New in-house financing rules may come into force in 4 weeks

Brokerage houses, banks broadly welcome the modified funding system.

KARACHI: Brokerage houses and banks have broadly welcomed the modified in-house financing system for investors at the Pakistan Stock Exchange (PSX), believing that it will be put in place in the next four weeks and help revive trade activities.

A high government official, who remains deeply involved in revising the in-house financing system to make it workable, said new rules had been placed on websites of the Securities and Exchange Commission of Pakistan (SECP) and  PSX for seven days for public feedback.



Financing under the new rules would be available to stock market investors in “four weeks,” he said. He highlighted that the margin financing framework was already available and modification was made in an effort to provide liquidity in the market.

Arif Habib Limited Chief Executive Officer Shahid Ali Habib said the biggest change the new rules would introduce was that the brokers would now be able to acquire bank financing against shares pledged with them by the investors.

“Earlier, the pledged shares were kept in a blocked account and these could not be used by the brokers for further financing [from banks],” he said. “The product will definitely address liquidity issues in the market.”

The brokerage house’s Head of Research, Shahbaz Ashraf, while welcoming the leverage product, said it would revive trade activities to remind the days when volumes used to be around 450-500 million in each trading session.

Such high volumes were seen in the market about two months ago. They started falling after regulators disallowed in-house financing under the old rules.

“The market recorded 12 to 13-year high volumes of around 900 million shares in September 2016,” he said. “The product will help revive the market once the political dust settles in a week or two.”

Ashraf said the new system would increase liquidity in the market as brokers would have more collateral that they could pledge with banks for acquiring financing.

Institute of Bankers Pakistan Chief Executive Officer Husain Lawai also welcomed the modification in the in-house financing system, saying it would channelise bank financing to stock investors via brokerage houses.

“Banks will be able to mitigate the risk of misuse of shares pledged by investors,” he said, recalling the recent incidents of misuse of investor funds/shares by a few brokerage houses in the country.



Under the new rules, brokers would submit a significant part of margins to cover expected losses with banks instead of investors. Margin calls, in case of increase in losses, would be dealt with as a separate matter with investors on a day-to-day basis, he added.

PSX broker Zafar Moti, however, did not have high hopes about the modified product.

He said it was not a modification of the in-house financing regulations, but the “tightening of regulations, which will not allow the leverage product to deliver the desire results”.

He demanded that the regulators allow in-house financing with old rules. “No financing product has ever worked in the market except for badla [in-house] financing and Continuous Funding System [which was also a form of badla financing],” he said.

Published in The Express Tribune, March 30^th, 2017.

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