KARACHI (September 12 2006): The Securities and Exchange Commission of Pakistan (SECP) has banned in-house badla while enhancing CFS cap to Rs 55 billion for Karachi Stock Exchange, Rs 10 billion for Lahore Stock Exchange and Rs 5 billion for Islamabad Stock Exchange from October 2, 2006.

The Commission also decided that CFS premium rate would be capped at 18 percent at all the three exchanges with effect from the same date, while some 40-45 scrips could be facilitated under CFS.

The Securities and Exchange Commission of Pakistan (SECP) had detailed discussions with various market participants, including Chairman and member Directors of Karachi Stock Exchange (KSE) through informal meetings, to review the existing CFS system and the interim risk management measures proposed by the SECP on August 2, 2006.

The Commission also had an exhaustive meeting on Monday with the management of three stock exchanges. The meeting observed that while the work on SECP's proposal regarding CFS MK II was already underway, in order to improve the risk management system and reduce the systemic risks associated with the existing CFS as well as in-house badla financing, it was important to take certain measures in the interest of the market.

In the context of in-house badla, the meeting noted that not only the same was non-transparent, but also the scrips financed under this system were more risky and prone to market manipulation besides having excessive rates of financing.

The eligibility criteria for selection of CFS scrips will be as follows:

-- Companies should have Average Daily Impact Cost of less than one percent, based on previous three months daily impact costs.

-- Companies should have traded on more than 90 percent of trading days during the past three months.

-- Companies with a free float of more than 20 percent of issued capital or where the free float is more than 190 million shares, whichever is lower.

-- Free-float of the company must be in dematerialised form on CDS.

The regulator has also decided that interim risk management regime, as proposed by SECP vide letter dated August 30, 2006, would be applicable from October 2, 2006. Margining regime and valuation of securities deposited for exposure purposes based on Value at Risk (VaR) will be applied in all markets with effect from November 1, 2006 and client level netting will be applicable from January 1, 2007.

It may be noted that the above measures have been taken for interim period. In the short term, the SECP expects to introduce multiple products for supporting the leveraged trading.

In this connection, the SECP has already issued guidelines for CFS Mk-II (regarding which necessary developmental work is already in progress), and draft regulations for the introduction of cash settled futures; besides promoting the wider acceptability of margin financing.

Copyright Business Recorder, 2006