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CFS to be reviewed by SECP

Introduced by the previous SECP chairman, Dr Tariq Hassan, last year by replacing the Badla financing system, CFS has invited a lot of criticism from the brokers community and it has become impossible for the SECP to maintain this system after it got its new chairman, Razi-ur-Rehman Khan, officials said.

They said the commission has to remove the ceiling of Rs25 billion from CFS in order to make the KSE agree to the much- needed demutualisation of the stock exchanges.

An SECP announcement said discussions would be held with the KSE management with a view to determining the phase in of the outstanding regulations so that CFS risks are minimised at the earliest.

Cap on CFS transactions of Rs25 billion for KSE and Rs2.31 billion for the Lahore Stock Exchange (LSE) would continue till further notification.

The SECP would continue with the reform process initiated by the government to ensure rapid development of the financial and capital markets of the country as per international best practices. All decisions would be taken after due diligence and examination of the facts to make sure that systemic risks were minimised and the system was protected from undue shocks.

"It is in this light that the CFS decision is being conveyed before the deadline so that hyper speculation and uncertainty is minimised if not totally removed", the announcement stated. The commission, it said, would continue to engage all stakeholders within its purview to find win win solutions on all issues.

It is to be mentioned that ministry of finance has asked SECP to evolve a transparent, foolproof and effective margin financing system (MFS) that could complement the CFS in consultation with all stakehholders.

After its implementation, the capital market experts had termed CFS as another name to badla financing. Badla financing had proven to the one of the few main reasons behind the stock market crash in March last that caused $12 to 15billion losses to small investors.

The ceiling of Rs25 billion is one of the few blurred lines that distinguishes CFS from badla, otherwise both are considered the same.

The implementation of CFS is equally interesting. The SECP had directed the stock exchanges to replace badla with Margin Financing System (MFS), a decision that had taken a lot of flake

from the brokers.

However, the CFS was introduced as sort of compromise between the KSE and regulator facilitated by Prime Minister, Shaukat Aziz, in Islamabad, after the brokers threatened a market

crash similar to that of March-2005.