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Margin Financing Recording System Through

Margin Financing Recording System Through. National Clearing Company of Pakistan Limited. Back Ground.

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Margin Financing Recording System Through

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  1. Margin Financing Recording System Through National Clearing Company of Pakistan Limited

  2. Back Ground • The Securities and Exchange Commission of Pakistan (“SECP”) formed Consultative Group on Capital Market comprises of market experts from Stock Exchanges, NCCPL, CDC, Financial Institutions and SBP. • Besides various other mandates, the Group was requested to prepare a working paper on Margin Financing in line with the best international practices. • The Committee conducted detailed analysis and forwarded its recommendations and detailed Concept Paper, for the provision of ‘Margin Financing System’ to SECP.

  3. Back Ground • Accordingly, such Concept Paper was circulated by SECP to all market participants for their feedback and comments. • The Rules, called “Securities (Leveraged Market and Pledging) Rules, 2011” have been circulated by SECP on February 18, 2011

  4. Introduction • Margin Financing (MF) facility will be made available to all brokers from financial institutions (Banks and DFIs) against net ready market purchases of their clients and proprietary positions. However, such ready market purchases shall not be included that are financed in MT Market. • MF may be obtained as per agreed Financier Participation Ratio (FPR). However, minimum of 25% or VaR whichever is higher should be contributed by financee. • MF may be provided by a broker through its own fund to its own client and to the broker of other stock exchange as its client. • MF Participants (Margin Financee and Margin Financier) will pre-define all terms and conditions pertaining to MF Transactions in accordance with the NCCPL Regulations.

  5. Introduction • National Clearing Company of Pakistan Limited (“NCCPL”) will provide a system to facilitate MF Participants for recording and settlement of MF Transactions through its National Clearing & Settlement System (“NCSS”) in the capacity of an Authorised Intermediately. • Reversal of MF Transactions (MFR) will also be recorded on such MF System. However, only MFR based on ready market sell shall only be settled through NCSS. • All MF Transactions will be based on counterparty risk. • Marked-to-market, Mark-up Rate and Corporate Entitlements will be managed by the MF Participants outside MF System.

  6. Eligibility Criteria Margin Financee All Broker Clearing Members shall be Margin Financees in the Margin Financing System of NCSS. Margin Financiers • A member of a Stock Exchange fulfills the net capital requirements (for Member of KSE Rs. 20 million, for Member of LSE Rs. 8 million and for Member of ISE Rs. 5 million); • A banking company within the meaning of the Banking Companies Ordinance, 1962 (LVII of 1962) and which has been allocated minimum short-term credit rating of A3; • A company, corporation or institution to which Section 3A of the Banking Companies Ordinance, 1962 (LVII of 1962) is applicable and which has been allocated minimum short-term credit rating of A3; • An investment finance company licensed by SECP and which has been allocated minimum management quality rating of AM3 minus; and • Any other corporate entity admitted by NCCPL Board and approved by SECP.

  7. MF Agreement • MF Agreement shall be executed between MF Participants before entering into MF Transaction. • Following matters shall be covered in the MF Agreement between MF Participants in accordance with the Rules and NCCPL Regulations: • List of Securities (to be selected form MF Eligible Securities) acceptable for Margin Financing. Any exclusion will require advance notice of at least two weeks. • FPR for each Security, which is acceptable to the Margin Financier; • Limit of Margin Financing Facility; • Margin Financing Mark-up Rate; • Margin Financing Contract Period; • Forms of acceptable Collateral for margin and MtM losses; • Default Management Procedures • Treatment of corporate actions; and • Any other matter as agreed upon between the MF Participant.

  8. Recording of Margin Financing Transactions on MF Module in NCSS

  9. Pre-checks of Initiation/Affirmation • Amount of financing facility from Margin Financier along with list of MF Eligible Security(ies) and its respective FPR for respective financees; • Availability of net purchases from ready market trades; • Position Limits (market-wide, member-wide, client-wide); • Capital adequacy; and • Affirmation by Margin Financier shall be restricted upto 5% of the free float of Eligible Security (ies).

  10. MF Initiation and Affirmation Process • MF System shall calculate member-wise, security-wise, UIN-wise and client code wise (including proprietary account) net purchases from ready market trades for Clearing Members as Margin Financee. • Margin Financee may initiate MF Transaction fully or partially. • Upon initiation, details of such initiated MF Transaction will be reflected to the counter Margin Financier for its affirmation. Such, affirmation shall be restricted upto FPR.

  11. MF Initiation and Affirmation Process • Affirming Margin Financier shall not be allowed to edit the details of an initiated transaction and shall have an option to affirm and/or reject any of number of initiated transactions on the Trade Date within Designated Time Schedule (DTS). • Margin Financee may cancel the initiated MF Transaction at any given point of time before its affirmation by the counter Margin Financier. • Where initiated MF Transaction is neither affirmed nor rejected within DTS, such MF Transactions shall be automatically dropped from MF System.

  12. Settlement of MF Transactions • Upon affirmation of MF Transaction by the counterparty Margin Financier, such transactions shall be settled under Balance Order of NCSS. • Settlement Date of each MF Transaction shall be the same of the underlying net purchases of MF Eligible Securities in ready market. • The Margin Financee will settle MF Transactions through its Regular CDC Account in NCSS on net basis. • The Margin Financier will settle MF Transactions through its separate Margin Financier Account in NCSS without netting with its Regular Account . For this purpose, Margin Financier shall be required to open a separate CDC MF Blocked Account. • Margin Financier shall be obliged to pay affirmed MF Transaction Value on the Settlement Date upto FPR whereas, remaining amount of the ready market purchases shall be paid by the Margin Financee accordingly. • Upon settlement, all MF Securities shall be moved to the CDC MF Blocked Account of the Margin Financier.

  13. MFR Initiation and Affirmation Process MFR Transactions can be executed on the following basis: • Ready Market Sell; • Without having Ready Market Sell; and • Direct release by Margin Financier.

  14. MFR Initiation and Affirmation Process 1. MFR Against Ready Market Sell • MFR Transactions can be initiated by Margin Financee fully or partially based on its net ready market sell position. • Upon initiation, the same details will be reflected to the counter Margin Financier for its affirmation. Affirming Margin Financier shall not be allowed to edit the details of the initiated transaction and shall have an option to affirm and/or reject any number of such initiated transactions. • If an initiated MFR Transaction neither affirmed nor rejected within the DTS, it will be automatically dropped from the MF System. Continued…..

  15. MFR Initiation and Affirmation Process • Settlement Date of each MFR Transaction shall be the same of the underlying Sell of MF Eligible Securities in ready market. • Upon affirmation by the Margin Financier, such MFR Transaction shall be settled under Balance Order of NCSS. • Accordingly, the Margin Financier will receive affirmed MF Transaction Value on the Settlement Date and deliver MF Financed Securities from its CDC MF Blocked Account. • The settlement of MF Mark-up Rate shall be handled between MF Participants out side NCSS. • Corporate actions of the MF Financed Securities shall be handled by the MF Participants as per their mutual agreement out side the MF Module. However, corporate entitlements of MF Financed Securities shall be credited in the regular CDC Account of Margin Financier.

  16. MFR Initiation and Affirmation Process 2. MFR Without Having Ready Market Sell • MFR Transactions without having sell position, may also be released. However, such MFR Transactions shall be settled directly between MF Participants outside the MF Module. • Such MFR Transactions shall be settled directly between Margin Financing Participants outside the NCSS. • However, upon affirmation, MF Financed Securities shall be moved from the CDC MF Blocked Account of respective Margin Financier to the counterparty Margin Financee Regular CDC Account. • If an initiated MFR Transaction neither affirmed nor rejected within the DTS, it will be automatically dropped from the MF System.

  17. MFR Initiation and Affirmation Process 3. Direct Release by Margin Financier • In case of any default and/or dispute occurred between MF Participants on MF Transactions and/or in case of non-fulfillment of any margin call by the Margin Financee, the Margin Financier may directly initiate MFR Transaction. • Such MFR Transaction shall be treated as auto-affirmed and MF Securities of the defaulted Margin Financee shall be delivered into the Regular CDC Account of the Margin Financier. Note: Margin Financier shall indemnify and hold the Company harmless against any claims made by the Margin Financee on the ground that the Margin Financed Securities should not have been unblocked for any reason whatsoever.

  18. Risk Management 1. Exposure Margins Margin Requirements from Financee Margins will initially be applied on Margin Financee on its ready market purchase as per the risk management requirements of the respective Stock Exchanges. However, Margin Financee will pay margins to counterparty Margin Financer in accordance with the terms and conditions set out in their MF Agreement. Margin Requirements from Financier Margin Financer will pay exposure margins on MF Transaction to NCCPL till the settlement date. No margins shall be collected from the Margin Financier after settlement of MF Transactions.

  19. Risk Management 2. Position Limits Position limit of Margin Financee shall not exceed the following:

  20. Risk Management 3. Capital Adequacy Limits for Margin Financee • The aggregate Exposure of Margin Financee in all markets including MF Transactions shall not exceed 25 times of its net capital balance. • The aggregate Exposure of Margin Financee in respect of MF Transactions shall not exceed 5 times of its net capital balance. • Exposure to a single client shall not exceed 5% and Exposure in single MF Eligible Security shall not exceed 20% of the total permissible exposure (5 times of net capital balance).

  21. Default Management • Since the MF Transactions will be executed on the basis of disclosed manner and carry counter-party risk, any default on MF and/or MFR Transaction will result in cancellation of all MF and/or MFR Transactions as the case may be. • In such cases respective counter-party Margin Financees shall be hold responsible for the settlement of their entire ready market purchases and/or sells, as the case may be. However, in case of non-fulfillment of obligation of affirmed MF Transaction by counterparty Margin Financier, penalties shall be imposed on such Margin Financier as per NCCPL Regulations. • In case of non-fulfillment of resultant ready market settlement obligation by the respective Margin Financee, normal default procedures in accordance with the NCCPL Regulations shall be applied.

  22. Thank you ! NATIONAL CLEARING COMPANY OF PAKISTAN LIMITED 8th Floor, Karachi Stock Exchange Building, Stock Exchange Road, Karachi – 74000 Pakistan TEL : (92-21) 3246 0811-19 FAX: (92-21) 3246 0827 E-Mail :rehansaif@nccpl.com.pk Website : http://www.nccpl.com.pk

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