Leveraged products fail to catch eye of investors | Pakistan Today

Leveraged products fail to catch eye of investors

KARACHI – The recently-introduced leveraged products, Margin Financing System (MFS), Margin Trading System (MTS) and Securities Lending and Borrowing (SLB), appears to have failed to achieve the desired result of increasing volume at the country’s volatile equity markets through luring greater investment.
Moreover, regulators from the Securities and Exchange Commission of Pakistan (SECP) have started smelling a rat in the stock members’ usage of leveraged products that were introduced some months ago to ensure transparency. According to market observers, while it has been over a fortnight that leveraged products hit local bourses, volumes at the country’s largest equity market, Karachi Stock Exchange (KSE), by and large have remained range-bound.
“The volume is staggering between 60 and 110 million (shares) as was the case a couple of months before introduction of the leverage,” opined an analyst. Many among brokers and investors view that the three leveraged products could so far not put the equity market even on a take-off position for reasons primarily relating to policymaking.
An ‘exorbitant’, KIBOR + 8, interest rate, ‘unjustifiably’ backbreaking levies like capital gains tax (CGT) and corporate tax, the financing precondition to show 25 percent cash and the unavailability of ‘white’ money at local bourses are major factors in the apparent ‘collapse’ of the new leverage system.
“The 22 percent (KIBOR + 8) interest rate is really exorbitant,” the analyst said, adding “The MTS having failed to bring improvement in volumes seems to have collapsed.” Rejecting as ‘nonsense” the impression that 22 percent was the ceiling, the analyst claimed that no MTS financing had so far been conducted at less than a mark-up rate of 20 percent.
A small investor claimed that unpopular taxes like the 10 percent CGT were already impeding small and medium investors. “Then you have other hurdles like the 35 percent and 15 percent corporate tax on the income of institutional financers from banks and open-end funds,” he added.
The new products were lacking the provision of ‘slabs and system’ that could provide the stakeholders with a level playing field, the investor claimed. The trader questioned why an investor should commit his money in an equity market which remains uncertain on the back of a poor security situation and with plenty of taxes in place to make trading an expensive proposition.
According to an observer, the precondition which make it compulsory for participants to show cash of not less than 25 percent of the financing they seek was also proving to be a major setback to the success of new products at the local bourses where ‘much of the liquidity is not white. You have a parallel black economy where many of the investors have no white money to show in the face of the 25 percent cash condition,” he claimed.
Restrictions on individual participation by the SECP, a recessionary liquidity crunch and anti-lenders conditions are other reasons that, some brokers think, have limited participation in the new trading system. A senior broker told Pakistan Today that the SECP had erred by moving against the KSE’s proposal supporting individual investors’ participation in the MTS. “A restricted participation by the institutional investors is keeping the volumes low at the stock markets,” said Rafi Securities CEO Naeem Rafi.
The broker went on to say that investors were faced with a liquidity crunch and were finding it difficult to fulfill the 25 percent cash requirement. “They should have set 25 percent shares portfolio of the total investment, instead,” he proposed. Rafi was critical of the conditions set for the SLB that he claimed was yet to be made functional. One such condition, he stressed, allows the National Clearing Company of Pakistan Limited (NCCPL) to hold 50 percent cost of the shares lent by the lender.
“This is illogical, why should the NCCPL retain 50 percent of the shares cost while it is already taking service charges,” he wondered. Many eyebrows were raised when the KSE management, quoting the SECP’s March 29th notice, warned card holders against introducing in outlawed practices like in-house financing that, the regulator warned, might result in ‘greater market risk’.
“Outlawed practices, like in-house financing, are discriminating and, if practiced, it brings greater market risk,” said KSE/N-1780 issued last Friday. The KSE stressed that the basic essence of introducing the leveraged products was to enhance liquidity, transparency and provide a level playing field for all investors and clients, thereby discouraging outlawed practices like in-house financing.
A market observer, however, termed the move ill-timed and late, saying that the menace had long been prevalent at the market in the face of what he termed ‘in-house badla’ with the regulator turning a blind eye to the practice. When asked, Rafi also did not rule out the possibility of some of the members being involved in the malpractice.

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