Muscat: Margin financing contributes to boosting liquidity levels in the stock markets, Ahmed Sulaiman Al Sibani, director of the Department of Compliance and Inspection at the Capital Market Authority (CMA), said.
This also activates trading transactions because it is a financial facility provided to the client to invest in the market collateralised by the securities.
The client contributes as initial margin, which is half of the total value of the portfolio in accordance with certain provisions regulating the relationship between the client and the company, which must be licensed to carry out margin financing activity by CMA.
On the Muscat Securities Market’s (MSM’s) experience in regulating margin financing, Al Sibani pointed out it started early, whereas brokerages were providing the facility to the clients to attract the largest number, however, such activity is not regulated and there were no limits for financing or follow up of the margins.
He added that to maintain the market’s integrity and protect the brokers from the risks of clients’ default in payment of their obligations and the impact of the same on the market and the financial position of the companies, margin financing rules were announced, whereby margin financing can be provided to protect both parties.
Al Sibani added the recent amendments were made after an assessment of the previous rules and the developments in the local and global securities markets and evaluation of the points of weakness to provide adequate protection for market participants to enhance the regulations for more flexibility required for trading transactions in the market and for risk management in view of market volatility.
Al Sibani said the recent amendments to the margin financing rules are more flexible with regards to the available options in the trading transactions to achieve the investment goals in addition to the benefits for brokerage companies due to increased trading volumes. He further said the new rules include the expansion of the base of companies’ license to carry out margin financing activity.
This includes the companies listed on both the regular and parallel markets, and not only the companies listed on the market index, which are pegged at 30. This would allow for more opportunities in trading volumes and a more active market besides increasing the funds the licensed companies are providing to the client OMR500,000 to pave the way for the clients with higher solvency to avail the investment benefits in the market.
Al Sibani also explained that the new amendments include raising the maintenance margin in five trading days instead of three so as to allow the broker to meet the margin maintenance ratio from the client. The licensed companies are allowed to deal with the securities listed on the regular and parallel markets based on standards set out by the companies.
Where the actual margin falls below the agreed maintenance margin, the legislator obligates the broker to inform the client immediately after the trading session by any means of communication to top up the actual margin to the level of the agreed maintenance margin in not more than five trading days from the trading date on which the fall had occurred so that the broker can meet the margin maintenance level because transferring cash from the client to the broker’s account will take longer than the previously allowed term.
Half of total assets
On the other hand, amendments have been allowed in the company licensed for secured financing to offer financial facilities for trading purposes, provided the client pay the facilities in not more than three months from the date of the transaction. The company can source the financing from the company’s total assets, and not the net assets, provided the financing does not exceed 50 per cent and the risks will be controlled through capital adequacy requirements, which were issued recently vide the Administrative Decision No. 41/2016.
The amount the company is allowed to grant as financing has been increased to OMR500,000 from OMR250,000, provided the sum will not be more than 15 per cent of the funds the licensed company provides for such activity.
Enhancing regulatory efforts
To regulate the relationship between the client and the broker, the Director of Compliance and Inspection said the broker shall not open more than one financing account for any client alone or together with his minor children or his enterprises; furthermore, the amendments added certain rules obligating the client to acknowledge the other margin financing accounts held with other companies and to undertake to report any future accounts. The minimum limit may be specified for the turnover of the portfolio and the required time. The broker may require the client to pay and close the facilities’ account if it becomes unviable or for any other reason.
Al Sibani urged the companies operating in securities and those licensed to carry out margin financing to exercise due diligence and to monitor the maintenance of the a minimum financing margin so that the broker is not forced to sell all the client’s shares to ensure the payment of his rights, which would lead to a large number of sell offers, resulting in a price drop. The broker shall also ensure the client is aware of the risks and rewards attached to investment by margin financing, including, but not limited to high losses exceeding the amounts contributed at the inception of the contract. He asserted the companies are required to have internal controls and audit by furnishing qualified staff to manage margin financing accounts in accordance with the directives of the CMA.
Article 130 of the Executive Regulation of the Capital Market Law states that the company licensed for margin financing (secured financing) may provide financing for investment in securities collateralised by securities held in the name of a licensed company pursuant to the rules issued by CMA, and Article 125 of the same Regulation provides for the minimum limit of capital of the licensed company. It is noteworthy that CMA has precluded the companies operating in securities from carrying out any financing facilities, other than margin financing and shall meet the minimum requirement of licensing to carry out margin financing.