Investors at capital market after reaching the limit under Continuous Funding System (CFS) have more avenues to finance shares to purchase, like in-house badla, futures options and other derivatives, soon to be formulated.
After being effective from August 22, 2005, the CFS in 14 scrips has reached its upper limit of Rs 25 billion.
The response of the market to the announcements made after the meeting of brokers, SECP and Prime Minister, which included launching of CFS, launching of Pre-Trade Verification System and increased tenors for future contracts, was very positive and the KSE-100 index gained 278 points, with trading volumes increasing by 69 percent on day-to-day basis from less than 200 million to over 300 million shares.
Despite the fact that the cap on CFS was increased to Rs 25 billion, from Rs 12 billion, and the number of eligible securities was raised to 14 scrips from 7, the CFS volumes increased by only 40 percent and investment in CFS increased by 38.5 percent on day-to-day basis.
Since August 22, the KSE-100 index gained 495 points (6.8 percent) and CFS volumes and investment witnessed a gradual increase. The market is again in a position where the investors might face some problems in obtaining financing for their leveraged buying in the short term.
However, alternatives, which include futures and in-house badla, may be adequate--for the time being. The upcoming developments, which include margins financing, increased number of future contracts to 30, 60 and 90 days and development of a derivatives market are likely to provide various avenues to investors.
The local bourses did not stop having fun as CFS reached its limit on last weekend. It was seen that leverage was being done through futures as futures open interest increased from Rs 7.3 billion to Rs 8.9 billion.
Whether the increase in open interest will keep on providing liquidity to the market to keep it on its upward track is yet to be seen. Some corporate results, such as Pakistan Oilfields, Attock Petroleum, and OGDC, are still to come, which can keep the bourses ignited.
With strong fundamentals of the country and the corporate sector of the country, traders were of the opinion that KSE would perform well in longer run. However, investors may jitter in the short term with new developments in the market as it is difficult to digest sudden major changes in the operations of the market after a long conventional history.
Analysts are of view that there is still appetite for more liquidity, which may be met by other sources of financing. They believe that investors would be jittery about the market in the near term as several major developments are in queue, which include the Pre-Trade Verification System, new future contracts and development of a derivatives market.
Currently, the CFS is not in its true form yet as it would be on real-time basis, for which technical work is under way and is likely to be completed in a couple of weeks. Other features of CFS, including 30-day maximum period instead of 10 days in COT and separate CDC accounts for securities under leverage are in place.