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Margin Trading System- MTS

Background
y The Securities and Exchange Commission of Pakistan (³SECP´) constituted a Committee of professionals on June 22, 2010 to explore avenues of generating liquidity in the capital market. y The Committee conducted detailed analysis and forwarded its recommendations and detailed Concept Paper, for the provision of µMargin Trading System¶ to SECP on July 19, 2010. y Accordingly, the Concept Paper proposed by the Committee disseminated to all market participants on July 20, 2010. y The Rules, called ³Securities (Leveraged Market and Pledging) Rules, 2011´ have been circulated by SECP on February 18, 2011
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Margin Trading System- MTS

Overview
y The term ³margin trading´ refers to the purchase of securities in ready

market by equity participation.
y Financing shall be made available only on pre-identified ready market

purchases, termed as µLeverage Buy¶. For this purposes, a separate function key i.e. F7 to be made available in the trading systems.
y Margin Trading will be done on an undisclosed manner through a platform

provided by NCCPL, as an Authorized Intermediary, to Financees and Financiers.
y Margin Trading facility will be made available only in Eligible Securities .

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y With the payment of such daily MtM payment. 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. equity participation by Financees. For this purpose. 4 . Accordingly. Financees shall be required to pay Marked-to-Market (MtM) losses to NCCPL on daily basis.Margin Trading System.MTS Overview y The maximum mark-up rate in MTS Market will be KIBOR+8%. y All transactions executed in MTS Market will be based on Financing Participation Ratio (³FPR´) i. y After settlement of ready market purchases. However. till the settlement of the entire MT Contract. in Cash only.e. FPR will be higher of VaR or 25% for the Financee. such MtM losses will be paid to the respective Financiers on daily basis. MT Contract value will be aligned and mark-up will be charged on the reducing balance accordingly. as mentioned above.

liquidity margins and MTM shall be applied on MT Contract. on every fifteenth (15th) calendar day. Accordingly. 5 . However. y 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.MTS Overview y All Trading Financiers will be required to open a separate MT Blocked Account in CDS. However. all MT Financed Securities will be moved in the respective client/house accounts in blocked status. y Risk management measures such as exposure margins.Margin Trading System. in case of same day release one day mark-up will be charged. MTS will automatically release one fourth quantity of the MT Contract Value. concentration margins. y Each MT Contract shall not exceed from sixty (60) calendar days. Capital adequacy limits and position limits shall also be applicable on Financiers and Financees in accordance with the Regulations.

and  CDC Regulations.MTS Legal Frame Work The operations of MTS shall be governed under the following:  Securities (Leveraged Market and Pledging) Rules.  NCCPL Regulations. 2011.  Relevant Regulations of the Stock Exchanges. 6 .Margin Trading System.  NCSS Procedures.

 ³banking company´ allocated minimum short-term credit rating of A3. 7 .  ³financial institution´ allocated minimum short-term credit rating of A3.MTS Trading Financiers The following entities will be eligible to apply to NCCPL for admission as Trading Financiers:  ³broker´ of stock exchange meets the minimum net capital balance and paid up capital requirements.Margin Trading System. and  any other corporate entity admitted by NCCPL Board and approved by SECP.  ³investment finance company´ allocated minimum management quality rating of AM3 minus.  ³collective investment scheme´ allocated minimum short-term credit rating of A3.

and  BCM meets the minimum net capital balance requirement.Margin Trading System.  no action is pending in any court or has been initiated by the concerned stock exchange(s) or the SECP against such BCM.  BCM submitted an addendum to the agreement to NCCPL.  BCM is not in breach of NCCPL Regulations or any law or other regulations. 8 .MTS Financee Broker Clearing Members (³BCM´) will be the Financees in MT Market subject to the following conditions:  BCM holds a membership of stock exchange(s).

Margin Trading System.e. 9 . ‡ Corporate Entitlements.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. will be credited automatically in the respective Financee¶s accounts in CDS. if any. MT Financed Securities). in MT Eligible Securities (having open position in MTS i.

 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. a separate Personal Computer (PC) shall be required for an exclusive use of MTS. 10 .  In order to avail financing through MTS. However.e.Margin Trading System. Financees shall be required to buy MT Eligible Security(ies) in ready market through specific key assigned i. client codes of non-broker clearing members (NBCMs) shall not be available. F7 in the trading system.  UINs and client codes tagged for ready market shall be made available in MTS Market as well to the Financees.MTS Operation of MTS  Since MTS is separate system from all trading systems and NCSS. These buys are termed as µLeverage Buy¶.

cancellation of Bid/Offer before matching will be allowed. at the day end and any excessive volume of MTS. over and above the net leverage buy. 11 .MTS Operation of MTS  MT Participants will not be allowed to modify any Bid/Offer once entered in MTS.  MTS will verify client code wise leverage buy of Financees before entering any Bid.Margin Trading System.  MTS will compare UIN-wise net position. in ready market. However. shall be force released on the same day.

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.  12 . tagged for ready market.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. shall be made available in MTS Market as well to the Broker Trading Financiers. UINs and client codes of corporate clients only.  Accordingly. However.Margin Trading System.

13 .  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. executing Broker Clearing Member will remain responsible for risk management of MT Contract. However.MTS Operation of MTS  MT Participants may place Bids/Offers in MT Market at their desired mark-up rate however.Margin Trading System. such mark-up rate will be maximum to KIBOR+8%.

Remaining value of such leverage buy shall be paid by the respective Trading Financier.Margin Trading System.000 FPR 30% Financee Obligation on SD 45.000 Trading Financier Obligation on SD 105.000 Rate 15 Total Amount 150.000 14 . Lets assume that FPR of ABC Securities is 30%: Qty 10.MTS Operation of MTS Financing Participation Ratio (³FPR´) y The FPR (equity participation by Financee) for leverage buy of MT Eligible Security shall not be less than 25% or VaR whichever is higher.

000 1.000 5.000 5.000 300 700 15 . 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) 700 Day End Forced Release (1000-700) 300 Remaining MT Open Pos.000 2. 1.000 5. Forced MT-R by MTS on four Maturity Dates of each MT Contract: Transaction Qty Date 1 Maturity Date 2nd Maturity Date 15th calendar day 30th calendar day st 3rd Maturity Date 45th calendar day 4th Maturity Date 60th calendar day Day 1 20.MTS Operation of MTS MTS Release and Rollover y MT Released (R ) Transactions will be of following Types: 1.Margin Trading System.000 5.

MTS Operation of MTS MTS Release and Rollover y MT Released (R ) Transactions will be of following Types: 1.Margin Trading System. Self MT-R of each MT Contract before any Maturity Dates by Financee F7 Lev Buy Forced Release st due on 1 Maturity Date Self Release by Financee before 1st Maturity Date Forced Release by MTS on 1st Maturity Date Remaining MTS Open Position MTS 1000 1000 250 100 150 750 y Financee may Roll-over Forced Release of MT-R Transactions on respective Maturity Dates and Self release of MT-R Transactions. Roll-over facility shall not be allowed on day-end Forced Releases due to excessive net sell position in the ready market. However. 16 .

all MT Financed Securities will be moved to respective house/subaccounts of Trading Financier in its separate MT Blocked Account in CDS. Settlement of MT Transaction  Financee will settle his FPR of MT Transaction in Cash. i. i. as the case may be.  After settlement.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 (³NCSS´) in the following manner: A. on settlement day through NCSS Pay & Collect mechanism.e. as the case may be. 75% or VaR. higher of 25% or VaR.Margin Trading System. on settlement day through NCSS Pay & Collect mechanism. 17 .e.  Trading Financier will settle remaining portion of MT Transaction in Cash.

 Accordingly. after settlement. as determined after adjustment of mark-up and Marked-to-Market Losses. 18 . Settlement of MT(R) Transactions  Financee will be required to settle remaining portion of MT Contract Value in Cash. on settlement day through NCSS Pay & Collect mechanism. MT Financed Securities will be moved from Trading Financier¶s respective CDS house/sub-account to Financee¶s respective CDS house/sub-account. 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.Margin Trading System.MTS Settlement of MT Contract B.

the MT Contract Value will be aligned with the adjustment of Marked-to-Market Losses payment.MTS Settlement of MT Contract Marked-to-Market Settlement ‡ After settlement of MT Transactions. ‡ Accordingly. Marked-to-Market Losses will be collected from Financees on their open positions of MT as per their FPR% in Cash only. FPR% will remain intact. ‡ Marked-to-Market Losses Collected from Financees shall be paid to respective Trading Financiers on daily basis through NCSS Pay & Collect mechanism. Such Marked-to-Market Losses shall be collected till the settlement of release of MT-R Transactions.Margin Trading System. However. 19 .

10 million Rs.t. 4 million Rs. 4 million 5 times of net capital balance 25 times of net capital balance 20 .r. Capital Adequacy Requirements Following conditions will be applicable on MT Participant w.Margin Trading System. Capital Adequacy requirements: y Financee¶s Capital Adequacy Limits: Financee Location Minimum Net Capital Balance Capital Adequacy Limit in MTS Capital Adequacy Limit in all Markets KSE LSE ISE Rs.MTS Risk Management Measures A.

5 million Rs. 20 million Rs. 10 million 21 .MTS Risk Management Measures y Trading Financier¶s Minimum NCB and Paid-up Capital: Broker Trading Financier Location Minimum Net Capital Balance Minimum Paid up Capital KSE LSE ISE Rs. 8 million Rs.Margin Trading System. 50 million Rs. 20 million Rs.

22 .  Upon execution of MT Transaction. Financee Risk Management  Stock Exchanges shall collect all margins and MTM Losses against leverage buy orders. as per their applicable margining regime in any form of approved collaterals.  After settlement of MT Transaction on T+2. till the settlement of MT Transaction on T+2. executed through special key i. Liquidity Margins and Concentration Margins on MT Contracts shall be collected from MT Participants as per the following mechanism. NCCPL will collect MtM Losses and Concentration Margins on open MT Contract Value. as per FPR. MTM Losses. in accordance with FPR in the form of Cash only till the settlement of MT-R Transactions.MTS Risk Management Measures B. All margining will be based on client level margining regime: I. Stock Exchanges shall be required to collect and maintain differential exposure margins.e. Exposure and Margins Exposure margins. F7.Margin Trading System.

in any form of approved Collateral. no margins and MtM will be required on open MTS Contract.Margin Trading System. till the settlement of MT Transaction on T+2.  23 .MTS Risk Management Measures II. Since MT Financed Securities are delivered in the separate MT Blocked Account in CDS of the Trading Financier.  Trading Financier¶s Risk Management Trading Financier shall pay Exposure Margin and MTM Losses as per their FPR to NCCPL.

1 billion.1 billion.5% of free-float of the MT Eligible Security subject to maximum of Rs. Position Limits for Financees Market wide position limit Member wide position limit Client wide position limit 20% of free-float for each MT Eligible Security subject to maximum of Rs. 10 billion 2% of free-float of the MT Eligible Security subject to maximum of Rs. Overall financing availed in all MT Eligible Securities shall not exceed Rs. 24 .MTS Risk Management Measures C.Margin Trading System. 0. 250 million for each MT Eligible Security.

In case of non-squaring-up by the Financee.MTS Default Management NCCPL shall manage default on MT Contract as per the following Procedures: I. 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. 25 . NCCPL shall suspend such UIN for taking position in all Markets.Margin Trading System. NCCPL shall initiates squaring-up of the open position of such defaulted client on the same day.     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.

In case of second default of same UIN(s). NCCPL may block such UIN for the period of three years. MT Contract of such defaulted UIN shall be treated as closed.MTS Financee Default (Marked-to Market Losses)  In case of non-squaring-up by NCCPL.    26 . 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. Accordingly. all open MTS Contracts of such defaulted UIN shall be Released. NCCPL shall restrict such defaulted UIN from taking new positions in all Markets for a period of six-months.Margin Trading System.

Margin Trading System. permanent restriction will be applied in leverage markets. 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.MTS Financee Default (Marked-to Market Losses) y 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. On any subsequent default by the Financee.   27 .

NCCPL shall hold proportionate amounts with the credits due to all Clearing Members to whom credits shall be due on that Settlement Date. In case of shortfall still persists. All margins of a suspended Financee. 28    . shall be liquidated. NCCPL shall initiate squaring-up process of open MT Contracts of such suspended Financee for two consecutive working days.Margin Trading System. NCCPL shall suspend such Financee in all Markets. till the recovery of shortfall amount. Financee Default (Settlement)  In case where Financee fails to settle his money obligation on the settlement date.MTS II. held by NCCPL/Stock Exchange.

the shortfall amount (if any) shall be proportionately allocated to all the Trading Financiers who have provided Margin Trading in such MT Financed Securities.  Relevant Financee shall be penalized in a manner as mentioned in previous slide number 27 29 . NCCPL shall allocate MT Financed Securities 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.  In case of squaring-up of open MT Contracts. respective MT Contract with respective Trading Financiers shall be treated as closed.Margin Trading System.MTS Financee Default (Settlement)  In case of shortfall persists even after the said squaring-up. of the suspended Financee.

till the recovery of shortfall amount. Trading Financier¶s Default  In case where Trading Financier fails to settle his money obligation on the settlement date.MTS III. All margins of a suspended Trading Financier. Respective Financees shall be given an opportunity to re-finance from MT Market. held by NCCPL shall be liquidated.Margin Trading System.    30 . 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.

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.MTS Trading Financier¶s Default  In case where Financees unable to re-finance the leverage buys.Margin Trading System. 31 .

32 . 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.MTS Trading Financier¶s Default y 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.Margin Trading System.

 Weighted average rate of mark-up charged in each of the MT Eligible Security for the day.  Funds to be force released in 3 days advance with respective 1/4th and 15th day philosophy  Scrip wise total amount of released transactions in the day.  Total amount of MTS funds released during the day and re-financed.MTS Market Information y NCCPL shall disseminate the following key statistics pertaining to MTS through its website:  Top 15 Financiers and Financees in MTS market will be disclosed. 33 .  Total funding provided in each MT Eligible Security.Margin Trading System.  Total Number of Financiers and financing provided in MTS Market.

Stock Exchange Road.Thank you ! NATIONAL CLEARING COMPANY OF PAKISTAN LIMITED 8th Floor.pk 34 . Karachi ² 74000 Pakistan TEL : (92-21) 3246 0811-19 FAX: (92-21) 3246 0827 (920811(92E-Mail : badi@nccpl.com.nccpl.pk Website : http://www.com. Karachi Stock Exchange Building.