After deliberations between all the stakeholders,
Securities Exchange Commission of Pakistan, (SECP), the stock market
regulator; Karachi Stock Exchange (KSE), front liner regulator; and
intervention by Prime Minister Shaukat Aziz, a bailout package was
designed and instead of badla, which appeared to be a crude jargon for
the market participants a new system- Continuous Funding System (CFS)
- has been introduced, which is a refined form of liquidity injection
The maximum amount under CFS is capped at Rs 25
billion while the financing facility has been raised to 14 scrips. CFS
is the replacement of Badla, which was capped at Rs 12 billion and
available for 7 scrips. The 7 new scrips included in CFS are: Muslim
Commercial Bank (MCB), Pakistan Petroleum Limited (PPL), Bank of
Punjab (BoP), Fauji Fertilizer Bin Qasim (FFBL), Pakistan PTA (PPTA),
Fauji Cement (FCCL) and Sui Northern Gas Pipelines Limited (SNGPL).
Total investment in CFS depicted a rising trend
during the first week of introduction and leverage buyers utilized Rs
10.5 billion on first session as badla investment reached Rs 22.5
billion at the weekend up from Rs 12 billion.
The introduction of new financing system gave much
needed support to the market and since its announcement the KSE-100
index has gained almost 9.7 percent, or 690 points to 7789.76 (closing
of the KSE on September 2).
"The CFS would be available for the whole day
and, going forward, my belief is that the rates would stabilise as the
system of financing has now been institutionalised and would be
price-effective. The rates would not show the yo-yo pattern, following
the new system. Rather, it would mitigate all risk factors and would
not show erratic behaviour as in the past," a leading trader
Index-based options are also being contemplated
upon and are expected to hit the market by year-end. Shares against
CFS financing would be kept in a separate CDC account to ensure that
these shares cannot be used for loaning against 'blank' and 'short'
selling. CFS and T+3 market would be separate for the purpose of risk
management. CFS margin regime would be different from T+3, and broker
assets other than margin would be available first for the settlement
of T+3 transactions and then for CFS.
Shahab Farooq, senior investment analyst at First
Capital Equities said that besides introduction of CFS, the market
gained momentum because of receiving healthy earning reports from
trendsetters of the market such as Bank of Punjab, National Bank of
Pakistan, Pakistan Petroleum Ltd., ICI etc and hoped that some more
results would filter in from the companies having heavy weightage in
the index such as OGDC and PTCL.
Responding to a question, Arshad Arif, head of
group research at KASB, said that the CFS system is primarily meant to
resolve the deadlock created by the replacement of COT with the margin
financing. However, this is a short-term measure as the regulators are
planning to review the situation during 1QCY06 and will then announce
the phase-out of CFS along with the re-launching of margin financing.
When asked will the system needs some amendments as
there is a feeling that there should be no cap on this?
Yes. The existing mechanism has a cap of Rs 25
billion in terms of overall financing under CFS. Given the fact that
the CFS financing is already approaching this level, it would be
difficult for the market to maintain its existing upward thrust in the
near future. I don't' think that enhancing this limit will be the
right solution. The market will be in a similar situation once the
enhanced limit hits. An optimal solution would be to free this cap and
let the market forces decide an appropriate level.
limit will be reviewed in February, what are your suggestions?
A: I think
the review will be on an overall basis, not just the limit. According
to my understanding, the regulators will review the viability of
re-launching margin financing in February and may come up with a new
schedule to replace CFS with margin financing. In my view the
regulators should try to find an alternative in a way that speculative
capital and speculative interest in the market should stay protected.
For the successful running of the margin financing, the regulators
have to come up with vital incentives for the investors to switch on
otherwise CFs or COT or private COT would stay as the most popular
means of financing among the speculators.
the regulator and front line runner should do more to improve the
sentiment of the market men and other investors?
A: I think
the regulators have to come up with a proper mechanism to penalize
those who ruined the market in March. In particular the regulators
have to come up with the appropriate solutions for insider trading,
front running, back burning and wash trades. Imposing nominal fines on
the large brokers would not deliver for this.
Why foreign investors are still not inclined towards Pakistani
Pakistan-specific risk is still in the minds of foreign investors.
Though our economy is turning into good shapes, the economic
turnaround is very skewed and this creates uncertainty about its
sustainability. We have yet to see any Western buyer of our assets
offered for privatization. The political risk is still lingering on
with most of the foreign investors raising concerns about the
viability of Pakistan without Musharraf.
It is a sure breather for the stock market but the
regulator is sticking to its words and wants to introduce margin
financing system. "The system is harsh and would increase
documentation of the buyers and sellers which would surely draw an
opposition as several investors are hesitant to disclose the trading
pattern, so in the long run, the limit would be revised and CFS would
be the new brand name for financing," a leading trader said.
The institution that would imitate the role of
Takas Bank of Turkey or Euro Net should become effective by February
28, 2006. It would perform financing, depository and settlement
functions. With CFS in place, one should hopefully not see re-eruption
any March-like crisis, the same trader said.