The CFS financing shall be provided by Banks/DFIs only against Continuous Funding System (CFS) approved securities through National Clearing Company of Pakistan Limited (NCCPL) only.
The State Bank of Pakistan (SBP) regulations for banks and DFIs for financing under CFS said that the CFS financing shall be offered through automated trading terminals installed at Banks/DFIs premises. The Banks/DFIs should take necessary steps to ensure that these terminals are manned by authorised persons only and no unauthorised person should have access to it.
The Banks/DFIs will prepare comprehensive policies and procedures for CFS MK II Financing, duly approved by their Board of Directors. The policy shall include official authority limits for CFS financing lines of credit. The policy would be formulated within six months time, from the date of issuance of these Regulations.
The SBP advised the Banks/DFIs to develop a list of scrips eligible for financing through CFS. The criteria for selection of the scrips shall be approved by the Board of Director or the risk management committee of the Bank/DFI. Banks/DFIs should identify the risks associated with CFS MK II and take necessary measures to mitigate these risks. While making master agreement with NCCPL, the Banks/DFIs should ensure that their interest is fully protected by NCCPL for collection of the required margin and other losses.
The SBP said that Banks/DFIs should be mindful of their exposure to stock markets and review their investment portfolio in shares, whether in equity investment, margin financing, CFS Financing, repo/reverse repo transaction or financing against shares, with a view to assess risks due to volatility in share prices. They are required to calculate their total exposure towards equity market and monitor it at least on a monthly basis.
For the purposes of monitoring and better control, Banks/DFIs will keep separate records of the following facilities: CFS Financing, Margin Financing, Acquisition of shares, Direct/strategic investment, Financing against the shares of clients.
The total exposure in shares whether in equity investment, margin financing, CFS, repo/reverse repo transaction, and financing against shares, etc at any given point of time, should not exceed 50 percent of the equity of the Bank/DFI and subject to compliance of limits laid down in Regulation R-6 of prudential regulations for Corporate/Commercial Banking. Financing to asset management companies and their mutual funds shall also be counted towards the aforesaid limit.
Total exposure of a Bank/DFI in any scrip, whether in the form of equity investment, margin financing, financing against shares, CFS, repo/reverse repo transaction, etc, shall not exceed 10 percent of its total exposure to stock market. Investment in subsidiary companies would be excluded from the limits under this Regulation.
The SBP said that the Banks/DFIs should ensure compliance at all times with the requirement of subsection (2) of Section 23 of the Banking Companies Ordinance, 1962, which is reproduced here: "Save as provided in subsection (1), no banking company shall hold shares in any company whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty percent of the paid-up share capital of that company or thirty percent of its own paid up share capital and reserves, whichever is less."
Total exposure limit and per scrip limits have been defined above. However, any Bank/DFI desirous of taking exposure beyond prescribed limits may approach State Bank of Pakistan. Their request will be considered keeping in view their risk management system, expertise in investment management, efficacy of internal control etc.
The areas not covered under these regulations will be governed by Prudential Regulations for Corporate/ Commercial Banking. The Banks/DFIs, which already have exposure over and above the limit/breach, are advised to adjust the same within a period of three months from the date of issuance of these Regulations under intimation to SBP.