KARACHI, March 1: The Karachi Stock Exchange (KSE) proposes to introduce Stock Index Futures to the market from Monday, March 3.

Analysts hope that futures trading would further expand the scope of products in which investors would have the choice to take stakes. With the phenomenal growth of the market, it was necessary to shed the old ways and push more products into the bourse. The regulators have already declared that they would replace CFS with CFS Mark II from April 7.

After a long period of hibernation, there is a sudden burst of activity. The Non-Banking Financial Companies (NBFCs) regulations have come along and quickly on top of that the REIT rules were introduced. Regulators were simply trudging along, until the Asian Development Bank, a couple of months ago reminded that they had paid some money to finance the capital markets reforms and they would be glad to see those funds put to use.

On Feb 27, the KSE issued a notice regarding the introduction of Stock Index Future Contract. The contract would be traded on the Karachi Automated Trading System (Kats).

It is understandable that for ordinary investors, it would be sometime before the product begins to make sense. But Samiullah Tariq, head of research at Invest Capital, tries to explain its modalities: “Stock Index Futures is simply the buying or selling of a specified number of contracts, which requires daily settlement of mark-to-market difference on a cash basis. The underlined index for the futures contract would be KSE-30 index.

The analyst said: “This contract would be conducive for investors willing to take exposure in the equity market, the alternative of which would be (as presently the case is) to take exposure in individual scrips included in the KSE-30 index. The contract mimics the movement of KSE-30 index”.

The introduction of the contract would firstly reduce the cost of investment as the cost and time required for investment into 30 securities according to specified weights is much higher than the investment in a single contract.

Secondly, it would allow investors to hedge their positions in the underlying stocks in a way that would enable them to maintain their positions in particular stocks while shielding them against macro events.

The analyst observed that the introduction of index futures would bring more liquidity and efficiency to the market. Investors wanting to align their portfolios with the market would be able to take exposure by investing in those futures.

The KSE management also plans to introduce sector indices based on the free-float methodology from 2QCY08. “These steps will help investors diversify their systemic risk at lower cost,” the InvestCap analyst said.

Regarding the functioning of the contract, Samiullah Tariq explained that the KSE-30 index futures contracts (having a duration of 90 days) would be priced by multiplying the index points by Rs10 (e.g. 18,644 x 10=Rs186,440).

The required margin would be 12.5 per cent of the total exposure. Fifty per cent of the margin could comprise selected scrips, while the other half of the margin would be cash.

The final settlement price of the index future would be the price calculated on the basis of a set of 121 readings of 15 second intervals of the underlying index levels taken between the last half an hour of the trading. The highest and the lowest 20 price points would be ignored, and the closing price computed as an average of the remaining 81 price points would be the final settlement price for the settlement of the contract.

The collection of losses would be on the basis of T+0, while the distribution of profits would be on the basis of T+3.