Just when things got really scary, with the market witnessing record low volumes, concrete steps to bring back glory are under way. When margin finance made its untimely exit from the KSE, the local bourse started a slow transformation towards an abandoned factory, in terms of output anyway.
Outlines for Margin Trading System (MTS) have been sent by market players to be discussed by the regulator and the boards of the three securities markets.
Details haven been made public yet, but sources privy to the discussions have provided insight to BR Research regarding the impending product.
Brokers and non-brokers are expected to become authorized financiers, if the proposed rules are accepted by SECP.
Investors will have to put up a 25 percent cash margin to achieve a leverage ratio of 1:4. It is likely to add some vigour to market velocity, given the recent upward trend in the KSE-100 index.
In anticipation of the much sought after leverage product, investors exchanged 96 million stocks on Tuesday. The last four days alone have seen a jump in activity by up to 40 million shares.
But before you start calling your broker, there are other parameters that bind the MTS. Only scrips that are actively traded - read liquid - with a free float of 35 percent and free of any regulatory blemishes are allowed.
And what about opportunity cost, one may wonder. Theres obviously the cash margin mentioned above, while financing charges are rumoured to be in the ball park figure of 1-month kibor plus 8 percent.
One fund manager, when questioned, said the rate is in a good range, but should be eventually determined by market forces.
The old days of leverage were exiled in the name of risk mitigation. The proposed rules limit the leverage per scrip to 20 percent and impose disclosure of broker and client exposures to NCCPL on a regular basis. Transactions are expected to be limited to 2 month tenors.
Mark to market losses are likely to be made payable in cash. Oh, and just in case an investor defaults, the first line of defence will be the broker financiers. In case they are unable to cough up the cash, NCCPL will step in to square the position.
When the clearing agent does step in, it is expected to charge a 2 percent penalty to make up a fund for the protection of MTS.
A word of caution for all those brimming with excitement, it may still be a few weeks before the product is introduced. And it could be a totally different cut and shape when it happens.
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