchange Correspondent of Xinhua, China’s state news agency and can be contacted at [email protected].
Published in The Express Tribune, January 10th, 2011.
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