Brokerage firms urge CMA to revise margin trading scheme

25/10/2011 00:00 AST

Brokerage firms on the Muscat Securities Market (MSM) will submit a memorandum to Capital Market Authority (CMA), the market regulator, for changing certain stringent norms of the proposed margin trading (or secured financing as it is called).

The market regulator recently proposed the ‘secured finance’ scheme, which allows an investor to avail a maximum of 50 per cent borrowed money from brokerage houses to purchase shares initially, which should not go below 40 per cent of the value of the clients’.

The Muscat Securities Market Brokers’ Association, which is now collecting feedbacks from its members, is expected to submit the memorandum this week or early next week. Brokerage companies are expected to give their feedback to the association by Wednesday. “If the value of the share falls to 40 per cent, we are forced to sell or recover the money from clients immediately.

We believe that 10 per cent is a very small spread. It (the share value) can fall by 10 per cent at any time and therefore there is a risk involved (in providing margin money). It is better if we can have a spread of 25 per cent, which will give us more flexibility,” Mustafa Ahmed Salman, chief executive of United Securities told Times of Oman.

Salman said that since the stocks that can be bought using secured finance are all liquid shares selected by the Muscat Securities Market, the brokers can always take more risk. Market operators also feel that the restrictions, which are aimed at checking the misuse of the scheme, are too stringent.

Citing another concern, Salman said the stipulation that funds invested in buying the securities of a single company should not exceed 10 per cent of the value of any portfolio is also not comfortable for speculative traders. “The margin account scheme is devised for speculative investors and traders and not for long-term investors. Since it is not of much help, we are seeking this to be raised to 25 per cent.”

More flexibility

Salman noted that majority of brokerage firms are asking for bringing in more flexibility to the scheme, to make the whole scheme active. “Otherwise, it will be only in papers.” The dwindling volumes on the local bourse in recent months have prompted the authorities to think on re-introducing the scheme with certain restrictions.

In fact, low market volumes are affecting the very viability of brokerage houses in Oman, especially small players. The average daily market turnover has plummeted to as low as RO2-3 million now, from RO6-7 million in the first quarter.

The interest rate of the secured finance should not exceed the interest ceiling set by the Central Bank of Oman for personal loan. As of now, it is 8 per cent per annum. The market regulator earlier said assets in the trust account that is financed should not be pledged to third parties to obtain finance.

The market regulator also said that the total funds allocated for secured financing should not exceed 50 per cent of the net assets of the brokerage firm and capital adequacy should not be less than 100 per cent.

Times of Oman