SECP Makes Changes to Margin Financing System After Receiving Feedback

Last week, the SECP and NCCPL made some changes to the margin financing product, which went live on Monday. The new changes were made by taking recommendations from the broker community.

The amended product not only allows the broker to use their own source of funding but also allows them to get bank funding for their clients through a tripartite agreement. Pledging of client securities to the bank has also been allowed, which was previously missing.

The banks would provide financing against deposit of securities/shares, while shares bought through the newly-acquired funding would be kept in a separate blocked account at the Central Depository Company.

The SECP back in February started a crackdown on the unofficial in-house financing of stocks, popularly known as ‘badla’. Since this initiative, the market has been missing liquidity and in turn, the overall volumes have also dropped.

One of the recommendations was to remove the requirement to collect 10% financing participation ratio (FPR) in the form of cash and to allow the deposit of entire FPR in the form of securities as is being done by banks. As far as cash margin is concerned, the requirement for 10 percent equity contribution has been removed and for the time being has been reduced to one percent till necessary changes to the Leveraged Markets and Pledging Rules 2011 are made.

To monitor these financing activities, the brokers would need to open separate sub-accounts of its clients. In this way both the clearing house and regulator would be able to determine the underlying risk in the market on a daily basis.

The NCCPL shall make this report available in the MF Module, showing necessary details pertaining to pledge position, margin/marked-to-market losses, deposited Securities etc. Broker Margin Financier shall be required to monitor its positions accordingly and maintain requisite securities against margins/marked-to-market loss.