KARACHI – The Ministry of Law has pointed certain objections in the Margin Trading System’s (MTS) draft and has sent it back to the Securities and Exchange Commission of Pakistan (SECP), thus putting fate of the long-awaited leverage product in abeyance.
Unconfirmed reports, however, reveal that the law ministry has approved and referred the MTS draft to the apex regulator, which is to be launched in the first week of next month. Market sources told Pakistan Today that the leverage product is unlikely to provide relief to the losses-hit investors, particularly small ones, as interest rate for financing is going to rang between high figures of 20 to 24 percent.
SECP officials stated that the Ministry of Law had referred the MTS draft back to the SECP with “some changes” instead of an approval. The MTS draft is said to have been pending at the law ministry for over the last three months. “The chairman (SECP) would, perhaps, now be reviewing the draft,” an official, seeking anonymity, told Pakistan Today. Sources at KSE, however, came up with a different version and said that the federal law ministry had cleared the proposed system which would be implemented by the SECP in the country’s equity market in the first week of next month. Once launched, the proposed MTS would be the only leverage product in the country’s equity market following failure of Continuous Financing Scheme Mark-II (CFS Mk-II) locally-called “Badla”, over a couple of years back. Another hitch posing a potential threat to the product pertains to the oft-repeated phenomenon of the country’s uncertain politico-security situation and the ever-present investors’ fear thereof.
Sources told Pakistan Today that given a “high-risk” nature of the local equity market, the banks and financial institutions had set a high interest rate for their finances under MTS. “Banks and financial institutions have told the SECP that they would charge at least 20 to 24 percent annual mark up,” sources claimed. The MTS is envisaged to increase volumes at local bourses by enabling traders to borrow money primarily from banks and other financial institutions against their shares.
Sources went on to claim that banks had initially shown little or no interest in participating in the leverage system at the equity market where they had incurred huge losses following the 2008 market crash. Recalling the 2008 crisis, sources said, banks like United Bank Limited and IGI Investment Bank, after a loss of 260 to 350 million rupees, had mobilised a court of law against the guarantor, Karachi Stock Exchange, for the recovery of their loans. The KSE had to make payments to banks after the court had decreed in favor of the latter. When approached, the SECP spokesman did not confirm reports that banks or other stakeholders had come up with such a demand. The spokesman said that investment banks might well be contacted for confirmation.
“Time factor” and other corrective measures also appear to be major determinants to make the proposed leverage product a success story. In addition, this volatile market has seen such experiences collapse earlier.
Market analysts, when asked about the launch of MTS next month, warned that the regulator, SECP, must be mindful of the “time factor”. “This is not an appropriate time for introducing the margin system,” an analyst said suggesting that the product should rather be launched in the next financial year.
He said the product would not make a difference in the presence of so many taxes which were enough to erode the investors’ trading power, thus putting volumes at bourses to low. Currently, investors are paying levies including 13.5 percent interest rate, five percent KIBOR, 10 percent capital gains tax, withholding tax and members’ commission. “The government should first look to withdraw the capital gains tax in the new budget and then introduce the leverage product,” the analyst proposed. The analyst feared that introduction of MTS; at a time when the KSE-100 benchmark was hitting a high, would inflict greater damages upon the stakeholders if the 2008-like crash recurred.
