SECP gives go-ahead

KARACHI: The Securities and Exchange Commission of Pakistan (SECP) has approved a concept paper for the margin trading system for equity trading at local stock exchanges. “The SECP in its commission meeting held on Wednesday approved the concept of the margin trading system with additional risk mitigating measures,” read a press release issued by the apex regulator on Wednesday.

The official notification cited that the approval of the commission would be followed by carrying out the necessary amendments in the draft Securities (margin financing, securities lending, borrowing and pledging) Rules 2010.

It recalled that the concept of the system was earlier proposed by the Karachi Stock Exchange (KSE) after which it was reviewed by an independent committee of professionals constituted by the SECP. This committee had submitted its report in July 2010, which was approved by “the board of directors of the three stock exchanges and the National Clearing Company in their subsequent meetings.”

“The recommendations of the committee in relation to the margin trading system were reviewed in detail by the SECP during the commission meeting,” according to the SECP’s head of internal and external communications, Shakil Ahmed Chaudry.  He said that certain amendments to further strengthen risk management and to provide for measures to curtail systemic risk in the interest of the market have been incorporated in the draft.

KSE Chairman Zubyr Soomro had objected to the initial proposal on the grounds that the draft lacked transparency on the financiers’ front and that it failed to satisfactorily address market risk. The release issued by the SECP added that once amendments are incorporated, the draft will be forwarded to the government for promulgation.

Sources disclosed that the said amendments will be geared towards reducing risks associated with not knowing the opposing party in case of default and money laundering possibilities. These may include higher margins to be paid by investors that use the margin trading system to purchase shares on leverage.

Members of the KSE expressed guarded optimism at the news of the approval. “This is a positive step for the market and will enhance liquidity and better price discovery,” commented Zafar Moti, a member of the KSE. However, he added: “We are not fully aware of the nature of the amendments made by the SECP and more clarity is needed on that front.”

“The SECP has put an end to a lengthy drawn out controversy,” said former KSE board member Haji Ghani Usman. “The exchange should now make sure that once the proposal is approved by the relevant ministries, they are ready to implement the system quickly.”

“This is a very positive development which will help bring back volumes to the market,” commented Ahsan Mehanti, a director at Arif Habib Investments. He added that although recent inflation numbers may cause jitters amongst some investors, the immediate reaction of this approval would result in a bullish trend over the next few days.

Member-directors of the KSE and market stalwarts Aqeel Karim Dhedhi and Arif Habib are expected to meet SECP chairman Salman Sheikh in Karachi on September 20 to discuss the implementation of the margin trading system and the reconstitution of the KSE board of directors to allow exchange members to assume chairmanship of the board.

“Further clarity on the additional amendments to the draft Securities Rules 2010 will be forthcoming in that encounter,” pointed out Hasnain Asghar Ali, a senior analyst at Aziz Fidahusein Securities.

The approval has seemingly put an end to a two month long saga that has seen trading volumes at all three exchanges sink to dismal levels. Market pundits are hopeful that the approval will bring back volumes to equity markets in the country.

Published in The Express Tribune, September 16^th, 2010.