SECP approves recommendations of the committee on review of financing by securities’ brokers to clients

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) had constituted a committee comprising of senior market professionals and stakeholders. It was mandated to review the matter of in-house financing, identification of any issues, inefficiencies or hurdles in the existing leverage products like margin financing and margin trading and provide recommendations for practical and viable solutions in light of best international practices to meet the needs of market participants in relation to financing through brokers.

The committee had submitted its report to the SECP, which primarily focused that reforms be introduced in the margin financing system (MFS) so that banks can provide funding to investors through brokers. The key recommendations of the committee were:

• Remove the requirement to collect 10% financing participation ratio (FPR) in the form of cash and to allow deposit entire FPR in the form of securities as is being done by banks.
• Allow pledging of margin financed securities in favor of bank through a tripartite agreement between bank, broker and client.
• For risk management mark-to-market (MTM) losses in case of decline in the price of financed securities shall be collected in cash from the client (finance). In case of increase in the price of financed securities’ margins and Marked-to-Market (MTM) losses shall be collected from proprietary account of broker.
• For transparency, monitoring and investor protection a special sub-accounts of clients shall be opened for the purpose of benefiting from margin finance and pledging of financed securities.

The Commission reviewed the report in detail in its last two meetings and on Tuesday gave its go ahead to make necessary changes to the regulatory framework and operational system at Central Depository Company (CDC) and National Clearing Company of Pakistan Limited (NCCPL). To make the product transparent and protect investors the following additional operational and disclosure requirements have been incorporated.
• All investors desirous of benefiting from margin financing shall be required to submit MF agreement to CDC prior to opening of MF sub-account.
• Distinct pledge ID for securities pledged for MF shall be created by CDC and it shall ensure that in the case of MF pledge ID, the pledge from normal sub-account will only be allowed if there is an open MF position of such client in the MF.
• Subscription to CDC Access (including web-access, e-alerts, SMS) and UIS system of NCCPL shall be mandatory for clients opening the MF sub-account. It will be also mandatory that CDC Account set-up report is signed in respect of CDC sub-account of such client. Client shall be able to view the pledge position of its securities and the open MF position through web access and UIS.
• NCCPL shall make available a facility on the MF system whereby the broker will identify the clients, who have open positions and against which pledge call shall be made by the bank. This system generated report will be submitted by the broker to the bank.
• In case of dispute over an MF transaction and consequential pledge transaction, NCCPL shall be empowered to review and decide the matter.
• NCCPL shall make necessary reports for disclosure to the public and for monitoring purposes.

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