The Securities and Exchange Commission of Pakistan (SECP) is likely to announce its decision regarding phasing out existing CFS Mk-II and to introduce new products in one or two days. The SECP has almost reviewed the recommendations sent by the CFS Mk-II Review Committee and any decision in this regard is expected to be announced in one or two days, Acting Chairman SECP, Salman A Shaikh told Business Recorder on Monday.
The recommendations were sent by the committee constituted by the SECP in consultation with the relevant stakeholders comprising representatives of the three stock exchanges, National Clearing Company of Pakistan Limited, Mutual Fund Association of Pakistan, Pakistan Banks Association and senior securities market professionals/stakeholders to review CFS Mk-II in its entirety.
Shehzad Naqvi, CEO of The Royal Bank of Scotland Limited is the chairman of the CFS Mk-II Review Committee while Mateenullah Khan, Joint Director SECP is the Secretary. The committee was constituted to review CFS Mk-II in its entirety, with particular reference to risk management, eligible securities for financing, margin requirements, analyse the role of CFS Mk-II as a leverage product during the recent stock market situation and draw conclusions, propose measures for further strengthening risk management of the product and to recommend other leverage products in line with the best international practices. The committee has submitted its recommendations to the SECP in line with the terms of reference.
The committee has strongly recommended that both CFS Mk-II and Deliverable Futures be discontinued. The committee said that the board of directors of Karachi Stock Exchange and National Clearing Company of Pakistan Limited have already passed resolutions recommending doing away with CFS Mk-II. One hundred and three (103) KSE members have also asked in writing for discontinuation of CFS Mk-II.
"This is opportune time to do away with both these products, as the outstanding sums involved are small and are not likely to cause stress in the market," the committee observed. The committee proposed to introduce a new product namely Securities Lending and Borrowing (SLB) with an obligation to redeliver the same securities in the same number and an agreed rent on the future date.
The potential lenders and borrowers can be the brokers, mutual funds, pension funds, banks, asset management companies, insurance companies and other companies managing large equity portfolios. All potential lenders/borrowers should be Clearing Members of the NCCPL.
The motivation for lenders is to earn income/return on their Idle Securities. The borrowers may utilise SLB functionality for the purpose of avoiding delivery failures in ready/future market and honouring delivery obligations after affecting the short sale. The lenders retain the right to any economic benefit associated with the lent securities, the committee said.
The committee also gave its proposals about the SLB models saying the facility will provide a solution for managing the delivery failure. About the risk management, the committee suggested that the borrowers shall pay 100 percent value, in terms of cash, of the borrowed securities to the NCCPL against the SLB transactions on a pre-trade basis.
The mark-to-market losses shall be collected from the borrowers on a daily basis in the form of cash only. The NCCPL shall hold such margins and mark-to-market till the settlement of the SLB transactions and where borrowers/lenders fail to return/deliver the securities that have been borrowed/lent.
On the settlement day, the NCCPL will initiate the buy-in or close out process in accordance with NCCPL regulations. Where lenders/borrowers fail to meet their settlement obligations and/or fail to pay margins and mark-to-market losses, they should be considered defaulters in term of NCCPL regulations.
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