National Clearing Company of Pakistan Limited

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Back GroundBack GroundThe Securities and Exchange Commission of Pakistan (“SECP”)

formed Consultative Group on Capital Market comprises of market experts from Stock Exchanges, NCCPL, CDC, Financial Institutions and SBP.

Besides various other mandates, the Group was requested to prepare a working paper on Margin Financing in line with the best international practices.

The Group prepared a concept paper on Margin Financing and submitted it to SECP. Accordingly, such paper was circulated by SECP to all market participants for their feedback and comments.

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IntroductionIntroductionMargin Financing (MF) facility will be available to all brokers from

financial institutions (banks and DFIs) against net ready market purchases of their clients and proprietary positions.

MF may be obtained as per agreed Financier Participation Ratio (FPR). However, minimum of 25% or VaR whichever is higher should be contributed by financee.

MF may be provided by a broker through its own fund to its own client and to the broker of other stock exchange.

MF Participants (financee and financier) will pre-define all terms and conditions pertaining to MF Transactions.

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IntroductionIntroductionNational Clearing Company of Pakistan Limited (“NCCPL”) will

provide a system to facilitate MF Participants for recording and settlement of MF Transactions through its National Clearing & Settlement System (“NCSS”).

Reversal of MF Transactions (MFR) will also be recorded on such MF System. However, MFR based on ready market sell shall only be settled through NCSS.

All MF Transactions will be based on the principles of counterparty risk.

Mark to market, Mark-up Rate and Corporate Entitlements will be managed by the MF Participants outside NCSS. 4

Eligibility CriteriaEligibility CriteriaEligible Financee

All Broker Clearing Members shall be Eligible Financees in the Margin Financing System of NCSS.

Eligible FinanciersA member of a Stock Exchange;

A banking company within the meaning of the Banking Companies Ordinance, 1962 (LVII of 1962) and which has been allocated minimum short-term credit rating of A3; and

A company, corporation or institution to which Section 3A of the Banking Companies Ordinance, 1962 (LVII of 1962) is applicable and which has been allocated minimum short-term credit rating of A3. 5

MF Agreement MF Agreement MF Agreement shall be executed between MF Participants covering at least the following matters:

List of Securities (to be selected form MF Eligible Securities) acceptable for Margin Financing. Any exclusion will require advance notice of at least two weeks.

FPR for each Security, which is acceptable to the Eligible Financier;Margin Financing Mark-up Rate; Margin Financing Contract Period;Forms of acceptable Collateral for margin and MtM losses;Treatment of corporate actions; and Any other matter as agreed upon between the Margin Financing

Participant.

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Pre-checks of Initiation/Affirmation Pre-checks of Initiation/Affirmation

Amount of financing facility from Eligible Financier along with list of Eligible Security(ies) and its respective FPR for respective financees;

Availability of net purchases from ready market trades;

Position Limits (market-wide, member-wide, client-wide);

Capital adequacy; and

Affirmation by Eligible Financier shall be restricted upto 5% of the free float of Eligible Security (ies).

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MF Initiation and Affirmation Process MF Initiation and Affirmation Process

MF System shall calculate member-wise, security-wise and UIN-wise (including proprietary account) net purchases from ready market trades for Clearing Members as Eligible Financee.

Eligible Financee may initiate MF Transaction fully or partially in multiple of Marketable Lots to its Eligible Financier.

Upon initiation, details of such initiated MF Transaction shall be reflected to the counter Eligible Financier for its affirmation. Such, affirmation shall be restricted upto FPR.

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MF Initiation and Affirmation Process MF Initiation and Affirmation Process

Affirming Eligible Financier shall not be allowed to edit the details of an initiated transaction and shall have an option to affirm and/or reject any of number of initiated transactions on the Trade Date within Designated Time Schedule (DTS).

Eligible Financee can cancel the initiated MF Transaction at any given point of time before its affirmation by the counter Eligible Financier.

Where initiated MF Transaction is neither affirmed nor rejected within DTS, such transactions shall be automatically dropped from MF System.

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MFR Initiation and Affirmation Process MFR Initiation and Affirmation Process

MFR transactions can be executed on the following basis:

Ready Market Sell;

Without having Ready Market Sell;

Direct call by Eligible Financier; and

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MFR Initiation and Affirmation Process MFR Initiation and Affirmation Process

1.1. MFR Against Ready Market SellMFR Against Ready Market Sell MFR Transactions can be initiated by Eligible Financee based on fully

or partially in multiple of Marketable Lots of the member-wise, security-wise and UIN-wise (including proprietary account) net sales.

Upon initiation, the same details shall be reflected to the counter Eligible Financier for its affirmation. Affirming Eligible Financier shall not be allowed to edit the details of the initiated transaction and shall have an option to affirm and/or reject any number of such initiated transactions.

If an initiated transaction neither affirmed nor rejected within the DTS, it will be automatically dropped from the MF System.

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MFR Initiation and Affirmation Process MFR Initiation and Affirmation Process

2.2. MFR Without Having Ready Market SellMFR Without Having Ready Market Sell MFR Transactions without having sell position may also be

released. However, such transactions shall be settled directly between MF Participants outside the NCSS.

Upon affirmation by counter Eligible Financier, MF Securities shall be directly unblocked from the MF Blocked Account of such Eligible Financier and delivered to counter Financee.

If an initiated transaction neither affirmed nor rejected within the DTS, it will be automatically dropped from the MF System.

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MFR Initiation and Affirmation Process MFR Initiation and Affirmation Process

3.3. MFR on Direct Call by Eligible FinancierMFR on Direct Call by Eligible FinancierIn case of any default and/or dispute occurred between MF

Participants on MF Transactions and/or in case of non-fulfillment of any margin call by the Financee, the Financier may directly initiate MFR.

Upon initiation such MFR shall be treated as auto-affirmed and Margin Financed Securities of the defaulted Eligible Financee shall be unblocked and delivered into the Regular account of the Financier.

Note: Financier shall indemnify the Company against any claims made by any of the Eligible Financee on the ground that the Margin Financed Securities should not

have been unblocked for any reason whatsoever.

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Settlement of MF TransactionsSettlement of MF TransactionsUpon affirmation of MF Transaction by the counterparty Eligible Financier, such

transactions shall be settled under Balance Order of NCSS.

Settlement Date of each MF Transaction shall be the same of the underlying buys of Eligible Securities in ready market.

The Financee will settle MF transactions through its Regular Account in NCSS on net basis.

The Financier will settle MF Transactions through its separate Eligible Financier Account in NCSS without netting with its Regular Account .

Financier shall be obliged to pay affirmed MF Transaction Value on the Settlement Date upto FPR whereas, remaining amount of the ready market purchases shall be paid by the Financee accordingly.

Upon settlement, all MF Securities shall be moved to the MF Blocked Account of the counterparty Financier.

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Settlement of MFR TransactionsSettlement of MFR Transactions

1.1. MFR Against Ready Market SellMFR Against Ready Market Sell Settlement Date of each MFR Transaction shall be the same of the underlying Sell of MF

Eligible Securities in ready market.

Upon affirmation by the Financier, such transaction shall be settled under Balance Order of NCSS.

Accordingly, the Financier will receive affirmed MF Transaction Value on the Settlement Date and deliver MF Securities from its MF Blocked Account. However, such movement of Securities shall remain blocked till the fulfillment of shortfall amount in NCSS (difference of MFR and Ready Market sell) by counterparty Financee.

The settlement of MF Mark-up Rate shall be handled between MF Participants out side NCSS.

Corporate actions of the MF Securities shall be handled by the MF Participants as per their mutual agreement out side NCSS.

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Settlement of MFR TransactionsSettlement of MFR Transactions

2.2. MFR Without Having Ready Market SellMFR Without Having Ready Market Sell Such MFR Transactions shall be settled directly between Margin Financing

Participants outside the NCSS.

Upon affirmation, MF Securities shall be unblocked from the MF Blocked Account of respective Eligible Financier and delivered to the counterparty Financee.

The settlement of MF Mark-up shall be handled by MF Participants out side NCSS.

Corporate actions of the MF Securities shall be handled by the MF Participants as per their mutual agreement out side NCSS

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Settlement of MFR TransactionsSettlement of MFR Transactions

3.3. MFR Due to Direct Call by FinancierMFR Due to Direct Call by Financier

Upon such MFR by Financier, the Margin Financed Securities of the defaulted Eligible Financee shall be automatically unblocked and delivered into Regular Account of the respective Financier.

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Risk ManagementRisk Management1.1. Exposure Margins Exposure Margins

Margin Requirements from Financee Margin Requirements from Financee

Margins will initially be applied on Eligible Financee on its ready market purchase as per the risk management requirements of the respective Exchanges. However, Eligible Financee will continue to pay margins to counterparty Eligible Financier until MFR in accordance with the terms and conditions set out in MF Agreement.

Margin Requirements from FinancierMargin Requirements from Financier

Since MF Securities shall be moved into the Blocked MF Account of the Financier, no margins shall be collected from the Financier on affirmed MF Transactions.

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Risk ManagementRisk Management2.2. Position LimitsPosition LimitsPosition limit of Financee shall not exceed the following:

Market wide position limit 40% of free-float for each security

Member wide position limit 1% of the free-float for each security

Client wide position limit 0.5% of the free-float for each security. Client position will be universal and determined on UIN basis.

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Risk ManagementRisk Management3.3. Capital Adequacy Limits for Financee Capital Adequacy Limits for Financee

The aggregate Exposure of Financee in all markets including MF Transactions shall not exceed 25 times of its net capital balance.

The aggregate Exposure of Financee in respect of MF Transactions shall not exceed 10 times of its net capital balance.

 Exposure to a single client shall not exceed 5% and Exposure in

single MF Eligible Security shall not exceed 20% of the total permissible exposure (10 times of net capital balance).

 

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Default ManagementDefault Management MF Transactions will be executed on disclosed basis and carry counter-party

risk as per the terms and conditions set out in MF Agreement. Therefore, any default on MF and/or MFR Transaction will result in cancellation of all MF and/or MFR Transactions as the case may be.

In such cases respective counter-party Financees shall be hold responsible for the settlement of their entire ready market purchases and/or sells, as the case may be. However, in case of non-fulfillment of obligation of affirmed MF Transaction by counterparty Financier, penalties shall be imposed on such Financier as per NCCPL Regulations.

In case of non-fulfillment of resultant ready market settlement obligation by the respective Financee, normal default procedures in accordance with the NCCPL Regulations shall be applied.

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Thank Thank youyou !NATIONAL CLEARING COMPANY OF PAKISTAN LIMITEDNATIONAL CLEARING COMPANY OF PAKISTAN LIMITED

88thth Floor, Karachi Stock Exchange Building, Floor, Karachi Stock Exchange Building, Stock Exchange Road, Karachi – 74000 Stock Exchange Road, Karachi – 74000

Pakistan Pakistan TEL : (92-21) 3246 0811-19 FAX: (92-21) 3246 TEL : (92-21) 3246 0811-19 FAX: (92-21) 3246

08270827

E-Mail :E-Mail : badi@nccpl.com.pk badi@nccpl.com.pk

Website : Website : http://www.nccpl.com.pk

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