Concept Paper

on

KSE Margin Trading System

Tuesday, October 06, 2009

Comparison for CFS, MF and KSE Margin Trading System

CFS Mk-IIMargin Financing Suggested by

SECPKSE Margin Trading System

Direct Participation of Non-Brokers and Brokers

Direct Participation of Non-Brokers and Brokers

Non-Brokers thru IDS and Brokers directly

Maximum Financiers ParticipationDepends on Banks / DFIs / Brokers Participation as Financiers

Depends on Banks / DFIs / Brokers Participation as Financiers

No Credit Assessment of Financees Financiers to assess Credit Worthiness of the Financees

Financiers to take Risk on Security Financed

100% settlement obligation shifted to financier.

Minimum FPR is 25% for ensuring Equity participation by the financee

Minimum FPR is higher of 25% or (VaR+ higher of CM & SM) for ensuring Equity participation by the Financee

Flexible criteria for selection of Securities allowed 53 Securities

The financier to decide which securities to finance.

Stringent criteria including same scrips as are eligible for DFC (18 scrips)

System Risk: --Netting with Ready Market-Use of Membership Right,& CHPF-Forced Liquidation of net position

No System Risk because risk is between the counter parties:--No Netting with Ready Market-No use of Membership Card & CHPF-Minimum distress selling in the Ready Market

Minimum System Risk because shares to be allocated all Financiers of the defaulted security:--No Netting with Ready Market-No use of Membership Card & CHPF-No forced selling in the Ready Market

No disclosure for leverage financing other than routed thru CFS Mk-II

Disclosure of Entire Credit given to the Brokerage Houses

No disclosure of leverage financing other than routed thru KSE Margin Trading

Length of contract was 22 Trading Days.

Length of Contract to be decided by Counter Parties

Length of contract to be decided by Financee and Financier after 22 days

Comparison for CFS, MF and KSE Margin Trading System

CFS Mk-IIMargin Financing Suggested by

SECPKSE Margin Trading System

Leverage buys were not Marked at Order Entry Level.

Leverage buys will not be Marked at Order Entry Level.

Leverage buys will be Marked at Order Entry Level.

Post-trade arrangement of FinancingPre-trade arrangement of financing through credit lines

Pre-trade arrangement of financing through KSE Margin Trading System

Unused funding cost was not involved

Fix cost on credit lines continuously applicable

Unused funding cost will not be involved

Default disrupt other Equity/Futures Trading Markets at the Exchange

Default will not disrupt any other markets at the Exchange

Default will not disrupt any other markets at the Exchange

In case of default, forced selling impact Equity/Futures Trading Markets at the Exchange, because:-NCCP was to forced sell all open positions-Exchange to close-out open position in all other markets.

In case of default in MF, forced selling will be minimum, because:-Only Counter Financiers may be sold on party to party basis-Exchange/NCCPL will not close-out open position in other Markets

In case of default in KSE Margin Trading, forced selling will be minimized because:-Financee to close-out defaulting UIN’s shares till FPR is near to Zero.-Remainder, if any, to be allocated to counter-party Financiers.-Exchange/NCCPL will not close-out open position in other Markets

Availability of funding to all Participants

Availability of funding to restricted participants

Availability of funding to all participants

• Undisclosed• Free market principle•Scrip-based Risk

Financing Arrangement

• Disclosed• Negotiated Dealing System•Counter Party-based Risk

Success

FailureReject Leverage Buy and

Financing

Reject Leverage Buy and

Financing

• FCE & FCR pay margin till T+2• In T+2, FCE & FCR pay FPR• On T+2, FCE & FCR get back their margins

• FCE & FCR pay margin till T+2• In T+2, FCE & FCR pay FPR• On T+2, FCE & FCR get back their margins

KSE Margin Trading & Margin Financing System KSE Margin Trading & Margin Financing System

Bilateral Arrangement

Bilateral Arrangement

Failure

KSE Margin Trading—Working Model

KSE Margin Trading System: Transaction Diagram

KSE Margin Trading—Key Features

KSE Margin Trading to be based on UIN and to work on a Pre-Trade basis– No-Netting with ready market– Financing to be acquired on premium agreed + underlying assets

price basis– Financing rate to be capped at 2 times 1month KIBOR– FPR i.e., 25% or VaR + Concentration Margin, whichever is higher

(if FPR is 25 than means 25% by Financee & 75% by Financier) on Settlement Date. Normal Exposure Margins based on VaR should be collected for T+2 days till settlement, thereafter, financing model will be worked on FPR.

– Three tier Concentration Margin will increase FPR for Financee UIN and Security.

– Same type of Concentration Margins will also be applicable to Financiers.

– Stringent Criteria as of DFC for selection of Securities.

Working Mechanism for Leverage Trades in Ready Market

• Financiers will be required to offer financing with disclosed Scrip, Volume & Mark-up Rate for all market Participants, which will be queued on time/price priority in KSE Margin Trading window. •Leverage Buyer UIN will enter BID with defined Scrip, Volume and Mark-up Rate but at available Market Price (Buy Market Order) for a Security.

•System will execute leverage buy in the Ready Market and Financing Transactions in the KSE Margin Trading System simultaneously either partially or full.

•All unmatched BIDs will be cancelled in the System, if either financing is not available at desired Mark-up Rate in KSE Margin Trading window or no Sell Order is available in the Ready Market.

•All leverage BIDs will be processed through separate window operated by separate function Key.

Working Mechanism for KSE Margin Trading Release-trans

•KSE Margin Trading transactions will be locked-in for Financier till 22 Trading Days

•Beyond 22nd Trading Day, Financier or Financee may both release their respective KSE Margin Trading Transactions

•All KSE Margin Trading un-released position for a particular UIN in a particular Security will also be MARKED either for Rollover or Settlement by the Financee.

• Rollover MARKING will be allowed subject to simultaneous execution of financing transaction if release is exercised by the Financee at any time.

•After 22nd Trading Day, Financiers will be allowed to release his Financing during the first half an hour of the opening of the Ready Market, however, financee may release any time during the day.

Working Mechanism for KSE Margin Trading Release Trans.

•If release is exercised by Financier after 22nd Trading Day, Financee may have option to Mark the released transactions for further Rollover subject to simultaneous execution of financing transactions.

•If financing is not available, Financiers’ release KSE Margin Trading transactions must be market for Settlement on Day-end

KSE Margin Trading– Mark-to-Market Settlement

Down-side Mark-to-Market differences: 

• Downside MtM losses to Financees will be settled in Cash. 

For example; if a security is financed at Rs. 100.00 with 25% FPR and its price will go down to Rs. 95.00, MtM of Rs. 5.00 will be collected from Financee and paid to financier and contract price will be adjusted at Rs. 95.00 with same FPR and financing cost will be based on Rs. 70.00 instead of Rs. 75. Similarly, if price reverse to Rs. 100.00, then no MtM difference will be settled, contract price will continue to be at Rs.95.00 so on so forth.

 • Financee Member will be responsible to pay MtM losses in Cash for each UIN through UINs (Clients) Level Margining System.

 

KSE Margin Trading– Exposure Margins

•Three tier Concentration Margins will be collected in Cash from Financiers even then financed Securities are blocked in their respective CDS Account.

•If Scrip-wise Special Margin %age based on 26 weeks upward its moving average Prices is greater than the Market-wide Concentration than Special Margin will replace such Concentration Margin for determining total additional margins %ages to FPR provided total FPR including additional margins will not be greater than 50%.

 •Financed Securities should be parked in CDS Blocked Account and snapshot on book closure start date for corporate actions shall continued to be applicable in favor Financee UINs.

 

KSE Margin Trading–Default Management Procedures

•If a Member fails to pay MtM losses at the day-end on account of his UIN in any security, a loss notice will be served upon such Member to fulfill his requirement on same day but not later than the opening of Ready Market on next trading day.

•If such Member will not pay MtM losses before opening of Ready Market on next trading day:

•Financee Member will be restricted to take further position in any security for defaulting UIN’s account until he pays full MtM losses for such UIN.

•Financee Member will be required to square-up the open positions of deficit UIN in the loss making security in the Ready Market for sales within ONE HOUR OF OPENIN OF MARKET for making FPR of such UIN in such Security at the desired level.

 •If Financee Member fails to either square-up or replenish FPR at desire level within such ONE HOUR, KSE MT System will try to square-up the UIN’s positions in order to make such UIN’s FPRs in all Securities at desired level.

KSE Margin Trading–Default Management Procedures

•If Security is financed at value Rs. 100/- and FPR 25% and Circuit Breakers for such Security are 7.5% and KSE MT System will continue to square-up defaulting UIN’s positions either its FPR will come at desired level or it approaches to Zero, which comes earlier:For examples:

• If Security is closed daily at Lower Circuit Breakers for continuous 3 Trading Days, maximum MtM Losses approaches to 22.50%, remaining open positions in such UIN’s Security will be allocated to Financiers at Rs. 77.50 (75 financed value +2.5 partial FPR).

 •If maximum downside fluctuation in 3 Trading Days is 20%, MtM Losses approaches to 20%, remaining open positions in such UIN’s Security will be allocated to Financiers at Rs. 80 (Rs. 75 as financed value +Rs. 5 as partial FPR).

•Partial FPR (either Rs. 2.5 or Rs. 5 per shares in above two cases) will be recovered from respective Financiers.

•KSE MT System will not try to square-up UIN’s positions, if its remaining FPR for a Security is less than the maximum circuit breaker for next trading day.

 

KSE Margin Trading–Default Management Procedures

• If final MtM losses are not paid by Financee in respect of any UIN, following allocation procedures will be followed:

 •Only remaining shares of loss making Security will be allocated to all Financiers at their FPR contribution in proportionate to their released position of respective security on the allocation date.

• •Allocated quantities determined based on above mechanism will be un-blocked in the financiers’ CDS Block Account and notified accordingly to both Financee and Financiers.

•Such client will be restricted to take any further open positions in his UIN account under any market, however, he will be allowed to release UPTO 22nd day of execution through system and square-up his open positions in all market.

KSE Margin Trading–Disciplinary Actions on Defaulting Member

•In case of one time default on of his any UIN, 1.00% of the value of such UIN position in loss making security will be charged to Financee Member and restricted to take further position for defaulting UIN.•On 2nd time default of his any UIN, 2.00% of the value of such UIN position in loss making security will be charged to Financee Member is restricted to take further position for defaulting UIN.

•If default repeated 3rd time by financee Member, he will be suspended for this Financing Product for 3 months with 4% penalty on defaulting UIN in loss making Security, however, financing for good UINs will be released on their 22nd Trading Day.

KSE Margin Trading–Disciplinary Actions on Defaulting Member

• If a defaulting Member, does not Pay MtM or Square-up positions of defaulting Clients till FPR approaches to ZERO, every day will be counted as daily default of such Member.

• Member’s assets including Membership Card, Clearing House Protection Fund etc. under Exchange’s custody will not be utilized for KSE Margin Trade failure.

•KSE Board may consider taking action against such Member who have been expelled from KSE Margin Trading system, for other markets at the Exchange.

KSE Margin Trading –Financing Limits on Financee

•Members’ participation in KSE Margin Trading will be based on new Capital Adequacy Regime. The appropriate limits will be decided in consultation with SECP based on new NCB regime;

•X time NCB for Proprietary UIN;

•X times NCB for all his Clients UINs;

•Position Limits:• Up to the extent of 2.00% of Free Float of a scrip at Member level;

• Up to the extent of 1.00% of Free Float of a scrip at UIN level globally at KSE level.

 •Market-wide financing will be restricted to 40% of Free Float of a scrip.

 

KSE Margin Trading –Financing Limits on Financier

• Financier participation in KSE Margin Trading will be based on new Capital Adequacy Regime. The appropriate limits will be decided in consultation with SECP based on new NCB regime;

•X time NCB for Proprietary UIN;

•X times NCB for all his Clients UINs;

• Position Limits:

•Up to the extent of 2.00% of its Free Float at Member-level.•Up to the extent of 1.00% of its Free Float at UIN-Level globally at KSE level.

• Financing by IDS Members will not be calculated for determining above limits provided that IDS transaction are affirmed by the IDS Members of NCCPL.