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Badla investment and rates decline: SECP suspends COT phase-out

KARACHI (July 11 2005): The Securities and Exchange Commission of Pakistan (SECP) has accepted the plea of stock exchanges to suspend the phase-out of Carryover Transaction (COT) at the present level of Rs 12 billion, according to an SECP announcement.

The SECP directive is in response to a letter written by three stock exchanges to Adviser to the Prime Minister on Finance Dr Salman Shah, last week, complaining about the non-availability of margin financing in the requisite amount.

It was claimed that there is a mismatch between the pace of phasing out of COT and its replacement by margin financing from banks.

A meeting was held on Sunday in which managing directors of the three stock exchanges were called in by the authorities wherein it was agreed that the contention of brokers and other stakeholders had merit.

A letter issued by the SECP said: “In pursuance to requests from stock exchanges and various other stakeholders, including small brokers and investors, further phasing out of COT has been suspended by capping the total COT financing amount prevailing as on Friday, July 8, 2005.

“The COT financing will continue to be available in seven scrips namely, PTC, OGDC, PSO, NBP, POL, DGKC and Hubco.

The decision was taken based on the fact that margin financing has not been developed to the desired level.”

BADLA: The weighted average badla rate at KSE substantially decreased by 238 basis points, to 12.5 percent on last Friday, whereas Badla investment, at Rs 11.9 billion, also declined by 6.2 percent due to offloading by weak holders and CoT phase-out formula.

Lower badla rates were seen despite tighter condition in the money market, which was due to OMO, followed by fortnightly T-Bill auction, on Wednesday, in which State Bank absorbed Rs 119.5 billion.

Badla rate at LSE was recorded at 13.6 percent on Friday, from 17.0 percent at the end of previous week. LSE badla investment stood at 9.7 million shares, or Rs 0.93 billion, at the weekend.

Annualised weighted average ready future spreads were marginally up by 179 basis points from previous Friday, to 16.3 percent. Average daily future volume was recorded at 68.3 million shares, which was 7.4 million shares less than the average daily future volume of 60.9 million shares during previous week. Future market turnover was around 37 percent of ready market turnover, in terms of shares.

This Friday, open interest in July future contract increased by Rs 1.7 billion and 16.8 million shares from previous Friday level, to Rs 10.7 billion and 93.4 million shares recorded on previous Friday. Highest open interest, of Rs 2.5 billion, was recorded in PPL stock. This was 23 percent of the total open interest at the KSE. PPL open interest in terms of shares stood at 11.4 million shares.

Stock futures in Pakistan currently are only traded on Karachi Stock Exchange.

However, average badla rates went down considerably amid increasing share values in the week on expectations of favourable news coming on the badla extension front.

Investors were reducing their exposure whereas relative decline in badla cost was mainly due to the fact that financiers were still charging the rates in order to lure the investors at a time where badla investment would continue to decrease.

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