Weekly CSF to be launched soon, KSE prepares mechanism

Sunday, May 16, 2010
By Javed Mirza

KARACHI: The Karachi Stock Exchange (KSE) is likely to launch the standardised 7-day contracts soon to buy and sell stock futures to be settled in cash with no delivery requirement for seller.

The margin in the cash settled futures (CSF) will be payable 100 percent in cash or bank guarantee, besides mark-to-market losses will also be payable 100 percent in cash, said a KSE draft seen by The News on Saturday.

“The value at risk (VaR) margin in CSF does not include worst case margins,” the KSE paper read.

“KSE has resisted and not imposed special margins and profit retention, however, concentration margins will be introduced,” the paper said.

Under the recently approved cash settled 7-day futures contract, the market-wide limit per scrip will be 40 percent of the free float, member-wide limit per scrip is one percent of the free float and client-wide limit per scrip will be one percent of the free float.

“Netting will not be allowed in any buy and sell position, however, spread discounts will soon be available as the volumes pick-up,” the paper added.

Weekly cash settled futures contract will begin every Monday or first trading day of the week and will end Friday or last working day of the week. The mark-to-market will be settled daily on T+1 basis.

The period of the contract will be 7 days with rollover opportunities in current, near and far month. There will be no over-lapping period. The contract value will be the product of futures price and the contract multiplier.

According to the paper, there will be no delivery requirement for seller in the weekly CSF and no requirement to settle principle amount and square-off the open position.

There will be no obligation to deliver shares at the end of the contract, as it does not contain risk of delivery pressures at the end of contract.

The value at risk (VaR) based exposure margin at the rate of 10 percent and mark-to-market will be settled 100 percent in cash on daily basis using daily settlement price.

The traders will be required to offer collateral in shape of cash or bank guarantee while the circuit breakers stand at standard 5percent.

According to the paper, contracts will not be available in week when dividend, bonus, right is expected.

It may be mentioned here that the Securities and Exchange Commission of Pakistan (SECP) has recently approved the proposal sent by KSE regarding 7-day futures contract and asked the stock exchange to develop the mechanism.