New rules approved for in-house financing, banks get involved

Move meant to create liquidity, reduce chances of broker default

Salman Siddiqui March 29, 2017

KARACHI: In a bid to create liquidity and reduce chances of broker default, the apex regulator has approved a modified version of in-house financing, conveying the new rules in a press release sent late last night. The approval is likely to be a positive trigger for the Pakistan Stock Exchange recently acquired by a Chinese consortium.

In the statement, the Securities and Exchange Commission of Pakistan said that it has reviewed the matter of in-house financing and approved the “recommendations for practical and viable solutions in light of best international practices to meet the needs of market participants in relation to financing through brokers”.

On Tuesday, the SECP said that it has approved the revised rules after the committee, comprising senior market professionals and stakeholders and mandated to review the matter of in-house financing, submitted its report to the regulator.

Interestingly, the Securities and Exchange Commission of Pakistan (SECP) has now allowed brokerage houses to provide financing to their clients through commercial banks.

The banks would provide financing against deposit of securities/shares, while shares bought through the newly-acquired funding would be kept in a separate blocked account at the Central Depository Company.

With this, the condition of depositing 10% cash against in-house financing has come to an end. In case prices of financed shares go down, the banks would collect the difference from the brokerage house that would, in turn, collect the difference in cash from the client.

Moreover, the National Clearing Company of Pakistan Limited (NCCPL) shall be empowered to review and decide the matter relating to disputes over securities pledged with banks and the securities held in blocked account with the Central Depository Company.

“NCCPL shall make necessary reports for disclosure to the public and for monitoring purposes,” said the SECP statement.

“The committee had submitted its report to the SECP, which primarily focused that reforms be introduced in the Margin Financing System (MFS) so that banks can provide funding to investors through brokers,” SECP handout said.

The following were the recommendations approved by the SECP:

• Remove the requirement to collect 10% financing participation ratio (FPR) in the form of cash and to allow deposit entire FPR in the form of securities as is being done by banks.

• Allow pledging of margin financed securities in favor of bank through a tripartite agreement between bank, broker and client.

• For risk management mark-to-market (MTM) losses in case of decline in the price of financed securities shall be collected in cash from the client (finance). In case of increase in the price of financed securities’ margins and Marked-to-Market (MTM) losses shall be collected from proprietary account of broker.

• For transparency, monitoring and investor protection special sub-accounts of clients shall be opened for the purpose of benefiting from margin finance and pledging of financed securities.

The statement comes after weeks of deliberation, broker defaults and bearish sentiment that saw the KSE-100 Index retreat from its record high of 50,269 to near the 48,500 level.

Zafar Hijazi, the SECP chairman, held multiple press conferences and even appeared before the Senate standing committee to explain the regulator’s position on the need to control in-house financing. This, he had said, was being done to avoid a potential crash at the stock market after months of a bullish run that saw the PSX become Asia’s top performing market in 2016.

Published in The Express Tribune, March 29th, 2017.

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