Margin Tradi ding P roduct t s Overview February 7, 2011

Transcription

1 Margin Trading Product s d Overview February 7, 2011

2 What Is Margin Trading? Margin trading is buying stocks without having to pay the entire money to do it. For example, if you were to buy 1000 shares of say Company A, which trades at Rs.200, you will need about Rs.2 lakh. But if you buy the same through MTS you only need to pay on settlement day 25% of 2 lakh, i-e Rs.50,000/= 000/ Here, your purchase is partly funded d by the Financier operating in the MTS who keeps these shares on your behalf in his CDC blocked account with any profit/loss going to the your (clients )account. M2M loss to be paid in proportion to the loan amount to Financier on daily basis.

3 AUTHORIZED INTERMEDIATRY FOR MARGIN TRADING SYSTEM(MTS) NCCPL will provide MTS in the capacity of an Authorized Intermediary to its Participants to avail / provide financing in an undisclosed manner

4 Working of MTS market Financees / Financiers place their respective orders in the MT-Market for required quantity in the respective scrip at their desired rates, ( Max. 6 month KIBOR + 8%)

5 MTS Offer Screen 5

6 MTS Bid Screen 6

7 SETTLEMENT OF MTS ORDERS MTS Contracts shall be settled through NCSS on T+2 settlement cycle. On settlement date, Financee will be required to pay his Equity Participation Ratio (EPR) which is 25% or VaR (which ever is higher) of the value of trades. Financier will be required to pay his EPR i-e the remaining amount of the trade on the settlement day. 100% Financed Securities will be moved to blocked house-account or sub-accounts maintained by Trading Financier in a separate CDC Account.

8 Clearing & settlement cont. NCCPL will collect M2M losses in the form of cash from Financees and pay to respective Trading Financiers on daily basis after the settlement of MT Transactions. Upon release of contract on maturity date, financed securities shall be delivered from the Trading Financiers Blocked Account and financing amount will be paid to the respective Financier after adjustment of M2M and EPR already paid by Financee. NCCPL Regulation define Maturity Date as following : Maturity Date means, in respect of MT Contract, every fifteenth (15 th ) calendar day of sixtieth (60 th ) calendar day on which day the MTS will automatically ti initiateiti t a one fourth quantity of MT(R) Transaction before the opening of business, which shall be settled in accordance with NCCS Procedures

9 Risk Management of MTS - 1 Financee Risk Management Broker Financee will pay Margins and MTM Losses in the form of cash/securities on leverage ready market purchases to the respective stock exchanges. Such exposure margins shall be higher of 25% or VaR of MT Eligible Security. After the settlement of MT Transaction, NCCPL will collect M2M and Concentration Margin from the Financee in the form of Cash only till the settlement of MT Contract. Capital adequacy limit shall be applicable on Financee as per net capital balance requirement. Position limits (market-wide, member-wide and client-wise) will also be applied

10 Risk Management of MTS - 2 Financier Risk Management Authorized Financiers will pay Margins and MTM Losses in the form of cash/securities to NCCPL till the settlement date. After the settlement of MT Transaction, NCCPL will not collect any margin or M2M losses from Trading Financier as MT Securities are held in the blocked CDS Account of such Financier. Net capital balance and minimum paid up capital requirements shall be applicable.

11 MTS Financee Default and Penalties Default Occurrence Treatment First default by the client 1. NCC to suspend UIN, Broker to square off all open positions of that UIN. 2. 2% of the defaulted d amount of such UIN and restriction in derivative markets for a period of three months 1. The Margin Trading Contracts are designed as such that after T+2, the chances of defaults remain with Financee only. Second default by the same 4% of the defaulted amount of such UIN 2. Financier may end up having client or any other client and restriction in leverage/ derivative markets for a the financed period of six months on the broker shares under extreme on any subsequent default permanent restriction on the broker situations. by any UIN of the broker

12 MTS Trade Cycle From T to T+2 Ready Market Buy and Sell Attracts Usual Margins, whereas in MTS the financee is required to pay higher of 25% or VaR + liquidity Margins till T+2 DAYS Financee Financier s3 Between T+0 AND T+2 Pays VaR Margin on full value of MTS contract Pays Mark to market on MTS contract Pays and M2M margin on 75% value of MTS contract Financier revives M2M on from FCE for MTS contract Pays Liquidity Margin Does not pay liquidity margins T+2 onwards Financee pay VaR, Concentration Margins to Exchange, and M2M to FCR No Margins, and M2M required from Financier

13 Slide 12 s3 >Add a bullet for Concentration Margin along with example >No margins from Financier after T+2 sani.khan, 2/3/2011

14 MTS Capital Adequacy and Position Limits Open Position 1. Any scrip cannot have open Scrip Wide Limits interest equivalent of 20% of its Rupee Value Free Float Market Wide 20% 8 Billion p Member Wise 2% 1 Billion Client Wise 0.5% 200 Million A UINs maximum open position o in MTS shall not exceed RS 1.25 Billion free float of RS 8 Billion value. 2. Any Member cannot have over 2% of free float or RS 1 Billion open interest. 3. Any UIN cannot have above 0.5% of Free float or RS 250 Million open interest. However, a client may take a total of RS 1.25 Billion exposure on MTS counter. Capital Adequacy Utilization Limits under Margin Trading System Member Capital Adequacy (MTS) Maximum Exposure in (MTS, CSF, SIFC, and DFM) 5ti times of eligible ibl financee NCB 7.5 time of NCB of broker Basic Refundable Deposit 250K

15 HOW MTS COMPARES WITH OTHER LEVERAGED PRODUCTS?

16 LEVERAGE PRODUCTS Eligible Entities Broker Margin Margin Trading CFS Mark II Financing FINANCEE FINANCIER FINANCEE FINANCIER FINANCEE FINANCIER * * Banking Company Investment Banks/financial institution Investment Company SECP approved Corporate Entity A collective investment scheme Requirement for Authorized Financier and Financees in MTS Net Capital Balance Paid Up Capital AUTHORIZED FINANCEE RS 10 Million No limit BROKER AUTHORIZED FINANCIER RS 20 Million 50 Million * (conditions apply)

17 Larger contract duration, and rollover against released positions are some of the features which makes leverage more attractive under MTS. s4 Universe Market Limit Duration Margin Trading allows around 20 stocks -No Capping Limits in MTS. 60 Calendar days Margin Financing NCC prescribed Companies. No Limit, Credit Risk Bilateral CFS Mark II Relaxed, allowed 53 stocks for financing CFS Mark II was capped at RS 55 Billion 30 calendar days 16

18 Slide 16 s4 Calendar days added Contract duration doubled from initially 3 to now 6 Same day release previously allowed sani.khan, 2/3/2011

19 Shifting the risk of default from Members to the scrip i-e to the collateral s5 Financing DVP Obligation EPR Margin Trading -Undisclosed -Free Market -Pre-identified (F7 Window) -Risk on Scrip -Mx KIBOR+8% Obligation shifted to Financier on T+2 Higher of 25% or VaR Margin Financing -Disclosed -NDS -Pre-arranged -Counterparty Risk Bilateral Arrangement before T+2 25% CFS Mark II -Undisclosed -Free Market -Post Trade -L iqui dity Risk Obligation shifted to Financier on T+0 0% 17

20 Slide 17 s5 FPR is now EPR F7 Window should check Capital Adequacy and occupied also sani.khan, 2/3/2011

21 MTS averts or minimizes Systemic Risk by allocating shares to all Financiers of the defaulted security as opposed to disposing off the shares in the ready market. JW6 Capital Adequacy Systemic Risk Mark Ready Trades Margin Trading -lower of 5 times of Capital Adequacy or 5BN -7.5 times for all derivatives. -Minimized -No Forced Sell -No usage of Members Card, CHPF F7 initiated trades, blockthe capital adequacy in MTS on real time basis Margin Financing Determined by Financier Outside system No Marking, but pre-trade bilateral arrangement must CFS Mark II 10 time for CFS and 15 times of NCB for all derivatives. -Systemic Risk Present -Selling Pressure-Ready -Member Card on risk -Use of CHPF -Ready M arket Netting No Marking of Ready Purchases,, Financing on post traded basis 18

22 Slide 18 JW6 Mr.Shafqat recommended to add "Closeout at prevailing price with applicable haircut subject to maximum 75%" Jibran Wasiq, 2/3/2011

23 MTS default is defined as a situation when FINANCEIR lifts the shares, the concept of UIN wide penalties and suspensions of brokers in all leverage products on the third default can always be questioned, yet they safeguard the integrity of the market.. Release & Rollovers Penalties Defaults Margin Trading - Available over 1 day financing Cost - Rollover for Forced release trades allowed UIN in default will be suspended in all derivative markets for 3 month 3 defaults in MTS, suspends the brokers for all leverage markets forever Margin Financing Not Possible Bank credit risk assessment Restricted Clients as defined by SECP CFS Mark II ROLLOVER for forced released trades was not allowed Client/UIN was not under focus CFS default could result in loss of member seat 19

24 Margin Trading Disclosures Some of key statistics that NCCPL Will make available to the public on a daily basis 1. Top 15 AFs and financees in MTS market will be disclosed by name 2. Total Number of financiers and financing gprovided in MTS. 3. Funds to be force released in 3 days advance with respect 1/4 th and 15 th day philosophy 4. Scrip and MTS market wide Total amount of released transactions in the day 5. Total funding provided in each share. 6. Total amount of MTS funds released during the day and refinanced. 7. Weighted average rate of interest charged in each of the eligible scrip for the day.