Several brokers yet to opt for MFS

KARACHI – Several brokers of Karachi and Lahore Stock Exchanges are yet to adopt the Margin Financing System (MFS) regime and are apparently unwilling to pay the fee to join the MFS. There are 200 brokers registered with the Karachi Stock Exchange (KSE). About 170 brokers have deposited the mandatory fee while 30 are yet to submit the fee as a result they are yet not in a position to start/facilitate trading under the MFS, sources indicated.
Similarly it is indicated; about 30 percent of brokers operating on the Lahore Stock Exchange (LSE) are yet to become part of the Margin Financing System. Before opting for the Margin Financing System, each broker and investor is supposed to deposit a fee of Rs 250,000 with the National Clearing Company of Pakistan Limited (NCCPL).
Low turnover and the expensive fees entailed by the MFS are the two major reasons behind the slow adoption of this system, sources pointed out. Last week, the average daily turnover of shares at KSE was around 112 million; far behind a good day at the KSE with turnover at over 400 million shares.
A minimum of 250 million shares turnover is essential for the survival of the brokerage houses, said Pearl Capital Management CEO Saad Bin Naseer. The cost of financing at stock market is very expensive, about 22 percent, excluding taxes and commission.
As per the MFS regime, the Karachi Interbank Operations Rate (KIBOR) plus eight percent would be charged as mark-up on the provision of financing at stock market. As the KIBOR moves around 14 percent, the total cost of financing amounts to 22 percent.
After including taxes like the capital gain tax, withholding tax, federal excise duty and commission of the brokerage houses, the cost runs over 35 percent, which is not financially viable for the small investors and jobbers.
The utilisation of the MFS is very low, about Rs 25 million between March 14th and the 19th of 2011, with average lending rate of about 20 percent. The Margin Financing System is yet to take off, said Naseer, adding the market is under recession since the beginning of the MFS and investors are reluctant to take new positions.
“We can see improvement in terms of the utilisation of MFS as soon as the market moves out of the recession and marches towards growth,” the broker stated.
According to sources, about 16 brokers of the KSE trade 75-80 percent of the total daily volume of the shares at the stock market while the remaining are facing difficulties in meeting their running expenditures because of low turnover.
The Margin Financing System was introduced at the stock market from March 14, 2011 and since then the facility of about Rs 25 million had been provided to investors. The expensive rate of MFS and taxes has eliminated day traders from the stock market, sources noted. Day traders previously contributed about 30 percent of the total turnover at the stock market and their absence is evident from the low turnover.
When contacted, Lahore Stock Exchange (LSE) Managing Director Aftab Ahmed Chaudhry opined that the new leverage products like the MFS would improve the market gradually. He asserted that most brokers and investors have got themselves registered with the NCCPL and the remainder is in process of receiving registration to adopt the MFS.
After the launching of the MFS, the Securities Lending and Borrowing (SLB) has been introduced at all three stock exchanges from March 21 to provide another source of investment and financing at the capital markets, he said.
Chaudhry stated that under the SLB, any investor can borrow shares from anyone and exchange them against his short-selling. For example, if any investor sells shares at stock market without having his/her own shares with the anticipation of decline in the index and value, he/she would borrow the shares from anyone to get adjustment against his sold shares. The managing director of the Lahore Stock Exchange is optimistic of an improvement in the stock market in the wake of the launching of the MFS and the SLB.