Margin trading only for select brokerage firms

29/09/2011 00:00 AST

The market watchdog Capital Market Authority (CMA) will allow only select brokerage firms to carry out margin trading (or secured trading as it is called), said a top-level official of CMA.

“All brokerage firms will not be allowed to carry out such trading. Brokerage firms are required to get a separate licence for collateral trading (or margin trading) from the CMA. They have to apply for it,” Abdullah bin Salem bin Abdullah al Salmi, executive vice-president of the Capital Market Authority (CMA) told Times of Oman.

Margin trading allows investors to borrow money from a broker to purchase stocks, using their investment as collateral.

According to an earlier circular issued by CMA, the proposed ‘secured finance’ scheme will allow an investor to avail a maximum of 50 per cent borrowed money from brokerage houses for purchasing shares initially, which should not go below 40 per cent of the value of the clients’ securities in the wake of market fluctuation.

In case of a fall in share value, the client has to make up for it, or else the broker concerned will be fined to the extent of 0.5 per cent on a daily basis for the difference.

CMA is introducing the scheme, which is aimed at attracting more liquidity into the market, with a lot of restrictions in order to ensure that it is not misused.

CMA circular said only select stocks can be bought using secured finance. “I would assume that the companies in MSM 30 group are qualified for trading using secured finance,” added Al Salmi.

CMA earlier said that MSM would select a group of companies, based on the financial performance and traded volumes, whose shares are allowed for secured trading.

However, sources in brokerage houses said that the CMA is not yet announced several details on the new scheme, which include a unified agreement between the brokerage firms and their clients (on margin trading).

Waiting for circular
“The CMA has announced a general guideline. We haven’t received any circular from the CMA thereafter. A unified agreement for brokerage houses covering all aspects (like legal issues) that needs to be signed between the brokerage firms and their clients is yet to come out. This will avoid disputes between brokers and their clients,” said Tariq Abdulrazaq, deputy general manager of United Securities.

Echoing a similar view, Kanaga Sundar, Senior Research Analyst at the Gulf Baader Capital Markets, said MSM has to come out with a list of select companies eligible for margin trading. Brokerage firms expect the regulating authorities to announce the unified agreement and the list of stocks eligible under the scheme within a week.

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 said assets in the trust account that is financed should not be pledged to third parties to obtain finance.

The market regulator (the CMA) 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.

Market sources said the move to introduce margin trading will be advantageous for the investors and market in general.

Sundar said that the market sentiment is still weak as uncertainty prevails in the market even now. “Foreign institutions were net sellers on the Muscat Securities Market in August. Probably, redemption pressures could have promoted these institutions to sell their portfolio in Oman,” Sundar said, adding: “Domestic institutions are also waiting on the sidelines, watching for more clarity (on global market market trends).”

Times of Oman