Much-awaited leverage product takes a step

SECP approves the concept paper of much-awaited leverage product – margin trading system.

The Securities and Exchange Commission of Pakistan (SECP) approved the concept paper of much-awaited leverage product –  margin trading system – but with additional risk mitigating measures, according to KASB Securities.

The market would closely track the official launch date and exact modalities of the margin trading system (MTS), especially the additional risk mitigating measures incorporated by the SECP.

Why is the KSE excited about leverage product?

The MTS is designed on a ‘borrow and buy’ principle which brings a natural upward bias for stock prices, informed KASB Securities strategist Imtiaz Gadar.

Leverage should help address the severe liquidity issues and volume drought at the bourses over the last couple of years where volumes are hovering at dismal levels last seen in early 2000s, said Gadar.

While this should not only lead to a better price discovery, a liquid market with ease of entry and exit is likely to facilitate foreign investment, said Gadar.

Leverage also provides a trading avenue to investors which after implementation of capital gains tax effective July 2010 are averse to trading as they do not want to disclose their source of income.

Final modalities yet to be revealed

The MTS concept paper earlier floated indicates that the product is a close variant of the previously prevalent CFS MK-II. However, the system has been modified with enhanced risk mitigation measures comprising client-level margins, forced release every 15 days and exposure limits. The product also entails greater transparency with the names of top 15 financiers and borrowers disclosed on a daily basis.

Published in The Express Tribune, September 17^th, 2010.