Financiers can assess borrowers’ creditworthiness

The Securities and Exchange Commission of Pakistan (SECP) has said it has received a draft of Securities Rules 2010 after vetting by the Ministry of Law.

A major part of the draft rules is based on a concept paper titled ‘margin financing’, which was finalised by the SECP after an extensive consultation process, said a press release issued on Thursday.

One of the distinct features of margin financing under the draft rules is the identification of counter-party which will enable financiers to assess credit worthiness of borrowers, said the press release. This will minimise any possible systematic risk and interruptions to the smooth functioning of capital markets.

Investment flexibility will also be offered whereby financiers will be able to choose shares for financing based on their analysis of fundamentals and liquidity position. The requirement of maintaining minimum equity participation ratio by the borrower will ensure better sharing of risk between the parties.

The SLB model envisages the Authorised Intermediary to act as a facilitation agent between borrowers and lenders of securities and provide an automated platform whereby SLB contracts will be executed between the parties.

Furthermore, as per the existing practice, clients’ securities are pledged for a variety of reasons by brokers including pledges in favour of exchanges and the clearing company in respect of margin requirements.

The draft rules seek to provide conditions and requirements that will govern the pledging mechanism and also prohibit pledges which are executed in contravention.

These draft rules are not only expected to introduce effective disclosure requirements to ensure greater transparency but also to cater for the financing needs of capital markets while providing retail investors with an easy access to financing against shares.

These rules will be promulgated by the government after completion of the consultative process.

Published in the Express Tribune, June 4^th, 2010.