Pakistan stock market regulator after reviewing all the aspects of the risk management has decided to take several measures aimed to boost the confidence of investors, improve liquidity in the stock market and larger interest of the capital market. The Board of Directors of Karachi, Lahore and Islamabad Stock Exchanges met Dr Tariq Hassan, chairman SECP, and Shahid Ghaffar, Commissioner SECP, in Islamabad on Wednesday to review the risk management issues.
Number of decisions were taken in the meeting, which are the position limit in future trading has been enhanced from 1 percent to 3 percent in each scrip by each member based on free float. The 3 percent may be enhanced to 5 percent on the implementation of pre-trade verification system at the Karachi Stock Exchange by July 2005.
The requirement of 100 percent cash margin in case of exposure exceeding Rs 200 million has been reduced to 50 percent cash margin and 50 percent margin in eligible securities in the futures market or bank guarantee from a scheduled bank acceptable to the exchange.
Existing futures contracts based on deliverables will be allowed for trading until September 2005. These contracts would be standardised. In the event of any settlement problem in the deliverable futures contracts the principle of hammer price shall be followed to settle the outstanding trades.
With effect from October 2005 the stock exchanges would introduce standardised contracts for 30, 60 and 90 days on cash settlement basis.
Client code shall be indicated in all trades by the members of the exchanges.
Margin mechanism based on volatility and liquidity would be developed and implemented by the end of September 2005. Concentration margins would be introduced by the end of July 2005. Unique Global ID shall be developed by the CDC and implemented by November 30, 2005. Exit mechanism in the context of circuit breakers would be developed and implemented latest by the end of June 2005.
The meeting concluded with the resolve that both the SECP and the stock exchanges were conscious of the responsibilities to make adequate arrangements of risk management for the smooth running of the capital market.
Another important development taking place was that the stock market regulator has asked the KSE board of directors to submit comprehensive proposals related to lower circuit breaker ie 5 percent. The idea behind this is to safeguard investors' interest from daily downfall of the particular scrip.
The stock exchange has agreed with the suggestion of the SECP and sought two weeks time to submit the plan.
A proposal, explained by a leading broker, said if a company says Pakistan Telecommunication has lost 5 percent in any particular session, margins would be called and scrip would be removed from the circuit breaker. Soon as the PTCL again faces correction and loses another 5 percent, again margins would be called but this time the scrip would be traded on the spot basis, if investors' have fund they can buy it on cash basis.