KARACHI – The Securities and Exchange Commission of Pakistan (SECP) has decided to ban trading in the listed Term Finance Certificates (TFC) that are not covered under Bonds Automated Trading System (BATS). Aimed at ensuring the development and growth of the debt capital market in the county, the SECP move came after the nine-member Review Committee submitted its report to the regulator on BATS.
The decision would come into effect from April 30, said the apex regulator. “The SECP decided that no trading in listed TFCs outside BATS shall be permitted beyond April 30, 2011,” it added. Comprising all stakeholders, the committee was earlier constituted by the SECP to identify long-term sustainable solutions to encourage trading activity on BATS at the local bourses.
The committee, in its report available with Pakistan Today, has recommended certain system enhancements in BATS along with additional proposals mainly focused on facilitating the market participants in negotiating transactions in line with international best practices. Major recommendations entail that the Risk Management System (RMS) is recommended to be revamped. The margins are recommended to be decreased considering the liquidity needs of the market.
In the event of default, a close out process is recommended to be followed with cash margins serving as penalty and the defaulting party is to be blacklisted. Secondly, it is recommended that the circuit breakers be removed to enable efficient price discovery and prevent disruption in trading. Thirdly, it is proposed that pricing methodology for BATS be adjusted with a 30-day look-back period with monetary thresholds of Rs 15 million for issue sizes up to Rs 1.0 billion and Rs 25 million for issue sizes of more than Rs 1.0 billion for selecting transactions that can affect a change in the closing price to avoid manipulative trades.
The proposed methodology is provided in section 4 of the report. Certain improvements are identified in the BATS interface, which are enlisted in Annexure B of the report. In addition, only a handful of TFCs are listed on more than one exchange which prevents active participation by investors through BATS in TFCs which are listed on different exchanges. Exchanges are requested to grant waiver in listing fees and share listing information to facilitate cross-listing of TFCs across all exchanges.
It is also clarified that for unlisted TFCs, the reporting of all transactions to exchanges must be made mandatory. This information must be disseminated to market through BATS. Restrictions in this regard should be imposed in the CDC and all settlements must be made through NCCPL. “(The) committee feels that while the off-market trades act as an impediment to active participation on the BATS… the small number of listed TFCs and the low level of liquidity implies that the negotiated deals cannot be completely eradicated,” it observed.
It linked as ‘essential’ the success of an undisclosed-automated order matching system to the liquidity and the availability of bid or offer with sufficient depth. The committee also recommended that an incentive package should be provided by exchanges to those unlisted TFCs that meet the eligibility criteria for listing by waiving/relaxing the listing fee and providing for a speedy mechanism for listing.
The SECP has endorsed the committee’s recommendations for disallowing relaxation to the restriction on off-market trades in the listed TFCs. However, the regulator has decided not to allow trading in the listed TFCs outside BATS and has set April 30, 2011 as a deadline. According to SECP, the above timeline had been fixed to ensure a smooth transition period while giving the market participants sufficient notice and for implementing the milestone set as part of a long-term roadmap for the development of debt capital market.
The committee members include MFAP CEO Shamshad Nabi, MFAP Director, Board Committee for pricing and trading of debt securities Chairman Yasir Qadir, Market Development and New Product Karachi Stock Exchange GM Sani-e-Mehmood Khan, NCCPL CEO Muhammad Lukman, FMAP Assistant Secretary Muhammad Ismail Usuf, BMA Capital Fixed Income and Corporate Treasury Head Adnan Qaseem and SECP Joint Directors Mateenullah Khan, Asif Iqbal and Waseem Khan.
