Index Based Market Halts Prospects and Challenges. Preamble

Transcription

1 Index Based Market Halts Prospects and Challenges Preamble A circuit breaker refers to a measure used by stock exchanges to avert panic selling or over-exuberant buying. After the stock s price has risen or fallen by a certain percentage, the exchanges across the globe activate restrictions or trading halts. PSX management has imposed a circuit breaker of 5% or Rs. 1/= whichever is higher for the purpose of upward/downward price fluctuations in the stock price from the closing price of the previous day.

2 Scrip Level Circuit Breakers, Background What are Circuit Breakers? Instruments, which restrict volatility Pros Protect clearinghouse risk An instrument to avoid large defaults Provides time-out in an overheated market situation Cons Known to have hindered the development of Markets Obstruct investors seeking exit Dent entry to bargain hunters Circuit Breakers Vs Market Halts Circuit Breakers limit price discovery, but help maintain Risk Market Halts allow price discovery without compromising on RM Price Discovery is faster and more efficient when Market Halts are used Why Should PSX Enlarge/Remove Circuit Breakers A number of jurisdiction observe Index Based Market Halts A Number of jurisdictions observe both scrip level Circuit Breakers and Index Based Market Halts 2

3 Scrip Level Circuit Breakers/Market Halts, latest trends The Scrip Level Circuit Breakers are either abandoned and replaced with Market Halts OR continue to stay with Market halts. The Markets Halts help avert the creation a speculative bubble which has often resulted in the crises. Market Circuit Breakers Market Halts Both India Jamaica (JSE) Nepal (NEPSE) Malaysia (KLSE) Brazil (BOVESPA) Canada NYSE Thailand UK NAIROBI STOCK EXCHANGE 3

4 MARKET HALTS Practices in Other Jurisdictions US, Singapore, Thailand, & Korean, Israel Stock Exchanges have no scrip level circuit breakers. HALTS First Second Third Scrip Level CBs India 10% 15% 20% Up-to 25% Scrip Level Fluctuation NYSE 10% 20% 30% Free Fall Korea 10% Israel 5% 8% 12% Free Fall Malaysia 10% 15% 20% Up-to 20% 4

5 Risk Management, Market Changes HALTS Current Practice After Market Halts Introduction Comments Pre-trade Margins 5% 5% No Change Exposure Margins VAR VAR+ topped up for initial six month VaR are scaled up to cater for additional Volatility. M2M Collection EOD basis On MH & EOD Members will be required to manage client margining in a more stringent manner 5

6 Circuit Breakers, Proposal Proposal for Phasing out existing Circuit Breakers Remove/enlarge Circuit Breakers in a Phased Manner, Months(1 3) The daily scrip level circuit breaker will be enhanced from 5% to 7.5%, and Index Based Trading Halt will be made operational on the basis of 5% index movement. In case KSE-30 Index continues to trade 5% up or down for consecutive 5 minutes from its opening index value, there will be a trading halt for 30 minutes. Such trading halt will not be applicable in case the movement takes place in the last 1 hour of the market. In case of a market halt, following procedures are proposed to be adopted: All equity and equity derivative markets will be suspended All orders will be cancelled All margins and Mark-to-Market losses will be collected The market will have a 5 minutes pre-open before its Opening Only those UINs, which have met the payment obligations, shall be eligible for trading after resumption of trading for that day For the rest of the day, the following restrictions will be observed: Individual scrips will be allowed to be traded up to 7.5% up or down from its previous day closing price The KSE30 Index can fluctuate 7.5% (circa) up or down from its previous day closing price Remove/enlarge Circuit Breakers in a Phased Manner, Months(3 6), the Exchange will operate in similar manner as that of Phase-1 with following parameters: The daily scrip level circuit breaker to operate on 10%, enhanced from 7.5%, and; Index based trading halt will be made operational on the basis of 7.5% index movement, in the similar manner described in Phase-1. For the rest of the day, the following restrictions will be observed: Individual scrip will be allowed to be traded up to 10% up or down from its previous day closing price The KSE30 Index can fluctuate 10% (circa) up or down from its previous day closing price 6

7 KSE 30 Index Movement in last two years Fluctuations Year Total Trading Days Less than 2% 2 to 3% 3 to 4% 4 to 5%

8 Thank You! For any further information or queries please contact: or 8