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KARACHI (November 07 2003): The State Bank of Pakistan (SBP) in its draft

regulations on margin financing has proposed an increase in minimum margin, bank/DFIs


to lend money only to credit rated brokers and lending is limited to a maximum of 20
percent of their paid-up capital and reserves.

The SBP has posted draft regulations for financing of brokers by banks and DFIs. These
regulations have been issued with a view to facilitating the transition from badla
financing to margin financing.

The SBP aims to encourage the active participation of banks/DFIs in the area, and has
invited comments on these regulations by November 20, 2003.

Banks/DFIs will extend margin financing to only those broker, who are incorporated as
limited companies, and credit rated from a credit rating agency on the approved panel of
State Bank of Pakistan.

The State Bank is not prescribing any minimum credit rating for the eligibility purposes.

The sole objective is to ensure that the lending bank/DFI gets this important information
before taking exposure on any broker.

The regularisation period of one-year from the date of issuance of these regulations is
granted to those brokers, who are not credit rated.

The margin financing shall be provided by banks/DFIs only against approved shares in
Central Depository Company of Pakistan.

The brokers availing the margin financing from banks/DFIs would be prohibited from
lending, the funds obtained from banks/DFIs or their own funds, directly or indirectly to
either their own or of lending bank's connected entities, directors or major shareholders
and relatives of directors or major shareholders.

RISK MANAGEMENT AND INTERNAL CONTROLS: Before undertaking margin


financing, the banks/DFIs will prepare comprehensive policies and procedures for the
purpose.

The policies in this respect will be duly approved by the Board of Directors, if not
already covered appropriately in the current credit policy.

The banks/DFIs will obtain legal opinions to ensure that the manner in which they are
accepting shares (especially those of the clients/customers of the broker) as collateral is
legally sound, the documentation (including the authority/consent of the
clients/customers of the broker in case their shares are being pledged) is sufficient to
create an effective pledge over the collateral and they are fulfilling all the legal
requirements appropriately.
In order to bring uniformity, the Pakistan Banks Association will prepare Master
Agreements and Standardised Documents for the purposes of extending margin financing
to brokers.

Banks/DFIs will put in place an effective system for monitoring margins and their
exposures on the shares of various companies and brokers, keeping in view the quantum
of their margin financing.

They would review, on an ongoing basis, their exposure in margin financing with a view
to assessing the risks due to volatility in assets prices.

The surveillance and overall monitoring of a banks/DFIs' investment in shares, margin


financing, financing against shares, etc will be done by a separate and independent
committee of the bank/DFI.

The Committee will review the total exposure of the bank to capital market, besides
ensuring compliance with all the SBP regulations, relevant rules, laws and policies and
procedures adopted by the bank/DFI.

MARGIN REQUIREMENTS: Banks/DFIs will provide margin financing only against


the security of approved shares.

A minimum margin of 30 percent of the current value of the shares will be retained by
the bank/DFI at all times. They may, however, set higher margin, if they so desire.

They will monitor the margin on at least once a day basis, and will take appropriate steps
for top-up and sell-out on the basis of their approved policy in this respect and
agreements with their customers (brokers). For the purpose of this regulation, value shall
be based on the last closing price of the share on the preceding market day.

PER PARTY LIMIT: Banks/DFIs must make efforts to avoid concentration of margin
financing to a few brokers. In this respect, they may prescribe internal limit for margin
financing to a single broker.

It is expected that the margin financing would be spread out by a bank/DFI amongst a
reasonable number of brokers.

A bank/DFI shall not extend financing to any broker in excess of 20 percent of its own
paid up capital and reserves.

The total margin financing portfolio, at any given point in time, should not exceed the
paid-up capital and reserves of the bank/DFI.

The total financing, including margin financing, availed by a broker from the financial
institutions shall not exceed 10-times its paid-up capital and reserves, subject to the
condition that margin financing will not exceed five-times its paid-up capital and
reserves.

Banks/DFIs shall make arrangements to effectively monitor this limit in co-ordination


with each other.

For this purpose, the banks/DFIs shall obtain, at least on weekly basis, detail of total
financing facilities availed by a broker from various financial institutions.

The total margin financing against the shares of one company will be determined by the
Bank/DFI.

However, such total financing should not exceed 10 percent of the paid-up capital and
reserves of the bank/DFI extending margin financing.

The banks are cautioned that they should keep in mind and ensure compliance at all times
with the requirement of subsection (2)of Section 23 of the Banking Companies
Ordinance, 1962 which requires that they do not hold shares, whether as pledgee,
mortgagee or absolute owner, in excess of 30 percent of the paid-up capital of the
company.

The DFIs are also advised to ensure compliance with this requirement.

Banks/DFIs in breach of limits mentioned above will ensure compliance with these limits
within three months of date of issuance of these regulations.

While extending financing to brokers, banks/DFIs shall ensure that they remain
compliant with the overall limits set in Prudential Regulations.

The margin financing extended to the directors or major shareholders of a broker shall be
considered a part of the margin financing allowed to the broker for the purposes of these
regulations.

The limits mentioned above are overall financing limits and total financing facilities to
brokers (eg working capital financing, financing against receivables of brokers, financing
to brokers for their proprietary trading, or any other financing to brokers by whatever
name called) should not exceed the limits prescribed above.

Further, for the purposes of monitoring and better controls, the banks will keep separate
records of the following facilities:

(I) Financing against the shares of clients of brokers. Financing against own shares of
brokers,(ii) Financing against receivables of brokers, (iii) Working capital finance against
any other security, and (iv)Any other financing facility to brokers.