The proposed 'Continuous Financing System' (CFS) would provide cushion to small and retail investors and would end all kinds of speculation about arranging financing to the stock market plagued by freezing of the limit to Rs 12 billion level.
The market is rife with news regarding a multitude of issues relating to the elimination of the double-margin requirement on margin financing to enhancement in COT financing limit to the launch of a new financing product called 'Continuous Fund Supply'.
None of the above proposals mentioned has reached any tone of finality and the market continues to flounder, feeding indecisiveness abound.
Pundits suggest that removal of double-margin requirement is one issue that is inevitable. Dr Salman Shah, after the Saturday meeting last week, stressed that the double margin requirement would be done away with in the next 48 hours, barring final seal of approval from SECP.
With the 'Continuous Fund Supply', rumoured to be in place, a parallel market for borrowing funds would be working simultaneously and in tandem with the regular market. This way, the investors would be apprised about the financing availability on real-time basis.
Furthermore, verification of securities would be necessary before the trade. Many modalities and issues associated with the actual implementation still need to be worked out. For instance, the 'lender of last resort' in the CFS system has not been decided upon yet. In addition to it, the actual form of financing, whether in the shape of securities or cash, is anybody's guess.
One product that has been making headlines lately is the 'Continuous Fund Supply', said Haseeb Ahmad, research analyst at Alfalah Securities. This mode of financing is tipped very heavily to replace the current Badla/COT mechanism, although many market players suggest that CFS is only a modified form of COT.
The current regim 'Badla' is termed as "a transaction where the borrower, in order to avoid funding/delivery for a purchase/sale transaction, carries forward his security exposure from the current settlement cycle to the next settlement cycle by sale in the present week and repurchase in the subsequent settlement week at a predetermined differential price".
The key factors that matter and influence Badla rates are: 1. Overbought and oversold conditions; demand and supply conditions stemming from the market's oversold or overbought position acts as a key determinant of the badla type and rates.
A strong correlation exists between money market liquidity and badla rates. This is due to a significant part of excess funds in the money market spilling over to the stock market.
Sentiment plays a key role in determining the rates. At times of high investor confidence (or maybe irrational exuberance), majority of the investors want to take delivery of the stock. This factor deflates the total demand for rollover of funds and eventually badla rates decrease. On the other hand, in times of higher uncertainty (or unjustified pessimism) the increased rollover of funds props up badla rates.
Under the current mechanism, the Badla market opens after the regular market has done with its dealings. Investors with leveraged positions in the regular market go to the badla market in search of financing. With the CFS in place, a parallel market for 'loanable funds' would be working simultaneously and in tandem with the regular market. This way, the investors would be apprised about the funds availability on real-time basis.
The biggest gainers would be the small and retail investors who would not be at the mercy of big badla lenders and more cognisant about their risk exposures. Furthermore, the liquidity problems currently plaguing the stock market (Shaukat Tarin report suggests that an injection of Rs 30 billion is required) would be dealt with in a positive manner. The future of the market; many detractors may disagree, looks rosy in the near future.
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