PSX introduces 90-day futures contract

KARACHI:

The Pakistan Stock Exchange (PSX) has introduced a 90-day deliverable futures contract (DFC), meaning that settlement will take place 90 days after the purchase of a stock on the forward counter.

Speaking at the launch of the 90-day DFC regime and new futures eligibility criteria, PSX Managing Director Farrukh Khan termed it a positive development for the stock market as well as the capital market.

“The 90-day DFC shall open each month in such a way where the market shall have three different maturities (current month expiry, next month expiry and last month expiry) at the start of each contract month,” he said.

“In addition to this, it will eliminate the need for a mandatory one-week rollover period as investors can roll over their existing positions any time before expiry, which will alleviate the rollover week pressure to some extent,” Khan said.

“The new selection parameters are dynamic and can adapt to any market situation.”

Referring to a recently issued list, he said 84 companies and one exchange-traded fund (ETF) were eligible to be traded on the futures counter.

He expected the new DFC regime to boost trading volumes and liquidity while improving depth of the market.

“Introduction of 90-day DFC will reduce volatility in the market,” remarked Pak-Kuwait Investment Company Head of Research Samiullah Tariq while speaking to The Express Tribune.

The stock market usually faces selling pressure in the last week of every month due to the pressure to settle 30-day futures contract.

“The 90-day products may reduce selling pressure in the market,” he said. “At the same time, however, the cost of carrying the product may go up (compared to the 30-day DFC) as a large number of investors buy futures contracts with borrowed money.”

Besides, the stock market has changed rules and criteria for the eligibility of shares for the 30-day, 60-day and 90-day DFC and cash-settled futures contract (CSF).

“The new criteria and the 90-day DFC shall come into effect from the August 2021 DFC, which shall start from July 26, 2021,” the PSX said in a notification.

Under the new criteria, 21 new stocks have become eligible for 30-day, 60-day and 90-day DFC. However, six existing stocks will be ineligible, meaning that they will be deleted from the DFC list.

“Pakistan futures market is now following international standards with the introduction of 90-day contract,” a PSX official commented.

“The 90-day contract will allow investors to access a large number of companies in the futures market while avoiding the monthly rollover pressure with the existing 30-day contract,” he said.

The official appreciated the role of Securities and Exchange Commission of Pakistan (SECP) in introducing the long-term futures contract.

According to the new rules, top 22% of stocks, excluding the ones placed in the defaulters’ segment, are eligible for DFC and CSF contract at the PSX.

“After the exclusion of securities in the defaulters’ segment, the list of securities in the top 22nd percentile will be prepared by assigning 60% weight to average daily traded volumes and 40% weight to free float market capitalisation (reduced by a factor of one thousand),” the notification stated.

The rules said that eligible stocks should have been traded for at least 90% of the trading days during the review period (past six months) and should officially be listed at the PSX earlier than the past six months.

“Securities of listed asset management companies, mutual funds, brokerage houses and companies whose principal activities include short-term investment and trading in securities shall not be eligible,” the notification read.

Futures eligible securities would be reviewed each quarter based on the previous six-month data on a rolling basis within 10 calendar days from the close of a calendar quarter (review period), it said.