Regulator turns down request for enhancement: CFS financing limit
By Dilawar Hussain
KARACHI, April 19: The Securities and Exchange Commission of Pakistan (SECP) on Thursday expressed its inability to entertain KSE’s request for enhancement of CFS amount from the currently capped limit of Rs55 billion.
The bull-run that has seen the Karachi bourse piece past the 12,000 level also has seen record leveraged buying with the financing under CFS mode touching Rs54.5 billion on Thursday. That is just a stone’s throw from the capped limit of Rs55bn.
CFS is a method of purchase of shares on borrowed money at interest rate capped at 18 per cent. Such financing for shares is peculiar only to Pakistan markets.
Earlier on November 2, 2006, the SECP had raised the limit of CFS financing from Rs25 to Rs55 billion on the plea of the stock broker fraternity, which had complained of shortage of liquidity.
A similar request made by the management/board on Wednesday, was turned down by the apex regulator, linking its “review” to addressing issues that were earlier agreed between the KSE and the SECP. But the stock brokers argued that at the time of putting the last cap, the SECP had agreed to “review the cap of Rs55bn, in case when the need arises”.
A letter that landed in the market at 34 minutes past noon on Thursday also sent the KSE-100 index reeling down. After resisting the red for a long time, the KSE 100-share index closed 68 points lower.
Traders attributed the sudden plunge to the SECP’s response which stated: “Such review (of cap on CFS) warrants complete implementation of certain other critical measures, which were also discussed and agreed during that time, which are extremely important for smooth functioning of the market vis-ŕ-vis to protect the interests of all stakeholders, especially the investors”.
The regulator lamented that despite continuous follow-ups and reminders from the Commission and after lapse of considerable time, there were number of issues, which had not been addressed/implemented by the bourse. The regulator listed seven such measures.
Siddiq Dalal, former director KSE, observed that the SECP had not straight away rejected the KSE’s request but made it conditional on implementation of certain measures. He thought that ample liquidity was available in the market, which was evidenced from the badla rate which stood at 12 per cent, compared to the cap of 18 per cent the last time index had seen the level of 12,000 points on April 17, 2006.
He thought that the regulator’s concern seemed to avoid a repeat of the previous stock crisis, when ‘badla financing’ had been withdrawn, throwing the market into a tailspin.
M.A. Lodhi, managing director of KSE is on, what some people still believe to be a “mysterious” leave of absence. And so had to be out of touch. But Haroon Askari, the chief operations manager of the bourse did not say much but pointed to one of the conditions notified in the SECP letter:
“Daily Value-at-Risk (VaR) based margining system has not yet been implemented by the exchange which was required to be implemented by January 31, 2007, under the New Risk Management Regime; as a result VaR based margins are currently being calculated using weekly VaR estimates obtained from NCEL instead of on a daily basis”.
The SECP letter further went out to say: “It is therefore clarified that the CFS limit would be reviewed once the applicable percentage of exposure margins matures up to 100 per cent, the above-mentioned measures are implemented by the exchange, and the required reports, as mentioned above, are submitted on daily basis by the exchange, to enable the Commission to make a well-informed decision in this regard”, and the regulator added: “Till such time, the CFS limit shall remain capped at Rs55 billion”.
A sitting member director of KSE, who asked not to be named, thought that the SECP’s reasoning was all ‘eye-wash’. He said that the regulator should have considered the limitation of human resources at the bourse, which was insufficient for complete implementation of new Risk Management System.
“It is only a question of whether you wish to do it or not,” he said, adding “reasons are easy to find in either case”.
A stock strategist commented that since ‘in-house’ badla was banned, the option left for investor short of fund would be to go for ‘future trading’ or ‘margin financing’.
Another analyst thought that the share of institutional investors in CFS had grown to around 70 per cent, leaving little room for money-less and speculative investors.
But what looked to be most worrisome for traders was that if the removal of CFS cap was linked to VaR-based margining system, where exposure margins were 69 per cent and collected at one per cent per week, it would take 31 weeks for the margins to matures up to 100 per cent.
“Does that mean that the situation would remain hopeless for another eight months? a broker queried.
Finally, the list of seven issues, which the SECP says have not been addressed/implemented by the exchange:
(1) Client-level netting regime has still not been implemented in the Future Deliverables Market;
(2) The New Risk Management Regime which is already in place since December 4, 2006, has still not been given legal protection, since the exchange has not made necessary amendments in its Regulatory framework;
(3) Financial Institutions margining system has still not been implemented by the exchange, which it had committed to implement before April 23, 2007;
(4) Position limits have not yet been implemented by the exchange, which were required to be implemented with effect from Feb 1, 2007;
(5) The exchange has not yet started submitting daily exposure and margins reports as per formats prescribed by the Commission on March 27, 2007;
(6) Daily VaR-based margining system has not yet been implemented by the exchange which was required to be implemented by Jan 1, 2007, under the New Risk Management Regime; as a result; VaR based margins are currently being calculated using weekly VaR estimates obtained from NCEL instead of on a daily basis; and
(7) Despite being repeatedly advised by the Commission on various occasions, the exchange has still not started keeping margins (cash as well as securities) in both Ready and CFS markets in their separate accounts.
