KARACHI (October 13 2006): The Karachi Stock Exchange (KSE) has framed the "Continuous Funding System Regulations-2006" with the prior approval of the Securities and Exchange Commission of Pakistan (SECP). In a notification issued here on Thursday.

The KSE said in order to enhance the liquidity in the capital market in a transparent and orderly manner with appropriate risk management measures to eliminate associated risks, it is desirable to repeal the existing Continuous Funding System Regulations, 2005 and reframe Continuous Funding System Regulations, 2006.

Now, therefore, in exercise of powers under section 34(1) of the Securities & Exchange Ordinance, 1969, the Karachi Stock Exchange (Guarantee) Limited with the prior approval of the Securities and Exchange Commission of Pakistan, hereby makes following regulations:

1. SHORT TITLE AND COMMENCEMENT:

(1) These regulations shall be called "Regulations, 2006". "The Continuous Funding System".

(2) These regulations shall come into force with effect from October 9, 2006.

2. DEFINITIONS: In these regulations, unless the subject or the context otherwise requires or permits

(a) "Approved Securities" means the securities approved by the board with the prior approval of the commission for the purpose of these regulations.

(b) "Board" means board of directors of the exchange.

(c) "Broker" means any member of the exchange engaged in the business of executing transactions in securities for the account of others and is registered with the commission for this purpose.

(d) "CDC" means the Central Depository Company of Pakistan Limited.

(e) "CFS" means Continuous Funding System.

(f) "CFS Account" means a house account of or a sub-account under the control of a CFS account holder, who is a CFS financier clearing member, and designated as such by such CFS account holder for keeping the CFS financed securities delivered to the CFS main account of such CFS account holder.

(g) "Commission" means the Securities & Exchange Commission of Pakistan.

(h) "Exchange" means the Karachi Stock Exchange (Guarantee) Limited.

(I) "Financier" means a broker or a non-broker clearing member providing finance against the approved securities under these regulations.

(j) "Margin" means the amount of cash or approved securities deposited by the financee or by the financier as security for the purpose of Continuous Funding System as provided under these regulations.

(k) "NCCPL" means the National Clearing Company of Pakistan Limited.

(l) "Net Capital" means net capital as defined under clause (d) of rule 2 of the Securities & Exchange Rules, 1971.

3. GENERAL CONDITIONS:

(1) The maximum amount of funding for the purpose of CFS shall be determined by the board from time to time with the prior approval of the commission.

(2) CFS facility will be allowed in approved securities selected in accordance with the criteria laid down by the board and approved by the commission from time to time. The approved securities shall be subject to review by the exchange on quarterly basis.

(3) The CFS market will be available for the entire trading period and shall run parallel to the ready market. In addition, the CFS market shall also be available one hour after the close of trading. CFS transactions shall take place through the Karachi Automated Trading System (KATS).

(4) The CFS facility shall be available for a maximum period of 22 working days at the option of the financee. On maturity of the contract, the same shall be settled. Financee will have the capacity to rollover his positions by entering into a fresh CFS contract at the prevailing finance rate. Provided that at the time of any corporate announcement in a particular security, the outstanding CFS trades, therein, shall be forced released prior to commencement of trading on SPOT basis to determine the impact of cash dividend/bonus/right and allow relevant adjustment and delivery thereof. A detailed procedure in this regard duly approved by the board in consultation with the CDC and NCCPL will be notified by the exchange.

(5) CFS facility shall only be available against purchases in the ready market on the day that the CFS facility is availed.

(6) CFS financed securities will not be allowed for pledging.

(7) All trades in the CFS market shall be conducted by brokers for and on behalf of their clients or for their own proprietary position who may either be financees or financiers. Usage of duly registered client codes (under UIN regime) shall be mandatory and shares acquired in CFS must be placed in the CDC accounts of those clients.

(8) All brokers shall issue sale/purchase contract notes to their clients for all CFS trades.

(9) CFS premium rates shall be subject to a minimum of Kibor and maximum of 18 percent. However, this will be subject to review by the board from time to time.

4. RISK MANAGEMENT:

(1) For the purpose of ensuring risk management, the CFS market shall be separate from the ready market and risk management shall be governed as per the attached annexure-1 titled "netting regime for exposure purposes under CFS market".

(2) CFS funding will not be available for settlement of future deliverable contracts.

(3) Open positions in the CFS market will attract the requisite exposure margins as per the VAR-based "margin regime" and "haircut regime" as may be determined by the board and approved by the commission from time to time.

4(a) The CFS financier shall open and maintain a separate blocked CFS account in CDC in his name exclusively to keep the CFS financed securities in order to ensure that the securities placed therein are used only for delivery to NCCPL in settlement of CFS outstanding trades and that the said securities are not allowed or used for loaning against blank and short sale; used for leveraging or for pledging with any other person or institution.

4(b) The exchange shall add a flag with each transaction in order to identify and segregate CFS trades so that NCCPL and CDC can ensure that all CFS-financed securities are held in a separate CDC-blocked CFS account and used exclusively for that purpose.

(5) Every broker shall maintain his leverage position in respect of CFS and other derivatives not exceeding 15 times of his net capital balance, provided that open CFS second ticket sale position of financier in CFS market will not be included in calculating the Capital Adequacy Limit as the CFS-financed securities are kept in a blocked CDC CFS account. Provided further that open CFS second ticket purchase position of financee will be subject to the Capital Adequacy Limit.

5. SETTLEMENT OF CLAIMS IN CASE OF DEFAULT OF A BROKER:

(1) The Members' Default and Procedure for Recovery of Losses Regulations shall also be applicable to defaults and recoveries under these regulations. In case of default of a broker, all his assets available to the exchange, including the Initial Margin Deposit and Mark-to-Market Losses held, will be utilised for settlement of all ready, futures and CFS market obligations of a broker on a pari-passu basis. Necessary authorisation in favour of the exchange from CFS financier, whether a broker or his client, to move CFS-financed securities from his CFS house account and/or CFS sub-accounts of his clients will be provided by the broker to CDC and NCCPL for the purpose of settlement and utilisation in the event of his default.

(2) No claim with regard to CFS trades shall be entertained by the exchange, which are executed outside the KATS.

6. AMENDMENT IN REGULATIONS: The board may amend these regulations with the prior approval of the commission after giving reasonable notice to market participants.

7. CFS PHASE-OUT: The phase out of the CFS shall be reviewed by December 31, 2006 or any other date as may be notified by the commission.

8. PROHIBITION: No broker shall be allowed to provide in-house financing to its clients.

9. PENALTY: The exchange shall, in addition to suspension of trading, impose penalties as may be prescribed by the board with the approval of the commission, on brokers, who are found violating these regulations.

10. REPEAL: The existing CFS regulations, 2005 are hereby repealed.

NETTING REGIME FOR EXPOSURE PURPOSE UNDER CFS MARKET FOR BROKER FINANCIER:

1. CFS financier shall deposit exposure margins as per applicable ready market margin regime on the first ticket on the day that its CFS offer is accepted on exchange's Automated Trading System. The margins will be held till T+3 when first ticket buy is settled by the financier. After settlement, exposure margin shall not be applicable on open second ticket sell positions as stated below.

2. CFS financier shall not pay exposure margins as applicable to ready market on all open CFS second ticket sale contracts, after first ticket buy contracts are settled as CFS-financed securities are held ins blocked account.

3. When CFS financed securities are deposited in a blocked CDC account, the exposure margins held by the exchange on first ticket buy contract will be released.

FOR BROKER FINANCEE:

1. Netting shall be allowed between all unsettled CFS trades of financees in the same scrip for same amount, ie, first ticket sell and second ticket buy. CFS Financee shall not deposit exposure margins and mark-to-market losses on first ticket sell contracts for three days of settlement as the financee broker is already paying the ready market margins on the ready open purchase position. After settlement date, margins shall be payable on second ticket purchase in CFS market as detailed below.

2. CFS financee shall pay exposure margins based on CFS contract price/execution price as applicable to ready market, including special margin on all open CFS second ticket purchase contracts after first ticket sale contracts are settled.

WHEN CFS BROKER FINANCIER AND ARE SAME:

1. The broker shall not net his second ticket purchase and second ticket sell open positions in the same scrip in the same contract period as settlement dates are likely to be different.

2. Netting shall be allowed between all unsettled CFS first/second ticket buy and CFS second/first ticket sell positions in the same scrip for the same amount in the same contract period and where settlement date is the same for first ticket buy and first ticket sell. This situation will arise where the broker is providing the finance for his own client. This netting shall typically take place from transaction date for three days to settlement date only where the four contracts are identical.

Deposit against exposure will be accepted either in cash or in the form of approved securities acceptable as deposit against exposure in the ready market.

Copyright Business Recorder, 2006