Leverage at last: Margin trading system one step away

The introduction of leverage products to the markets is expected to provide much-needed liquidity to local bourses.

ISLAMABAD: The draft Securities Act of 2010 has been approved by the federal ministry of law, justice and parliamentary affairs, paving the way for introduction of leverage financing in the country’s stock exchanges.

A Securities and Exchange Commission of Pakistan (SECP) official confirmed to The Express Tribune on Thursday that the draft of regulations pertaining to provision of leverage at equity markets had been forwarded by the apex regulator to the law ministry.

“The approved draft has been returned to the SECP by the ministry,” said the official, adding that legal and financial experts at the apex regulator are reviewing the approved document for amendments introduced by the ministry.

The official explained that SECP will gauge the likely impact of these changes. However, the official disclosed that “no major changes have been made to the draft that was initially forwarded by the Karachi Stock Exchange.”

He asserted that the margin trading system may be introduced in as little as one week’s time: “A formal notification will be issued within a week.”

The introduction of leverage to the markets is expected to provide much-needed liquidity to the local bourses that have been without any mechanism for share financing for more than 21 months.

A little bit of history

On April 8, 2009 the SECP had stopped investors from assuming fresh positions in continuous financing system MK-II after the local stock exchanges witnessed crumbling equities prices.

After much lobbying from local brokers and influential market participants, a committee was set up on June 22, 2010 to submit recommendations for a new leverage mechanism for the bourses.

The committee submitted its initial findings on July 16, 2010 and less than a week later the same proposal was also approved by the National Clearing Company of Pakistan (NCCPL). However, the draft hit a hurdle as the then chairman Karachi Stock Exchange (KSE) Zubyr Soomro raised multiple objections against the proposed mechanism, citing lack of transparency and risk mitigation tools in the proposed system.

Repeated attempts to reach a compromise between brokers and the SECP-nominated chairman remained fruitless and the draft was consequently delayed.

Given the repeated delays in the introduction of the Securities Act of 2010, the quick introduction of margin financing at the local bourses will be considered an early score for newly inducted SECP Chairman Mohammad Ali Ghulam Mohammad.

The implementation of the regulations is being considered as goods as an injection of funds by many stock experts. “The news of the approval from the law ministry resounded through the trading halls on Thursday and the benchmark KSE 100-index rallied to 12,450 points,” said Samar Iqbal, a local equity equity dealer. “The market had not been at this level in the past 30 months.”

Stock prices have rallied since November 2010, after spending months in the doldrums. Except for investments in blue chip energy stocks, local investors have remained largely inactive during the recent surge.

Market pundits are hopeful that the positive sentiment that has so far been limited to index heavyweights will spill over to the broader market with the introduction of leverage financing.

Published in The Express Tribune, January 14^th, 2011.