KARACHI, March 25: The Securities and Exchange Commission of Pakistan (SECP) on Tuesday agreed to waive the requirement of initial margin in ‘cash’ under the CFS Mk-II, removing a major hurdle in the introduction of new market products, prompting a chorus of cheers from market participants.

The waiver of the requirement of deposit of 25 per cent of the margin exposure in ‘cash’ under the CFS Mk-II in the initial stage, nonetheless, comes with certain specifications, and the SECP chairman, Razi-ur-Rehman Khan, told Dawn that the intention was to make the product acceptable for the market, without compromising on main features and the process of on-going reforms in the capital markets.

Separate but similar announcements by the SECP and the KSE, following a marathon meeting of the board of directors of the KSE; managements of the KSE and the NCCPL (National Clearing Company of Pakistan Limited) and representatives of the Mutual Fund Association and some of the stock brokers with the apex regulator on Tuesday, specified in details the discussion and decisions.

An obviously happy participant said that the apex regulator had been generous to concede more than asked for since ‘cash’ margin requirements in the futures market had also been softened.

Not easily understandable to an ordinary investor, the pundits translated the minute features of the agreement.

Samiullah Tariq, head of research at the InvestCap, summarised the decisions as follows: (1) CFS Mk-II to run parallel with the current CFS market with the same cap as present (Rs55bn) from April 7. New scrips added in Mk-II to completely replace the current CFS in July ’08.

(2) Upon complete implementation of the CFS Mk-II, initial margin will be 100 per cent securities where financing remains at or below Rs85 billion; 10 per cent in cash and the rest in eligible securities when financing crosses Rs85bn up to Rs100bn; 20pc in cash plus securities when amount crosses Rs100bn up to Rs125bn; 35pc cash plus securities when amount exceeds Rs125bn up to Rs150bn; 50 pc cash plus securities on the amount crossing over Rs150bn.

A notification issued by the SECP in the evening stated as follows:

The following decisions were taken in the meeting held today (Tuesday) at the SECP’s Karachi office to discuss the issues being faced by the market participants in various markets:

1) Implementation date of CFS Mk-II ---- Current CFS Market will run for 41 securities till June 30, 2008 and will have the existing cap of Rs55 billion. Existing CFS will be available on securities (Annexure ‘A’)

CFS Mk-II market will have no cap and will be available on the following eligible securities with effect from April 7, 2008.

Category “A” CFS MK-II Eligible Securities: AHBL (Arif Habib Bank Limited); CSAP (Crescent Steel); HBL (Habib Bank Limited); JSBL (JS Bank Limited); JSCL (Jahangir Siddiqui & Co); NRL (National Refinery); PACE (Pace Pak Limited); SPL (Sitara Peroxide) and UBL (United Bank Limited).

Category “B” CFS MK-II Eligible Securities: MEBL (Meezan Bank); PICT (Pakistan International Container Terminal); TRIPF (Tri-Pack Films).

2) Eligibility criteria of scrips in CFS Mk-II securities will be reviewed by KSE and the NCCPL jointly on May 1, 2008 and revised CFS Mk-II eligible securities will be modified accordingly with due notice to market participants.

3) The current CFS will merge with CFS Mk-II market with effect from July 1, 2008.

4) Margining regime for Financees in CFS Mk-II Till July 1, 2008, initial margins in CFS Mk-II will be collected 100 per cent in eligible securities or collateral. After July 01, 2008, initial margins will be: 100 per cent in eligible securities where financing in CFS Mk-II market remains at or below Rs85 billion; ten per cent in cash and the rest in eligible securities, where financing in CFS MK-II market crosses Rs85 billion but remains at or below Rs100 billion.

Twenty per cent in cash and the rest in eligible securities, where financing in CFS MK-II market crosses Rs100 billion but remains at or below Rs 125 billion; 35pc in cash and the rest in eligible securities where financing in CFS MK-II market crosses 125 billion but remains at or below Rs150 billion.

Fifty per cent in cash and rest in eligible securities, where financing in CFS MK-II market crosses 150 billion.

Where any of the above limits is crossed and the respective cash requirement becomes applicable, it shall remain in force irrespective of the fact that the financing has reduced below that limit subsequently.

5) Initial Margins by Financier in CFS Mk – II --- Initial margin for financiers shall be 100pc in eligible securities and other acceptable collateral under the NCCPL Regulations from April 7, 2008 and July 1, 2008.

6) Mark to Market Losses and Special Margins for Financee and Mark to Market Losses of Financier in CFS Mk-II --- 100pc in cash (bank guarantees are also acceptable in lieu of margins under the present regulatory framework).

7) Infrastructure requirements -- CFS Mk-II will be implemented on separate terminals for Authorized Financier and Financee. All market participants shall be required to install the requisite hardware and make it available to the KSE and the NCCPL for system installation by April 04, 2008.

8) Initial Margin in Cash Settled Futures and SIFC Initial Margin shall be: 100pc eligible securities where open interest in the relevant market remains at or below Rs10 billion; ten per cent in cash and the rest in eligible securities where open interest in the relevant market exceeds Rs10 billion but remains at or below Rs20 billion; 20pc in cash and the rest in eligible securities where open interest in the relevant market exceeds Rs20 billion but remains at or below Rs30 billion.

Thirty-five per cent in cash and the rest in eligible securities where open interest in the relevant market exceeds Rs30 billion but remains at or below Rs35 billion; 50pc in cash and the rest in eligible securities where open interest in the relevant market exceeds Rs35 billion.

9) Initial Margin in Deliverable Futures Market --- Initial Margin shall be: 100pc eligible securities where open interest in the relevant market remains at or below Rs20 billion; 20pc in cash and the rest in eligible securities where open interest in the relevant market exceeds Rs20 billion but remains at or below Rs30 billion; 35pc in cash and the rest in eligible securities where open interest in the relevant market exceeds Rs30 billion but remains at or below Rs35 billion; 50pc in cash and the rest in eligible securities where open interest in the relevant market exceeds Rs35 billion.

10) Special Margin in Deliverable Futures Market --- Special margins shall be 50pc in cash and the rest in eligible securities; however, where open interest in Deliverable Futures Market crosses Rs25 billion, special margins will be collected 100pc in Cash.

11) The above amendments in the risk management regime for Deliverable Futures, Cash Settled Futures and SIFC Markets will be implemented with effect from the next applicable contract after getting necessary approvals from the SECP.

12) It was agreed that release and roll-over in CFS Mk-II Market shall only be allowed in the last five working days of the contract in CFS Mk-II Market. Unreleased financing shall be forced released on expiration of the maturity of 22 working days.13) Number of eligible securities in cash settled futures shall be increased to 15 securities at the earliest.