SECP allows brokers to fund share purchase
Regulator makes amendments to in-house financing regulations
Brokers may also provide bridge financing from banks to their clients under the amended regulations, which will come into effect from June 19, according to the SECP. PHOTO: SECP
KARACHI:
The apex regulator of the corporate sector has approved nine amendments to the regulations for in-house financing in the stock market, allowing brokers to continue funding share purchase from their own pockets and that too without seeking margins in cash, but now the entire process will be documented.
It was an old demand of the brokers to allow them to continue financing from their own resources and provide much-needed liquidity for the market in a bid to increase the stock trading volumes.
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They were of the opinion that no other financing product could meet the demand of investors under strict regulations.
The brokers may also provide bridge financing from banks to their clients under the amended regulations, which will come into effect from June 19, according to the Securities and Exchange Commission of Pakistan (SECP).
“It should be identified in the MFS (margin financing system) that funding will be provided by the broker margin financier from its own resources to its client and/or funding is arranged from bank,” the SECP said.
The SECP has approved amendments to the NCCPL Regulations 2015 on recommendations made by a committee constituted to review the in-house financing system, according to a notification on the Pakistan Stock Exchange (PSX) website.
The minimum equity participation required to be paid by the borrower in cash was 10% of the margin financing transaction value. “It has been recommended by the committee that the minimum equity participation of ‘margin financee’ in cash shall no longer be required,” it said.
The commission, in principle, approved the recommendation of zero cash margin. In order to implement this, it has to make additional amendments to the Securities (Leveraged Markets and Pledging) Rules 2011 and by that time, the minimum equity participation in cash will be 1% of the margin financing transaction value, the SECP said.
A margin financier will be allowed to provide financing for eligible securities only to the extent of 5% of a security’s free float. Free float for this purpose will be determined by the PSX.
“If any discrepancy is found in the margin financing open and pledged position...the company (National Clearing Company of Pakistan Limited - NCCPL) may charge penalty from such broker margin financier amounting to 10% of the amount of discrepancy highlighted by the company or Rs500,000, whichever is higher.
“The company may also impose restriction/suspend the margin financier concerned from taking any new position for a period of three months or permanently. During the period of suspension, only the release of open position shall be allowed,” it said.
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According to the SECP, “where market price of a security, which was financed through margin financing, declines 5%, the broker margin financier will be required to collect mark-to-market losses from clients in the form of cash only whereas the non-broker margin financier will collect mark-to-market losses from the margin financee as per terms and conditions set out in the margin financing agreement.”
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• Remove the requirement of collecting 10% financing participation ratio (FPR) in the form of cash and allow the deposit of entire FPR in the form of securities as is being done by banks.
• Allow the pledging of margin financed-securities in favour of a bank through a tripartite agreement between the bank, broker and client.
• For risk management, the mark-to-market losses in case of a decline in the price of financed securities shall be collected in cash from the client. In case of an increase in the price of financed securities’ margins, the mark-to-market losses shall be collected from the 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.
Published in The Express Tribune, June 17th, 2017.
The apex regulator of the corporate sector has approved nine amendments to the regulations for in-house financing in the stock market, allowing brokers to continue funding share purchase from their own pockets and that too without seeking margins in cash, but now the entire process will be documented.
It was an old demand of the brokers to allow them to continue financing from their own resources and provide much-needed liquidity for the market in a bid to increase the stock trading volumes.
SECP files criminal complaint against seven investors
They were of the opinion that no other financing product could meet the demand of investors under strict regulations.
The brokers may also provide bridge financing from banks to their clients under the amended regulations, which will come into effect from June 19, according to the Securities and Exchange Commission of Pakistan (SECP).
“It should be identified in the MFS (margin financing system) that funding will be provided by the broker margin financier from its own resources to its client and/or funding is arranged from bank,” the SECP said.
The SECP has approved amendments to the NCCPL Regulations 2015 on recommendations made by a committee constituted to review the in-house financing system, according to a notification on the Pakistan Stock Exchange (PSX) website.
The minimum equity participation required to be paid by the borrower in cash was 10% of the margin financing transaction value. “It has been recommended by the committee that the minimum equity participation of ‘margin financee’ in cash shall no longer be required,” it said.
The commission, in principle, approved the recommendation of zero cash margin. In order to implement this, it has to make additional amendments to the Securities (Leveraged Markets and Pledging) Rules 2011 and by that time, the minimum equity participation in cash will be 1% of the margin financing transaction value, the SECP said.
A margin financier will be allowed to provide financing for eligible securities only to the extent of 5% of a security’s free float. Free float for this purpose will be determined by the PSX.
“If any discrepancy is found in the margin financing open and pledged position...the company (National Clearing Company of Pakistan Limited - NCCPL) may charge penalty from such broker margin financier amounting to 10% of the amount of discrepancy highlighted by the company or Rs500,000, whichever is higher.
“The company may also impose restriction/suspend the margin financier concerned from taking any new position for a period of three months or permanently. During the period of suspension, only the release of open position shall be allowed,” it said.
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According to the SECP, “where market price of a security, which was financed through margin financing, declines 5%, the broker margin financier will be required to collect mark-to-market losses from clients in the form of cash only whereas the non-broker margin financier will collect mark-to-market losses from the margin financee as per terms and conditions set out in the margin financing agreement.”
Green Light: Recommendations approved by the SECP
• Remove the requirement of collecting 10% financing participation ratio (FPR) in the form of cash and allow the deposit of entire FPR in the form of securities as is being done by banks.
• Allow the pledging of margin financed-securities in favour of a bank through a tripartite agreement between the bank, broker and client.
• For risk management, the mark-to-market losses in case of a decline in the price of financed securities shall be collected in cash from the client. In case of an increase in the price of financed securities’ margins, the mark-to-market losses shall be collected from the 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.
Published in The Express Tribune, June 17th, 2017.