Karachi, March 08, 2013 (PPI-OT): In its meetings of January 3, 2013 and February 14, 2013, the Market Development and New Product Committee of the KSE have recommended certain changes in regulations governing the operation of Stock Index Future Contracts with a view to making this product more attractive for the investors.
Globally, Cash Settled Futures (CSF) Contracts have been used for leverage purposes. In Pakistan too, under SECP’s guidance, CSF were introduced in 2007/2008. However, given the market participants familiarity with our deliverable products, Cash Settled Future products did not take off. This was especially due to the fact that DFM margin requirement is 50% in Cash and 50% in Securities, whereas in CSF, 100% margin requirement is in Cash.
PROPOSED REGULATORY CHANGES
In view of the above, the Market Development and New Product Committee (MDNPC) has proposed three major changes in Regulations related to Stock Index Futures Contracts (SIFC) and two changes in Regulations related to deliverable futures, in order to bring liquidity to both the deliverable and cash settled futures, operating under derivatives segment of our equity market.
1. Uniform Universe of Securities for SIFC, DFM and CSF:
Stock Index Future Contracts (SIFC) has significant potential for growth provided the lacunas related to their operating mechanism are streamlined to facilitate market participants and investors. Enabling active investors to devise and implement a trading strategy is the basic prerequisite for success of the product-mix available at KSE. At present, Stock Index Futures are offered on KSE-30 Index and a trader cannot perfectly hedge through buying in deliverable futures or Cash Settled Futures and selling them in Stock Index Futures. This is because Cash Settled and Deliverable Futures are not available in following six securities.
KSE-30 Securities not Available in DFC/CSFC
|Sr. No.||Symbol||Security Name|
|1||APL||Attock Petroleum Ltd|
|2||HBL||Habib Bank Ltd.|
|3||ICI||ICI Pakistan Ltd.|
|4||JSCL||Jahangir Siddiqui. and Company Limited|
|5||MTL||Millat Tractors Limited|
|6||NRL||National Refinery Limited|
Absence of above KSE-30 Stocks in Single Stock Futures and Deliverable Futures is said to be a reason for low liquidity in the ready market as well as in futures markets as it denies perfect hedge facility to investors engaged in short-term trading. Considering the above, and to facilitate active investors to form trading strategies based on hedging and arbitrage, it has been recommended to have a uniform universe of securities for CSF, DFM and KSE-30 index based Stock Index Futures Contracts.
2. Uniform Collateral Management Regime for DFM, CSF and SIFC:
Deliverable Futures traded at up-to 35% of ready market volumes in 2005, and today the ratio ranges between 7.50% and 10%, after touching the lowest level of 0.50% in 2009 when collaterals in DFM were received in the form of CASH only. The volume of DFM improved subsequent to a change in collateral acceptance requirement whereby participants were allowed to deposit margins in the form of eligible securities up to a limit of 50% of the margin requirement amount.
Single Stock Cash Settled Futures were introduced in 2007 while Stock Index Futures Contracts (SIFC) were introduced in 2008 and only after the introduction of a market-maker SIFCs have shown liquidity, reaching a maximum of 1.50% of ready market traded values in January 2013. At present collaterals are required to be furnished in the form of cash only.
With a view a to provide a level playing field to both the deliverable and cash settled futures, the Market Development and New Product Committee in in its meeting of Jan 3, 2013 recommended to the KSE Board that Cash Settled Futures should have a similar Collateral Scheme as that of Deliverable Futures.
3. Rationalized Market Halts in Stock Index Futures: under the Regulations governing Stock Index Futures, the trading is halted if transaction in even a single contract takes place at a price that is 5% above or below the last day’s closing price. The SIFC market remains suspended for atleast 30 minutes for collection of MtM Losses as a result of which the market participants including the market maker are unable to continue their bids/offers.
The Committee was of the view that as SIFC is on a kick start stage due to appointment of Market Maker and compliance of market halt rule should be in a rationalized manner. Under the existing Regulations Governing Stock Index Futures(SIFC), the trading in SIFC Market is to be suspended (for 30 minutes) to facilitate the collection of Mark-to-Market Losses (MTM Losses), when a transaction in even a single contract takes place at a price that is 5% above or below the last day’s closing price.
The Committee was of the view that placing a minimal time or minimum Contracts threshold may help in managing risk and mitigating practical problems and market anomalies faced by market participants. Therefore, Committee, recommended that at least two minutes consecutive time-limit check and/or 100 contracts execution (whichever comes first) outside the band of 5% from the Closing Price of last trading day in SIFC and maximum of 30 minutes or at least 20% MtM losses collection should be the parameters defining the duration of Market Halts. For Example, if a trade occurs on SIFC counter beyond the 5% fluctuation threshold, then the trading system shall check the following: If quantity of executed contracts are 100 or more, halt shall be initiated immediately; or In case of lower number of SIFC contracts, the system shall start a reverse 120 second timer which shall monitor if trading beyond the threshold occurs continuously in each of the remaining seconds. If yes, then the halt shall be initiated, if no, the timer shall reset to 120.
In case either at least 100 Stock Index Futures Contracts trade beyond the limit of five percent from the previous day’s closing price of the contract or trading beyond the five percent limit occurs continuously for two minutes, whichever comes first, the Exchange shall announce a market halt in Stock Index Futures Market for 30 minutes or as long as 20% of the loss making Brokers deposit their all outstanding losses, whichever happens earlier.
Upon resumption of Stock Index Futures Market, the terminals of Brokers who have failed to deposit their losses shall remain suspended and in case of default in payment of such losses, default proceedings shall be initiated against the defaulting Broker. 4. Collection of Mark-to-Market Losses and Bank Guarantee in Deliverable Futures Non-Broker Institutions settling their deliverable positions directly through NCCPL are required to deposit Mark-to-Market in the form cash on daily basis, despite the placement of irrevocable bank guarantees in the favor of NCCPL.
It has been proposed that that NCCPL should start accepting Bank Guarantee or Undertaking from such non-broker institutions in lieu of cash required against their MtM Losses in Deliverable Futures Contracts. Management of the Exchange is of the view that Bank Guarantee/Undertaking is as good as Cash; and as such there is no harm in adopting the proposed practice.
5. Collection of Mark-to-Market Losses from Sellers of Deliverable Futures There exists a practice of keeping 100% delivery of Securities with a view to drop all Margins and Mark-to-Market calls from the seller. The Committee recommended that such deposit of shares (in the same security) should be up-to the extent of double of the prevailing VaR Margin of the respective Security.
The Management of the Exchange is of the opinion that “adopting such practice may carry potential risks on account of price appreciation in the scrip. However, using net-sold securities as exposure margin for open positions in the same security may be allowed” The Market Participants are requested to kindly send their suggestions and feedback to undersigned in writing or e-mail their comments at email@example.com latest by 1:30 p.m. March 18, 2013.
For more information, contact:
S. Munawar Ali
Karachi Stock Exchange
Tel: (92-21) 111-001122
Fax: (92-21) 3241 0825, (92-21) 3241 5136