KSE in process of setting up risk management rules

The Karachi Stock Exchange (KSE) has again sent a request to the Securities and Exchange Commission of Pakistan (SECP) to reconsider its proposals, allowing the stockbrokers to enhance their exposure in the futures market from one percent to five percent. KSC further said that it was in the process of setting up risk management measures. The SECP had rejected the plea of KSE on weekend to allow the stockbrokers to take exposure in the futures market, ie five percent of the free-float, instead of one percent allowed last month.
However, the SECP accepted the demand of the board of directors relating to margin financing, allowing them to deposit 50 percent cash and 50 percent approved securities, ie treasury bills.
The KSE has sent a letter on Monday in which, it said, further strengthening of risk management measures was proposed by SECP. KSE agreed to implement some steps while others were to be implemented under a time bound plan, such as unique/global client identification mechanism, which shall be developed by CDC and implemented by November 30, 2005.
From December 31, 2005, Netting would only be allowed of an individual client's position in the same scrip, and the margin would be collected on gross position.
Concentration margins would be introduced by July 2005. Margin mechanism based on volatility and liquidity would be implemented by the end of September 2005. An independent consultant will review the existing risk management system at KSE, and a risk management manual shall be developed by end-November 2005. Pre-trade verification would be introduced. Work on it by KSE management is in progress.
"KSE and SECP are conscious of their responsibility to make adequate arrangements of risk management for the smooth running of the stock market", the letter said. With the phasing out of COT, and introduction of margin financing - which is at a nascent stage and may take considerable time for its induction and acceptability - it is imperative to provide alternative market like futures to sustain the market's dynamism and vibrancy.
It might be necessary to run deliverable futures along with cash settlement from July 2005 for at least three months to ease out float from COT as after June 2005 no exit strategy would be available to carry the load of COT market.