The Securities and Exchange Commission of Pakistan (SECP) has given its go ahead to make necessary changes in the regulatory framework and operational system at Central Depository Company (CDC) and National Clearing Company (NCCPL) for margin financing system (MFS) through broker to clients.
About a month ago, the SECP issued notices to several brokerage houses in Pakistan which were trading in house financing and exceeded their limits.
Later, the Commission had constituted a committee comprising of senior market professionals and stakeholders. It was mandated to review the matter of in-house financing, identification of any issues, inefficiencies or hurdles in the existing leverage products like margin financing and margin trading and provide recommendations for practical and viable solutions in light of best international practices to cater for the needs of market participants in relation to financing through brokers.
The committee had submitted its report to the Commission which primarily focused that reforms be introduced in the Margin Financing System (MFS) so that banks can provide funding to investors through brokers.
To make the product transparent, all investors desirous of availing margin financing shall be required to submit Margin Financing (MF) agreement to CDC prior to opening of MF sub account.
Distinct pledge ID for securities pledged for MF shall be created by CDC and it shall ensure that in the case of MF pledge ID, the pledge from normal sub-account will only be allowed if there is an open MF position of such client in the MF.
Subscription to CDC Access (including web-access, e-alerts, SMS) and UIS system of NCCPL shall be mandatory for clients opening the MF sub-account. It will be also mandatory that CDC Account set-up report is signed in respect of CDC sub-account of such client. Client shall be able to view the pledge position of its securities and the open MF position through web access and UIS.
NCCPL shall make available a facility on the MF system whereby the broker will identify the clients which have open positions and against which pledge call shall be made by the bank. This system generated report will be submitted by the broker to the bank.
In case of dispute over an MF transaction and consequential pledge transaction, NCCPL shall be empowered to review and decide the matter. NCCPL shall make necessary reports for disclosure to general public and for monitoring purposes.
The constituted committee also recommended removing the requirement to collect 10 per cent financing participation ratio (FPR) in the form of cash and to allow deposit entire FPR in the form of securities as is being done by banks and allow pledging of margin financed securities in favor of bank through a tripartite agreement between bank, broker and client.
It recommends for risk management mark-to market (MTM) losses in case of decline in the price of financed securities shall be collected in cash from the client (finance). In case of increase in the price of financed securities margins and Marked-to-Market (MTM) losses shall be collected from proprietary account of broker and for transparency, monitoring and investor protection a special sub-accounts of clients shall be opened for the purpose of availing margin finance and pledging of financed securities.
