In Pakistan, leverage trading is primarily facilitated and regulated through specific systems managed by the National Clearing Company of Pakistan Limited (NCCPL), under the oversight of the Securities and Exchange Commission of Pakistan (SECP). The key avenues for leverage trading in Pakistan include:
Types of Leverage Trading in Pakistan
Future Markets (FUT)
Description: Futures contracts are standardized agreements to buy or sell a specific quantity of an underlying asset (like a stock or an index, such as the KSE 100 or KSE 30 Index) at a predetermined price on a future date.
Leverage Mechanism: Investors only need to deposit a percentage of the contract's total value as initial margin to open a position. This allows them to control a much larger value of the underlying asset than their actual cash outlay. For example, by putting up a margin of 15-30%, an investor can participate in a contract worth the full value.
Settlement: Futures contracts can be Deliverable Future Contracts (DFCs), where physical delivery of shares occurs, or Cash Settled Futures (CSFs), where only the price difference is settled in cash.
Margin Trading System (MTS)
Description: MTS is a facility offered by brokerage firms in Pakistan that allow investors to purchase eligible securities by paying only a part of the total value upfront. The remaining amount is financed by the broker or a designated financier.
Leverage Mechanism: The investor (financee) is required to contribute a minimum percentage of the transaction value as equity participation (typically not less than 15% or a Value at Risk (VAR) based percentage, though this can be adjusted by the SECP/NCCPL). The remaining amount is lent by the financier (broker/bank).
Cost of Leverage: A mark-up rate (e.g., KIBOR + 8%) is charged on the borrowed funds.
Contract Duration: MTS contracts usually have a maximum duration (e.g., 60 calendar days).
Market Type: MTS transactions are executed through NCCPL's online trading system and operate as an "undisclosed market" between the financee and financier.
Purpose: Primarily used for "leverage buy" positions on eligible ready market shares.
Margin Financing System (MFS)
Description: Similar to MTS, MFS is another regulated system for providing short-term financing against the purchase of securities on the PSX. It allows investors to amplify their buying power.
Leverage Mechanism: Investors provide a specified Financier Participation Ratio (FPR), with a minimum equity contribution (e.g., typically 25% or VAR, whichever is higher, though this can also be adjusted).
Key Differences from MTS (subtle): While conceptually similar to MTS, MFS may have different eligibility criteria for securities, contract terms, or specific financing arrangements between the financier and financee. NCCPL provides separate data for MTS and MFS, indicating distinct operational parameters.
Disclosure: Unlike the "undisclosed" nature of MTS, MFS transactions are generally based on counterparty risk in a disclosed manner.
How Leverage Trading Works in Pakistan
Opening a Margin Account: An investor wishing to engage in leverage trading must open a margin account with a brokerage firm licensed by the SECP to offer such facilities.
Depositing Margin: The investor deposits a portion of the total trade value (the initial margin) into this account. This can be cash or, for some securities and systems, eligible shares.
Borrowing Funds: The brokerage firm or an affiliated financial institution lends the remaining funds required to complete the trade.
Taking a Larger Position: With these borrowed funds, the investor can purchase a larger quantity of shares than their own capital would allow.
Market Movement:
Favorable Movement: If the price of the purchased shares increases, the investor's profit is calculated on the total value of the position, significantly amplifying returns on the initial margin.
Unfavorable Movement: If the price decreases, the losses are also calculated on the total value, which can quickly erode the initial margin and even lead to losses exceeding the initial investment.
Margin Call: If the value of the securities in the margin account falls below a certain maintenance margin level, the investor will receive a margin call from their broker. This demands additional funds to restore the account to the required margin level. Failure to meet a margin call can result in the broker forcibly selling off the investor's securities to cover the loan, often at a loss.