Banks support sought

The Karachi Stock Exchange (KSE) has said that in a meeting with the Securities Exchange Commission of Pakistan (SECP) it was decided that support from various banks have been sought to extend financing facilities to the members through the preferred option of margin financing. According to a release of the KSE issued late on Monday night, the KSE said that there was a news item in a section of print media, on Monday, March 28, mentioning that the KSE transferred its funds and undistributed profits, to certain banks against financing by these banks to the Exchange members.
As a matter of fact, this is not the correct account and the Exchange denies such baseless news.
THE CORRECT VERSION IS THAT: following the meeting of the SECP with the Exchange management and representatives of the market participants, the latter held a meeting with various banks and advised them to extend financing facilities to the members through the preferred option of Margin Financing. While all the settling banks agreed to extend the Margin Financing, certain banks also showed their willingness to make financing in COT Market, as the SBP restriction in this respect was withdrawn.
In view of this, the Exchange held the COT session on Sunday, March 27, till 10 pm. Moreover, on Monday, March 28, a part of electronic media reported that an amount of Rs 6 billion remained un-financed in the COT Market. In fact leftovers in COT Market is not an uncommon phenomenon. Usually, where finances try to seek financing on cheaper rates, from the prevailing premium rates, such leftovers do occur.
The same factor was the cause of leftover in COT Market on Sunday, March 27, where part of the financing was sought at 0 to 5 percent premium rate, whereas the prevailing rate was 24 percent.
With reference to an article published in a daily on Monday, March 28, we wish to apprise how Cash and Derivative Markets operate parallel to each other. In theory as well as in practice, spread of prices between these two markets always exists and the difference between the two - "The Basis Risk" depends upon several factors which include (a) volatility of underlying scrip, (b) prevailing interest rates (c) investors confidence / prediction about the market (d) demand & supply in each market and (e) time to end the contract. Such factors force the spread between the two markets to give opportunity to investors to hedge their positions as well as to make gains.
Nevertheless, any of such market features could either be misused or abused, which are curbed through regulatory framework supplemented by market control functions and in case of such abuse in the absence of statutory measures and/or infrastructure limitations, it may not be desirable to suddenly introduce controlling measures, which may have dire effects for the market.
The emergent Board of Directors meeting in the morning of Thursday, March 24 was convened by the Chairman of the Board, in which extension in March Futures Contract, by one week, was decided unanimously, on the proposal of the Chairman.
That decision was within the ambit of the prevailing regulations and at that time considered to be the best among the options available, within the powers of KSE Board. However, in the latter part of the day, after considering further views & representations of the market participants, the Board, in the best interest of the market, reversed its earlier decision.
THE ABOVE MEASURES WERE TAKEN ON THE BASIS OF THREE PRINCIPLES:
(i) honouring the contracts;
(ii) maintaining the integrity of the system and
(iii) protection of investors by ensuring provision of financing to the market participants.
The Exchange wishes to reiterate here that all of its risk management measures are satisfactorily in place and working smoothly. Moreover, the routine function of settlement of the Exchange trades is also carrying out in smooth and effective manner.
GROUP ACCOUNT: The Securities Exchange Commission has increased the facility of group account by one month, according to a circular issued on Monday.
According to a letter issued to Central Depository Committee, it says that a suggestion was sent to the SECP by the members of the Karachi Stock Exchange to extend the date of the closure of Group book facility.
The SECP said that the date of the group account facility has been extended to April 30, 2005. It further said no further extension would be granted.