Transcript MTS Presentation - The Karachi Stock Exchange

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Margin Trading System- MTS
Background
 The Securities and Exchange Commission of Pakistan (“SECP”)
constituted a Committee of professionals on June 22, 2010 to explore
avenues of generating liquidity in the capital market.
 The Committee conducted detailed analysis and forwarded its
recommendations and detailed Concept Paper, for the provision of
‘Margin Trading System’ to SECP on July 19, 2010.
 Accordingly, the Concept Paper proposed by the Committee
disseminated to all market participants on July 20, 2010.
 The Rules, called “Securities (Leveraged Market and Pledging) Rules,
2011” have been circulated by SECP on February 18, 2011
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Margin Trading System- MTS
Overview
 The term “margin trading” refers to the purchase of securities in ready
market by equity participation.
 Financing shall be made available only on pre-identified ready market
purchases, termed as ‘Leverage Buy’. For this purposes, a separate function
key i.e. F7 to be made available in the trading systems.
 Margin Trading will be done on an undisclosed manner through a platform
provided by NCCPL, as an Authorized Intermediary, to Financees and
Financiers.
 Margin Trading facility will be made available only in Eligible Securities .
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Margin Trading System- MTS
Overview
 The maximum mark-up rate in MTS Market will be KIBOR+8%.
 All transactions executed in MTS Market will be based on Financing Participation
Ratio (“FPR”) i.e. equity participation by Financees. For this purpose, FPR will be
higher of VaR or 25% for the Financee. Accordingly, Financee will pay its FPR of
leverage buys on respective settlement date and Trading Financier will pay remaining
amount of such leverage buy to settle such ready market purchases.
 After settlement of ready market purchases, as mentioned above, Financees shall be
required to pay Marked-to-Market (MtM) losses to NCCPL on daily basis, in Cash
only, till the settlement of the entire MT Contract. However, such MtM losses will be
paid to the respective Financiers on daily basis.
 With the payment of such daily MtM payment, MT Contract value will be aligned
and mark-up will be charged on the reducing balance accordingly.
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Margin Trading System- MTS
Overview
 All Trading Financiers will be required to open a separate MT Blocked Account in CDS.
Accordingly, all MT Financed Securities will be moved in the respective client/house accounts
in blocked status.
 Each MT Contract shall not exceed from sixty (60) calendar days. However, on every fifteenth
(15th) calendar day, MTS will automatically release one fourth quantity of the MT Contract
Value.
 The Financees shall also be allowed to release their MT Contract at any given point of time
during the entire MT Contract period and will be allowed to roll-over in MT Market.
However, in case of same day release one day mark-up will be charged.
 Risk management measures such as exposure margins, concentration margins, liquidity
margins and MTM shall be applied on MT Contract. Capital adequacy limits and position
limits shall also be applicable on Financiers and Financees in accordance with the
Regulations.
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Margin Trading System- MTS
Legal Frame Work
The operations of MTS shall be governed under the following:
 Securities (Leveraged Market and Pledging) Rules, 2011;
 NCCPL Regulations;
 NCSS Procedures;
 Relevant Regulations of the Stock Exchanges; and
 CDC Regulations.
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Margin Trading System- MTS
Trading Financiers
The following entities will be eligible to apply to NCCPL for
admission as Trading Financiers:
 “broker” of stock exchange meets the minimum net capital balance and
paid up capital requirements;
 “banking company” allocated minimum short-term credit rating of A3;
 “financial institution” allocated minimum short-term credit rating of
A3;
 “collective investment scheme” allocated minimum short-term credit
rating of A3;
 “investment finance company” allocated minimum management
quality rating of AM3 minus; and
 any other corporate entity admitted by NCCPL Board and approved
by SECP.
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Margin Trading System- MTS
Financee
Broker Clearing Members (“BCM”) will be the Financees in MT Market
subject to the following conditions:
 BCM holds a membership of stock exchange(s);
 no action is pending in any court or has been initiated by the concerned
stock exchange(s) or the SECP against such BCM;
 BCM is not in breach of NCCPL Regulations or any law or other
regulations;
 BCM submitted an addendum to the agreement to NCCPL; and
 BCM meets the minimum net capital balance requirement.
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Margin Trading System- MTS
MT Eligible Securities
• NCCPL will declare list of MT Eligible Securities based on the
eligibility criteria.
• Eligibility criteria for MT Eligible Securities will be reviewed by
NCCPL in accordance with its Regulations and any addition or
deletion shall be done by giving at least 60 days prior notice.
• Corporate Entitlements, if any, in MT Eligible Securities (having open
position in MTS i.e. MT Financed Securities), will be
automatically in the respective Financee’s accounts in CDS.
credited
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Margin Trading System- MTS
Operation of MTS
 Since MTS is separate system from all trading systems and NCSS, a separate
Personal Computer (PC) shall be required for an exclusive use of MTS.
 In order to avail financing through MTS, Financees shall be required to buy
MT Eligible Security(ies) in ready market through specific key assigned i.e.
F7 in the trading system. These buys are termed as ‘Leverage Buy’.
 All Bids/Offers will be entered in MTS by Financee/Financier in an un-
disclosed manner whereby they will never know the counter-party of MT
Transaction.
 UINs and client codes tagged for ready market shall be made available in
MTS Market as well to the Financees. However, client codes of non-broker
clearing members (NBCMs) shall not be available.
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Margin Trading System- MTS
Operation of MTS
 MT Participants will not be allowed to modify any Bid/Offer once entered in
MTS. However, cancellation of Bid/Offer before matching will be allowed.
 MTS will verify client code wise leverage buy of Financees before entering
any Bid.
 MTS will compare UIN-wise net position, in ready market, at the day end
and any excessive volume of MTS, over and above the net leverage buy,
shall be force released on the same day.
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Margin Trading System- MTS
Operation of MTS
 Broker Trading Financiers will be allowed to provide financing in MTS through their
own funds or borrowed from their corporate clients only
 Broker Trading Financiers will be required to enter into a separate agreement with
their corporate clients in accordance with the provisions of the Rules.
 Accordingly, UINs and client codes of corporate clients only, tagged for ready
market, shall be made available in MTS Market as well to the Broker Trading
Financiers. However, Broker Trading Financiers shall be required to tag such client
codes of corporate clients with the respective sub-accounts to be maintained in their
separate MT Blocked Account in CDS.

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Margin Trading System- MTS
Operation of MTS
 MT Participants may place Bids/Offers in MT Market at their desired mark-up rate
however, such mark-up rate will be maximum to KIBOR+8%.
 Inter-exchange trades shall be made available in MTS to the executing Broker
Clearing Member whereby settlement obligation will be shifted to affirming Broker
Clearing Member through BTB Module of NCSS. However, executing Broker
Clearing Member will remain responsible for risk management of MT Contract.
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Margin Trading System- MTS
Operation of MTS
Financing Participation Ratio (“FPR”)
 The FPR (equity participation by Financee) for leverage buy of MT
Eligible Security shall not be less than 25% or VaR whichever is
higher. Remaining value of such leverage buy shall be paid by the
respective Trading Financier.
Lets assume that FPR of ABC Securities is 30%:
Qty
Rate
Total Amount
FPR
Financee
Obligation on SD
Trading Financier
Obligation on SD
10,000
15
150,000
30%
45,000
105,000
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Margin Trading System- MTS
Operation of MTS
MTS Release and Rollover
 MT Released (R ) Transactions will be of following Types:
1. Forced MT-R by MTS on four Maturity Dates of each MT Contract:
st
Transaction Qty
Date
Day 1
20,000
1 Maturity Date 2nd Maturity Date
15th calendar day 30th calendar day
5,000
5,000
3rd Maturity
Date 45th
calendar day
4th Maturity
Date 60th
calendar day
5,000
5,000
2. Forced MT-R by MTS due to Excessive Financing over and above net leverage buy
at the day end:
F7 Lev
Buy
MTS
Net-Ready
Sell
Net-Lev
Buy
(1000-300)
Day End
Forced
Release
(1000-700)
Remaining MT
Open Pos.
1,000
1,000
300
700
300
700
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Margin Trading System- MTS
Operation of MTS
MTS Release and Rollover
 MT Released (R ) Transactions will be of following Types:
1. Self MT-R of each MT Contract before any Maturity Dates by Financee
F7 Lev Buy
MTS
1000
1000
Forced Release
st
due on 1
Maturity Date
250
Self Release by
Financee before
1st Maturity Date
Forced Release
by MTS on 1st
Maturity Date
Remaining MTS
Open Position
100
150
750
 Financee may Roll-over Forced Release of MT-R Transactions on respective
Maturity Dates and Self release of MT-R Transactions. However, Roll-over
facility shall not be allowed on day-end Forced Releases due to excessive net
sell position in the ready market.
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Margin Trading System- MTS
Settlement of MT Contract
All MT Contracts (MT and MT-R Transactions) shall be settled on T+2
settlement cycle through National Clearing and Settlement System (“NCSS”)
in the following manner:
A. Settlement of MT Transaction
 Financee will settle his FPR of MT Transaction in Cash, i.e. higher of 25% or VaR,
as the case may be, on settlement day through NCSS Pay & Collect mechanism.
 Trading Financier will settle remaining portion of MT Transaction in Cash, i.e. 75%
or VaR, as the case may be, on settlement day through NCSS Pay & Collect
mechanism.
 After settlement, all MT Financed Securities will be moved to respective house/sub-
accounts of Trading Financier in its separate MT Blocked Account in CDS.
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Margin Trading System- MTS
Settlement of MT Contract
B. Settlement of MT(R) Transactions
 Financee will be required to settle remaining portion of MT Contract Value in
Cash, as determined after adjustment of mark-up and Marked-to-Market
Losses, on settlement day through NCSS Pay & Collect mechanism.
 Trading Financier will be received remaining portion of MT Contract Value
in Cash, as determined after adjustment of mark-up and Marked-to-Market
Losses, on settlement day through NCSS Pay & Collect mechanism.
 Accordingly, after settlement, MT Financed Securities will be moved from
Trading Financier’s respective CDS house/sub-account to Financee’s
respective CDS house/sub-account.
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Margin Trading System- MTS
Settlement of MT Contract
Marked-to-Market Settlement
• After settlement of MT Transactions, Marked-to-Market Losses will be
collected from Financees on their open positions of MT as per their FPR% in
Cash only. Such Marked-to-Market Losses shall be collected till the
settlement of release of MT-R Transactions.
• Marked-to-Market Losses
Collected from Financees shall be paid to
respective Trading Financiers on daily basis through NCSS Pay & Collect
mechanism.
• Accordingly, the MT Contract Value will be aligned with the adjustment of
Marked-to-Market Losses payment. However, FPR% will remain intact.
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Margin Trading System- MTS
Risk Management Measures
A. Capital Adequacy Requirements
Following conditions will be applicable on MT Participant w.r.t. Capital
Adequacy requirements:
 Financee’s Capital Adequacy Limits:
Financee Location Minimum Net
Capital Balance
KSE
Capital Adequacy
Limit in MTS
Capital Adequacy
Limit in all
Markets
5 times of net
capital balance
25 times of net
capital balance
Rs. 10 million
LSE
Rs. 4 million
ISE
Rs. 4 million
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Margin Trading System- MTS
Risk Management Measures
 Trading Financier’s Minimum NCB and Paid-up Capital:
Broker Trading Financier
Location
Minimum Net Capital
Balance
Minimum Paid up
Capital
KSE
Rs. 20 million
Rs. 50 million
LSE
Rs. 8 million
Rs. 20 million
ISE
Rs. 5 million
Rs. 10 million
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Margin Trading System- MTS
Risk Management Measures
B. Exposure and Margins
Exposure margins, MTM Losses, Liquidity Margins and Concentration
Margins on MT Contracts shall be collected from MT Participants as per the
following mechanism. All margining will be based on client level margining
regime:
Financee Risk Management
 Stock Exchanges shall collect all margins and MTM Losses against leverage buy
orders, executed through special key i.e. F7, as per their applicable margining
regime in any form of approved collaterals.
 Upon execution of MT Transaction, Stock Exchanges shall be required to collect
and maintain differential exposure margins, as per FPR, till the settlement of MT
Transaction on T+2.
 After settlement of MT Transaction on T+2, NCCPL will collect MtM Losses and
Concentration Margins on open MT Contract Value, in accordance with FPR in
the form of Cash only till the settlement of MT-R Transactions.
I.
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Margin Trading System- MTS
Risk Management Measures
Trading Financier’s Risk Management
II.

Trading Financier shall pay Exposure Margin and MTM Losses as per
their FPR to NCCPL, in any form of approved Collateral, till the
settlement of MT Transaction on T+2.

Since MT Financed Securities are delivered in the separate MT
Blocked Account in CDS of the Trading Financier, no margins and
MtM will be required on open MTS Contract.
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Margin Trading System- MTS
Risk Management Measures
C. Position Limits for Financees
Market wide position
limit
20% of free-float for each MT Eligible Security subject to
maximum of Rs. 10 billion
Member wide position
limit
2% of free-float of the MT Eligible Security subject to
maximum of Rs. 1 billion.
Client wide position limit
0.5% of free-float of the MT Eligible Security subject to
maximum of Rs. 250 million for each MT Eligible Security.
Overall financing availed in all MT Eligible Securities shall
not exceed Rs.1 billion.
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Margin Trading System- MTS
Default Management
NCCPL shall manage default on MT Contract as per the following
Procedures:
I.




Financee Default (Marked-to Market Losses)
In case of non-payment of MTM Losses, Financee shall be required to
identify the defaulted UIN of its client to NCCPL.
NCCPL shall suspend such UIN for taking position in all Markets.
Financee shall be required to square up the open position of the
defaulted client within 3 hours on next Trading Day and deposit the
MtM Losses to NCCPL.
In case of non-squaring-up by the Financee, NCCPL shall initiates
squaring-up of the open position of such defaulted client on the same
day.
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Margin Trading System- MTS
Financee Default (Marked-to Market Losses)

In case of non-squaring-up by NCCPL, all open MTS Contracts of such
defaulted UIN shall be Released. Accordingly, MT Financed Securities of such
defaulted UIN will be allocated to all the Trading Financiers who have provided
Margin Trading in such MT Financed Securities.

MT Contract of such defaulted UIN shall be treated as closed.

NCCPL shall restrict such defaulted UIN from taking new positions in all
Markets for a period of six-months.

In case of second default of same UIN(s), NCCPL may block such UIN for the
period of three years.
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Margin Trading System- MTS
Financee Default (Marked-to Market Losses)

Relevant Financee shall also be penalized as follows:

In case of first default by the Financee: 2% of the defaulted amount shall be
charged and will be restricted in leverage markets for three months.

In case of second default by the Financee: 4% of the defaulted amount shall
be charged and will be restricted in leverage markets for six months.

On any subsequent default by the Financee, permanent restriction will be
applied in leverage markets.
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Margin Trading System- MTS
II. Financee Default (Settlement)

In case where Financee fails to settle his money obligation on the settlement
date, NCCPL shall suspend such Financee in all Markets.

NCCPL shall hold proportionate amounts with the credits due to all Clearing
Members to whom credits shall be due on that Settlement Date, till the recovery
of shortfall amount.

All margins of a suspended Financee, held by NCCPL/Stock Exchange, shall
be liquidated.

In case of shortfall still persists, NCCPL shall initiate squaring-up process of
open MT Contracts of such suspended Financee for two consecutive working
days.
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Margin Trading System- MTS
Financee Default (Settlement)
 In case of shortfall persists even after the said squaring-up, NCCPL shall allocate
MT Financed Securities to all the Trading Financiers who have provided Margin
Trading in such MT Financed Securities.
 In case of squaring-up of open MT Contracts, the shortfall amount (if any) shall
be proportionately allocated to all the Trading Financiers who have provided
Margin Trading in such MT Financed Securities.
 In case of allocation of MT Financed Securities and/or shortfall amount, of the
suspended Financee, respective MT Contract with respective Trading Financiers
shall be treated as closed.
 Relevant Financee shall be penalized in a manner as mentioned in previous slide
number 27
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Margin Trading System- MTS
III. Trading Financier’s Default

In case where Trading Financier fails to settle his money obligation on the
settlement date, NCCPL shall suspend such Trading Financier for all Markets.

NCCPL shall hold proportionate amounts with the credits due to all Clearing
Members on that Settlement Date, till the recovery of shortfall amount.

All margins of a suspended Trading Financier, held by NCCPL shall be
liquidated.

Respective Financees shall be given an opportunity to re-finance from MT
Market.
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Margin Trading System- MTS
Trading Financier’s Default
 In case where Financees unable to re-finance the leverage buys, such
Financees shall be required to settle such leverage buys through NCSS
Balance Order.
 All other open MT Contracts of the suspended Trading Financier shall be
released on their respective Maturity Dates and will be settled in
accordance with the relevant Regulations of NCCPL and CDC.
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Margin Trading System- MTS
Trading Financier’s Default

Relevant Trading Financier’s Default shall be penalized as follows:

In case of one time default in a calendar year: 1% of the defaulted amount.

In case of second time default in a calendar year : 2% of the defaulted amount

In case of third time default in a calendar year: 4% of the defaulted amount
and suspension of three months in MT Market.
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Margin Trading System- MTS
Market Information
 NCCPL shall disseminate the following key statistics pertaining to
MTS through its website:
 Top 15 Financiers and Financees in MTS market will be disclosed.
 Total Number of Financiers and financing provided in MTS Market.
 Funds to be force released in 3 days advance with respective 1/4 th and 15th day philosophy
 Scrip wise total amount of released transactions in the day.
 Total funding provided in each MT Eligible Security.
 Total amount of MTS funds released during the day and re-financed.
 Weighted average rate of mark-up charged in each of the MT Eligible Security for the day.
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Thank you !
NATIONAL CLEARING COMPANY OF PAKISTAN LIMITED
8th Floor, Karachi Stock Exchange Building,
Stock Exchange Road, Karachi – 74000 Pakistan
TEL : (92-21) 3246 0811-19 FAX: (92-21) 3246 0827
E-Mail : [email protected]
Website : http://www.nccpl.com.pk
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