1. margin trading system- mts background the securities and exchange commission of pakistan...

Margin Trading System- MTS

BackgroundThe Securities and Exchange Commission of Pakistan (“SECP”)

constituted a Committee of professionals on June 22, 2010 to explore avenues of generating liquidity in the capital market.

The Committee conducted detailed analysis and forwarded its recommendations and detailed Concept Paper, for the provision of ‘Margin Trading System’ to SECP on July 19, 2010.

Accordingly, the Concept Paper proposed by the Committee disseminated to all market participants on July 20, 2010.

The Rules, called “Securities (Leveraged Market and Pledging) Rules, 2011” have been circulated by SECP on February 18, 2011

2


OverviewThe term “margin trading” refers to the purchase of securities in ready

market by equity participation.

Financing shall be made available only on pre-identified ready market purchases, termed as ‘Leverage Buy’. For this purposes, a separate function key i.e. F7 to be made available in the trading systems.

Margin Trading will be done on an undisclosed manner through a platform provided by NCCPL, as an Authorized Intermediary, to Financees and Financiers.

Margin Trading facility will be made available only in Eligible Securities .

3


OverviewThe maximum mark-up rate in MTS Market will be KIBOR+8%.

All transactions executed in MTS Market will be based on Financing Participation Ratio (“FPR”) i.e. equity participation by Financees. For this purpose, FPR will be higher of VaR or 25% for the Financee. Accordingly, Financee will pay its FPR of leverage buys on respective settlement date and Trading Financier will pay remaining amount of such leverage buy to settle such ready market purchases.

After settlement of ready market purchases, as mentioned above, Financees shall be required to pay Marked-to-Market (MtM) losses to NCCPL on daily basis, in Cash only, till the settlement of the entire MT Contract. However, such MtM losses will be paid to the respective Financiers on daily basis.

With the payment of such daily MtM payment, MT Contract value will be aligned and mark-up will be charged on the reducing balance accordingly.

4


Overview All Trading Financiers will be required to open a separate MT Blocked Account in CDS.

Accordingly, all MT Financed Securities will be moved in the respective client/house accounts in blocked status.

Each MT Contract shall not exceed from sixty (60) calendar days. However, on every fifteenth (15th) calendar day, MTS will automatically release one fourth quantity of the MT Contract Value.

The Financees shall also be allowed to release their MT Contract at any given point of time during the entire MT Contract period and will be allowed to roll-over in MT Market. However, in case of same day release one day mark-up will be charged.

Risk management measures such as exposure margins, concentration margins, liquidity margins and MTM shall be applied on MT Contract. Capital adequacy limits and position limits shall also be applicable on Financiers and Financees in accordance with the Regulations.

5


Legal Frame WorkThe operations of MTS shall be governed under the following:

Securities (Leveraged Market and Pledging) Rules, 2011;

NCCPL Regulations;

NCSS Procedures;

Relevant Regulations of the Stock Exchanges; and

CDC Regulations.

6

Margin Trading System- MTS Trading Financiers

The following entities will be eligible to apply to NCCPL for admission as Trading Financiers:

“broker” of stock exchange meets the minimum net capital balance and paid up capital requirements;

“banking company” allocated minimum short-term credit rating of A3; “financial institution” allocated minimum short-term credit rating of

A3; “collective investment scheme” allocated minimum short-term credit

rating of A3; “investment finance company” allocated minimum management

quality rating of AM3 minus; and any other corporate entity admitted by NCCPL Board and approved

by SECP.7

Margin Trading System- MTS Financee

Broker Clearing Members (“BCM”) will be the Financees in MT Market subject to the following conditions: BCM holds a membership of stock exchange(s);

no action is pending in any court or has been initiated by the concerned stock exchange(s) or the SECP against such BCM;

BCM is not in breach of NCCPL Regulations or any law or other regulations;

BCM submitted an addendum to the agreement to NCCPL; and

BCM meets the minimum net capital balance requirement.

8

Margin Trading System- MTS MT Eligible Securities

• NCCPL will declare list of MT Eligible Securities based on the eligibility criteria.

• Eligibility criteria for MT Eligible Securities will be reviewed by NCCPL in accordance with its Regulations and any addition or deletion shall be done by giving at least 60 days prior notice.

• Corporate Entitlements, if any, in MT Eligible Securities (having open position in MTS i.e. MT Financed Securities), will be credited automatically in the respective Financee’s accounts in CDS.

9

Margin Trading System- MTS Operation of MTS Since MTS is separate system from all trading systems and NCSS, a separate

Personal Computer (PC) shall be required for an exclusive use of MTS.

In order to avail financing through MTS, Financees shall be required to buy MT Eligible Security(ies) in ready market through specific key assigned i.e. F7 in the trading system. These buys are termed as ‘Leverage Buy’.

All Bids/Offers will be entered in MTS by Financee/Financier in an un-disclosed manner whereby they will never know the counter-party of MT Transaction.

UINs and client codes tagged for ready market shall be made available in MTS Market as well to the Financees. However, client codes of non-broker clearing members (NBCMs) shall not be available.

10

Margin Trading System- MTS Operation of MTS

MT Participants will not be allowed to modify any Bid/Offer once entered in MTS. However, cancellation of Bid/Offer before matching will be allowed.

MTS will verify client code wise leverage buy of Financees before entering any Bid.

MTS will compare UIN-wise net position, in ready market, at the day end and any excessive volume of MTS, over and above the net leverage buy, shall be force released on the same day.

11

Margin Trading System- MTS Operation of MTS Broker Trading Financiers will be allowed to provide financing in MTS through

their own funds or borrowed from their corporate clients only

Broker Trading Financiers will be required to enter into a separate agreement with their corporate clients in accordance with the provisions of the Rules.

Accordingly, UINs and client codes of corporate clients only, tagged for ready market, shall be made available in MTS Market as well to the Broker Trading Financiers. However, Broker Trading Financiers shall be required to tag such client codes of corporate clients with the respective sub-accounts to be maintained in their separate MT Blocked Account in CDS.

12


MT Participants may place Bids/Offers in MT Market at their desired mark-up rate however, such mark-up rate will be maximum to KIBOR+8%.

Inter-exchange trades shall be made available in MTS to the executing Broker Clearing Member whereby settlement obligation will be shifted to affirming Broker Clearing Member through BTB Module of NCSS. However, executing Broker Clearing Member will remain responsible for risk management of MT Contract.

13


Financing Participation Ratio (“FPR”)

The FPR (equity participation by Financee) for leverage buy of MT Eligible Security shall not be less than 25% or VaR whichever is higher. Remaining value of such leverage buy shall be paid by the respective Trading Financier.

Lets assume that FPR of ABC Securities is 30%:

14

Qty Rate Total Amount FPR Financee Obligation on SD

Trading Financier Obligation on SD

10,000 15 150,000 30% 45,000 105,000

Margin Trading System- MTS Operation of MTSMTS Release and RolloverMT Released (R ) Transactions will be of following Types:1. Forced MT-R by MTS on four Maturity Dates of each MT Contract:

2. Forced MT-R by MTS due to Excessive Financing over and above net leverage buy

at the day end:

15

Transaction Date

Qty1st Maturity Date 15th calendar day

2nd Maturity Date 30th calendar day

3rd Maturity Date 45th calendar day

4th Maturity Date 60th calendar day

Day 1 20,000 5,000 5,000 5,000 5,000

F7 Lev Buy

MTS Net-Ready Sell

Net-Lev Buy (1000-300)

Day End Forced Release(1000-700)

Remaining MT Open Pos.

1,000 1,000 300 700 300 700

Margin Trading System- MTS Operation of MTSMTS Release and RolloverMT Released (R ) Transactions will be of following Types:1. Self MT-R of each MT Contract before any Maturity Dates by Financee

Financee may Roll-over Forced Release of MT-R Transactions on respective Maturity Dates and Self release of MT-R Transactions. However, Roll-over facility shall not be allowed on day-end Forced Releases due to excessive net sell position in the ready market.

16

F7 Lev Buy MTS Forced Release due on 1st Maturity Date

Self Release by Financee before 1st Maturity Date

Forced Release by MTS on 1st Maturity Date

Remaining MTS Open Position

1000 1000 250 100 150 750

Margin Trading System- MTS Settlement of MT Contract

All MT Contracts (MT and MT-R Transactions) shall be settled on T+2 settlement cycle through National Clearing and Settlement System (“NCSS”) in the following manner:

A. Settlement of MT Transaction Financee will settle his FPR of MT Transaction in Cash, i.e. higher of 25% or VaR,

as the case may be, on settlement day through NCSS Pay & Collect mechanism.

Trading Financier will settle remaining portion of MT Transaction in Cash, i.e. 75%

or VaR, as the case may be, on settlement day through NCSS Pay & Collect mechanism.

After settlement, all MT Financed Securities will be moved to respective house/sub-accounts of Trading Financier in its separate MT Blocked Account in CDS.

17


Settlement of MT Contract

B. Settlement of MT(R) Transactions Financee will be required to settle remaining portion of MT Contract Value

in Cash, as determined after adjustment of mark-up and Marked-to-Market Losses, on settlement day through NCSS Pay & Collect mechanism.

Trading Financier will be received remaining portion of MT Contract Value

in Cash, as determined after adjustment of mark-up and Marked-to-Market Losses, on settlement day through NCSS Pay & Collect mechanism.

Accordingly, after settlement, MT Financed Securities will be moved from Trading Financier’s respective CDS house/sub-account to Financee’s respective CDS house/sub-account.

18

Margin Trading System- MTS Settlement of MT Contract

Marked-to-Market Settlement

• After settlement of MT Transactions, Marked-to-Market Losses will be collected from Financees on their open positions of MT as per their FPR% in Cash only. Such Marked-to-Market Losses shall be collected till the settlement of release of MT-R Transactions.

• Marked-to-Market Losses Collected from Financees shall be paid to respective Trading Financiers on daily basis through NCSS Pay & Collect mechanism.

• Accordingly, the MT Contract Value will be aligned with the adjustment of Marked-to-Market Losses payment. However, FPR% will remain intact.

19

Margin Trading System- MTS Risk Management Measures

A. Capital Adequacy Requirements

Following conditions will be applicable on MT Participant w.r.t. Capital Adequacy requirements: Financee’s Capital Adequacy Limits:

20

Financee Location Minimum Net Capital Balance

Capital Adequacy Limit in MTS

Capital Adequacy Limit in all Markets

KSE Rs. 10 million5 times of net

capital balance25 times of net capital balanceLSE Rs. 4 million

ISE Rs. 4 million

Margin Trading System- MTS Risk Management MeasuresTrading Financier’s Minimum NCB and Paid-up Capital:

21

Broker Trading Financier Location

Minimum Net Capital Balance

Minimum Paid up Capital

KSE Rs. 20 million Rs. 50 million

LSE Rs. 8 million Rs. 20 million

ISE Rs. 5 million Rs. 10 million


B. Exposure and Margins

Exposure margins, MTM Losses, Liquidity Margins and Concentration Margins on MT Contracts shall be collected from MT Participants as per the following mechanism. All margining will be based on client level margining regime:I. Financee Risk Management Stock Exchanges shall collect all margins and MTM Losses against leverage buy

orders, executed through special key i.e. F7, as per their applicable margining regime in any form of approved collaterals.

Upon execution of MT Transaction, Stock Exchanges shall be required to collect and maintain differential exposure margins, as per FPR, till the settlement of MT Transaction on T+2.

After settlement of MT Transaction on T+2, NCCPL will collect MtM Losses and Concentration Margins on open MT Contract Value, in accordance with FPR in the form of Cash only till the settlement of MT-R Transactions.

22


II. Trading Financier’s Risk Management Trading Financier shall pay Exposure Margin and MTM Losses as per

their FPR to NCCPL, in any form of approved Collateral, till the settlement of MT Transaction on T+2.

Since MT Financed Securities are delivered in the separate MT Blocked Account in CDS of the Trading Financier, no margins and MtM will be required on open MTS Contract.

23


C. Position Limits for Financees

24

Market wide position limit

20% of free-float for each MT Eligible Security subject to maximum of Rs. 10 billion

Member wide position limit

2% of free-float of the MT Eligible Security subject to maximum of Rs. 1 billion.

Client wide position limit 0.5% of free-float of the MT Eligible Security subject to maximum of Rs. 250 million for each MT Eligible Security. Overall financing availed in all MT Eligible Securities shall not exceed Rs.1 billion.

Margin Trading System- MTS Default Management

NCCPL shall manage default on MT Contract as per the following Procedures:

I. Financee Default (Marked-to Market Losses) In case of non-payment of MTM Losses, Financee shall be required to

identify the defaulted UIN of its client to NCCPL. NCCPL shall suspend such UIN for taking position in all Markets. Financee shall be required to square up the open position of the

defaulted client within 3 hours on next Trading Day and deposit the MtM Losses to NCCPL.

In case of non-squaring-up by the Financee, NCCPL shall initiates squaring-up of the open position of such defaulted client on the same day.

25

Margin Trading System- MTS Financee Default (Marked-to Market Losses)

In case of non-squaring-up by NCCPL, all open MTS Contracts of such defaulted UIN shall be Released. Accordingly, MT Financed Securities of such defaulted UIN will be allocated to all the Trading Financiers who have provided Margin Trading in such MT Financed Securities.

MT Contract of such defaulted UIN shall be treated as closed.

NCCPL shall restrict such defaulted UIN from taking new positions in all Markets for a period of six-months.

In case of second default of same UIN(s), NCCPL may block such UIN for the period of three years.

26

Margin Trading System- MTS Financee Default (Marked-to Market Losses) Relevant Financee shall also be penalized as follows:

In case of first default by the Financee: 2% of the defaulted amount shall be charged and will be restricted in leverage markets for three months.

In case of second default by the Financee: 4% of the defaulted amount shall be charged and will be restricted in leverage markets for six months.

On any subsequent default by the Financee, permanent restriction will be applied in leverage markets.

27

Margin Trading System- MTS II. Financee Default (Settlement)

In case where Financee fails to settle his money obligation on the settlement date, NCCPL shall suspend such Financee in all Markets.

NCCPL shall hold proportionate amounts with the credits due to all Clearing Members to whom credits shall be due on that Settlement Date, till the recovery of shortfall amount.

All margins of a suspended Financee, held by NCCPL/Stock Exchange, shall be liquidated.

In case of shortfall still persists, NCCPL shall initiate squaring-up process of open MT Contracts of such suspended Financee for two consecutive working days.

28

Margin Trading System- MTS Financee Default (Settlement)

In case of shortfall persists even after the said squaring-up, NCCPL shall allocate MT Financed Securities to all the Trading Financiers who have provided Margin Trading in such MT Financed Securities.

In case of squaring-up of open MT Contracts, the shortfall amount (if any) shall be proportionately allocated to all the Trading Financiers who have provided Margin Trading in such MT Financed Securities.

In case of allocation of MT Financed Securities and/or shortfall amount, of the suspended Financee, respective MT Contract with respective Trading Financiers shall be treated as closed.

Relevant Financee shall be penalized in a manner as mentioned in previous slide number 27

29

Margin Trading System- MTS III. Trading Financier’s Default

In case where Trading Financier fails to settle his money obligation on the settlement date, NCCPL shall suspend such Trading Financier for all Markets.

NCCPL shall hold proportionate amounts with the credits due to all Clearing Members on that Settlement Date, till the recovery of shortfall amount.

All margins of a suspended Trading Financier, held by NCCPL shall be liquidated.

Respective Financees shall be given an opportunity to re-finance from MT Market.

30

Margin Trading System- MTS Trading Financier’s Default

In case where Financees unable to re-finance the leverage buys, such Financees shall be required to settle such leverage buys through NCSS Balance Order.

All other open MT Contracts of the suspended Trading Financier shall be released on their respective Maturity Dates and will be settled in accordance with the relevant Regulations of NCCPL and CDC.

31

Margin Trading System- MTS Trading Financier’s Default Relevant Trading Financier’s Default shall be penalized as follows:

In case of one time default in a calendar year: 1% of the defaulted amount.

In case of second time default in a calendar year : 2% of the defaulted amount

In case of third time default in a calendar year: 4% of the defaulted amount and suspension of three months in MT Market.

32

Margin Trading System- MTS Market Information NCCPL shall disseminate the following key statistics pertaining to

MTS through its website:

Top 15 Financiers and Financees in MTS market will be disclosed.

Total Number of Financiers and financing provided in MTS Market.

Funds to be force released in 3 days advance with respective 1/4 th and 15th day philosophy

Scrip wise total amount of released transactions in the day.

Total funding provided in each MT Eligible Security.

Total amount of MTS funds released during the day and re-financed.

Weighted average rate of mark-up charged in each of the MT Eligible Security for the day.

33

Thank Thank youyou !NATIONAL CLEARING COMPANY OF PAKISTAN LIMITEDNATIONAL CLEARING COMPANY OF PAKISTAN LIMITED

88thth Floor, Karachi Stock Exchange Building, Floor, Karachi Stock Exchange Building, Stock Exchange Road, Karachi – 74000 Stock Exchange Road, Karachi – 74000

Pakistan Pakistan TEL : (92-21) 3246 0811-19 FAX: (92-21) 3246 TEL : (92-21) 3246 0811-19 FAX: (92-21) 3246

08270827

E-Mail :E-Mail : [email protected] [email protected]

Website : Website : http://www.nccpl.com.pk

34

1. margin trading system- mts background the securities and exchange commission of pakistan...

Documents