Its earlier version CFS mark-II, a very risky form of leverage blamed for stock market crash, was abandoned in 2008.

The Karachi Stock Exchange redefined this leverage product in October, 2009 forapproval by the Securities & Exchange Commission of Pakistan (SECP). Apparently, the regulator resisted the brokers' move to reintroduce this tried and tested leverage product that earlier precipitated a stock market crash.

Margin Financing - the SECP's leverage version -- though risky in itself failed to meet brokers' expectations. This was because they wanted something which holds a promise to bring good old days and billions in brokerage commissions, notwithstanding the pitfalls. The SECP gave in to the broker's pressure when on June 22, it constituted a 10-member committee to assess the efficacy of KSE's proposed 'margin trading system'.

The Committee Report, approved by the KSE board of directors is now public. It clearly shows how cleverly and artfully the bankers, brokers and fund managers - all member of the committee - have crafted proposals to benefit from them at the cost of investors.

The lesson that corporate America learnt in 1930s seems to have been totally ignored by these market professionals while finalising the report. Excessive credit to stock investors led to the market collapse in 1929 in the US and the Federal Reserve Board reacted by fixing the maximum credit limit for a stock investor the following year.

The investor was required to put up at least 50 per cent of the value of stock purchase called initial margin. He was, however, given a breathing space in a declining equity market and the initial margin was allowed to fall to 25 per cent of the value of shareholding called maintenance margin.

Under the scheme, when the investors' equity in his/her shareholding falls below 25 per cent, the broker calls upon the investor to deposit additional funds as to bring his equity to maintenance margin.

Brokers normally charge bank rate plus 1.50 per cent on their margin financing loans. This is the practice in most of the developed capital markets.

In our case, members of the KSE committee probably knew what lethal dose of leverage they were prescribing. In order to escape the damages suits by those who will suffer in consequence of their recommendations, committee members added here and there caveats in the report that the 'margin trading system' which ignored counter party risk assessment could trigger systemic defaults and another market debacle. They advised the regulator to chalk out a long-term plan for the development and sustainable growth of capital market.

The committee has deviated in its report as much from international practice as it professed to adhere to it in its executive summary. The specification of initial margin at 50 per cent in line with international practice, the first shield against credit risk and market collapse, is totally missing in the report.

The maintenance margin of 25 per cent is provided but the investor is required to maintain it in a way that is divorced from international practice.

The investors' account will be marked to market daily and he will be required to pay daily marked to market losses to the financier broker in proportion to the 75 per cent debt taken to finance the share purchase.

The concepts of marking to market and payment of marked to market losses are alien to the stock market in which company stock is traded.

These are the concepts taken from futures market in which contracts on company stock are traded.

Since these contracts are future obligations, no price payment and therefore no debt is required at the time of contract initiation.

To guard against the build up of counter party default risk till the contract maturity date, the investors' account is daily marked to market and the gains are added to and losses deducted from investors' account.

To help the financiers make money at negligible risk, the fruits of margin financing have been intermixed with marked to market safety feature of futures market. Payment of daily marked to market losses to financier, deposit of financed shares in financiers' name in a blocked CDC account and the financiers' interest rate on margin financing loan linked with the risk of the share financed all mete out an unjust treatment to the stock investors who happen to use leverage in their investment.

The catch in these terms of financing is that the broker financier will be taking the risk of fixed income investment but will be reaping the return of equity investment. To earn the higher return of equity investment, one has to take a greater risk. The report is designed to help the broker earn equity investment return with fixed income investment risk.

The contract period for margin financing loan is another interesting feature of the report. The contract period will be 60 days but NCCPL will forcibly withdraw 25 per cent margin financing from the financee after every 15 days. High interest rate up to kibor plus eight per cent on margin financing, payment of daily marked to market losses and the forcible segmentation of a small contract period into 15 days intervals ensure that the financee investor loses his savings within the shortest possible time.

These terms are repugnant to the nature of stock investment which yields return only over a reasonably long holding period. However, forcible withdrawal of 25 per cent of the loan every 15 days and eligibility of the shares so released for refinancing will certainly inflate trading volumes and bring back the dazzling levels of brokers' commission of good old days.

The clause 1(A)(iii) of the report contains all the elements responsible for the stock crashes of 2005 and 2008. According to this clause, the financier can choose interest rate for financing, change the interest rate and withdraw the financing offer. These are the same options which brokers massively abused to manipulate earlier stock market crashes.