PSX DERIVATIVE SEGMENT DEVELOPMENT

Transcription

1 PSX DERIVATIVE SEGMENT DEVELOPMENT Presentation by: Mr. Sani-e-Mehmood Khan General Manager - Pakistan Stock Exchange (PSX) Date: November 29, 2016

2 Financial Inclusion Deep and Liquid Ready Market Product Suite Enabling environment and Institutional Participation DERIVATIVE SEGMENT DEVELOPMENT PRE REQUISITES A Properties of Fair, Vibrant and Inclusive Capital Markets Fair, Vibrant and Inclusive Capital Market is the basic pre-requisite for an efficient DERIVATIVE SEGMENT Roadmap for Market Development 2 Pakistan Stock Exchange Limited 2

3 FINANCIAL INCLUSION

4 FINANCIAL INCLUSION Indicator Pakistan Turkey Bangladesh Thailand Population 197,000,000 73,722, ,570,000 66,870,000 # of Investors 216,996 (.13%) 4,132,704 (5.6%) 2,804,629 (1.77%) 3,050,000 (4.6%) Insurance 0.7% 1.28% 0.94% 4.1% Penetration # of CIS Unit Holders 140,000 (.075%) 3,626,017 (4.9%) N/A 1,550,000 (2.3%) Participants of Pension Funds 2,000 (.001%) 2,638,310 (3.6%) N/A 3,400,000 (5.1%) Savings Rate 13.8% 12.7% 19% 30.7% Literacy Rate 56% 90.8% 48.8% 93.5% Pakistan Stock Exchange Limited 4

5 DEEP AND LIQUID MARKET

6 DEEP AND LIQUID READY MARKET MARKET HAVING OVER 1 BN $s AVG DAILY VALUE TRADED US, India, Thailand, Turkey, France, Hong Kong, Germany, Korea, UK, Russia, and Japan are amongst the Markets which observe an average daily value traded which is over and above US $ one billion per day. MARKET HAVING MLN $s AVG DAILY VALUE TRADED Mexico, Malaysia and Singapore are the nations which observe an average daily value traded between Millions of US $s per day Pakistan Stock Exchange Limited 6

7 DERIVATIVE PRODUCTS, ACROSS ASIA AND ACROSS GLOBE Region Asia Types of Derivative Products Country Market Futures Options Forward Classification SSF SIF SSO IO DFM Hong Kong Developed Japan Developed Singapore Developed China Emerging India Emerging Indonesia Emerging Korea Emerging Malaysia Emerging Philippines Emerging Thailand Emerging Bangladesh Frontier Pakistan Frontier Sri Lanka Frontier Vietnam Frontier Pakistan Stock Exchange Limited 7

8 DERIVATIVE PRODUCTS, ACROSS ASIA AND ACROSS GLOBE Region Americas Middle East & Africa Europe Types of Derivative Products Country Market Futures Options Forward Classification SSF SIF SSO IO DFM United States Developed Canada Developed Mexico Emerging Brazil Emerging Colombia Emerging Saudi Arabia Emerging Jordan Frontier Qatar Emerging South Africa Emerging United Kingdom Developed France Developed Germany Developed Israel Developed Russia Emerging Turkey Emerging Pakistan Stock Exchange Limited 8

9 PRODUCT POSITIONING: INDIA S GLOBAL RANKING Index Options 2 Single Stock Futures Index Futures 3 3 Equities 4 Equity derivatives turnover 12.6 times of cash market in FY13 Pakistan Stock Exchange Limited 9

10 PSX Present Dynamics, Derivative Product Suite Stock Index Futures Cash Settled Futures Ready Market Deliverable Futures DFM turnover accounts for 0.17% of cash market in FY15-16 Pakistan Stock Exchange Limited 10

11 PRODUCT SUITE *FOCUSES only on the inactive derivatives

12 CASH SETTLED FUTURES, PRODUCT OVERVIEW What are Cash Settled Futures? Standardized 90 Days Contracts to buy/sell single stock futures to be settled in cash M2M is settled in cash on daily basis using Daily Settlement Price Attracts VaR Margin on open positions Contract are concluded on basis of underlined instrument s price on Cash Counter The result of the trade is the cash difference between the bought and sold price. Pros No requirement to settle principle amount No requirement to square-off the open position Provides 6-7 times leverage for retail audience There shall be no obligation to deliver shares at the end of contract Cons Small investors may become the victim of smart institutional hedging Does not contain risk of delivery pressures at the end of contract as observed in March 2005 Pakistan Stock Exchange Limited 12

13 PRODUCT OVERVIEW, CONTRACT SPECIFICATION Period Contract 90 or 30 days Opening of Contract First Trading day of the next week following the close of the contract. Overlapping Period None. Expiration Date/ Last Trading day Last Friday of the calendar month, if last Friday is not a trading day, then immediate preceding trading day. Final Settlement Cash settlement on T+1 basis on the expiration date. Contract Value The Contract Value shall be the product of Futures price and the Contract Multiplier Pakistan Stock Exchange Limited 13

14 CSF TRANSACTION LIFE CYCLE, DAILY SETTLEMENT PRICE Sr# Volume Rate Value , , , , , , , , , , , , , , , , , , , , , , , , , Total Volume of Last 1/2 Hours 77, Total Value of Last 1/2 Hours 788, Daily Settlement Price India, Brazil, Philippines Athens, and Mexico use similar CSF closing price as DAILY SETTLEMENT PRICE. i.e. Volume weighted price of last 30 minutes for each stock. Pakistan Stock Exchange Limited 14

15 CSF TRANSACTION LIFE CYCLE, DAILY SETTLEMENT PRICE Suppose a buy transaction takes place at RS 41/= Days Scrip Trade Type Prevailing Trade Rate Trade Qty Open Contract Value Daily Settlement Price PLS/M2M Settlement On T+1 Close Contract Value MGN Requirement at EOD 1 LUCK-CJUN BUY , , , , , , , , , , , , , , , , , , , , , , , , , , , (1,700.00) 48, , , , , , Profit/Loss till 2nd last day of the contract======== 7, Pakistan Stock Exchange Limited 15

16 CSF TRANSACTION LIFE CYCLE, DAILY SETTLEMENT PRICE Days Scrip Trade Type Prevailing Trade Rate Trade Qty Contract Value Daily Settlement Price Gain/Loss on T+1 1 LUCK-CJUN BUY , , , , , , , , , , , , , , , , , (1,700.00) , , Profit/Loss till 2nd last day of the contract======> 7, What happens when you take a position on CSF and continue to hold? 5% pre-trade Margin is required for the placement of order Subsequent to order execution 1-Day VaR is payable immediately after trade-generation by KATS M2M/Gain-or-loss is settled in cash on daily basis using Daily Settlement Price The next day open position is set at last day s daily settlement price prevailing at CSF Contract are concluded on the last day using the FINAL SETTLEMENT PRICE of underlined instrument s price on Cash Counter What happens when you offset your open position? The result of the trade is the cash difference between the bought and sold price. The difference is credited/debited to your account on T+1 basis Open position is not carried forward anymore Pakistan Stock Exchange Limited 16

17 CSF TRANSACTION LIFE CYCLE, FINAL SETTLEMENT PRICE The average bid / ask quote of the scrip in the Ready Market which would be calculated as a ratio of A/B where A equals the sum of market bid and ask prices taking the best bid and best ask prices of the scrip during each one minute interval for last two hour trading. Sr# One Minute Interval BID X ASK Y Sum X+Y Total Total Bid Count 110 Total Ask Count 110 Final Settlement Price (FSP) FSP = /220 FSP = India, Brazil Athens and Malaysia use underlined assets closing price as Final Settlement Price Pakistan Stock Exchange Limited 17

18 CSF TRANSACTION LIFE CYCLE, FINAL SETTLEMENT PRICE Days Scrip Trade Type Prevailing Trade Rate Trade Qty Contract Value Daily Settlement Price Gain/Loss on T+1 1 LUCK-CJUN BUY , , , , , , , , , , , , , , , , , (1,700.00) , , Profit/Loss till 2nd last day of the contract------> 7, What happens to the open positions at the end of CSF Contract? Contract are concluded on the last day using the FINAL SETTLEMENT PRICE of underlined instrument s price on Cash Counter 120 readings of bids and offers of last 2 hours are taken The open positions does not require an square-off, gain-or-loss is collected on the basis of final settlement price and the contract is concluded What happens when you offset your open position? The result of the trade is the cash difference between the bought and sold price. The difference is credited/debited to your account on T+1 basis Open position is not carried forward anymore Pakistan Stock Exchange Limited 18

19 CSF TRANSACTION LIFE CYCLE NETTING REGIME, RMS, & LIMITS Netting Regime? Netting SHALL NOT be allowed between buy and sell position in same scrip for different clients Netting SHALL NOT be allowed between buy and sell position in different scrip for same client Netting SHALL NOT be allowed across different contracts(30, 60, 90) for same client in same scrip Spread Discounts shall soon be available as the volumes pick-up Risk Management? Open positions to attract Ready Market VaR Margins applicable at client level Margin are payable 100% in securities and will soon be in Cash Normal haircuts are applied on the collaterals KSE has resisted and not imposed special margins and profit retention, however, concentration margins shall be introduced subsequent detailed presentation to member community Capital Adequacy Limit? CAL shall continue to be in the multiple of NCB times 25 of a member With the conclusion of CFS and DFM, a member can utilize 10 times of its NCB in CSF Position Limits? Market wide limit per scrip is 40% of the free float Member-wide limit per scrip is 10% of the free float Client-wide limit per scrip is 1% of the free float Pakistan Stock Exchange Limited 19

20 CSF TRANSACTION LIFE CYCLE CORPORATE ACTIONS Adjustments in case of RIGHT ISSUE? The contract multiplier will be adjusted against RIGHT issue in the underlying scrip When there is 1-for-2 right issue, the contract multiplier will be adjusted to 750 from 500 in the following manner 750 (500 X 3/2) On the ex-right date The buyer or seller can square-off their open positions in the multiple of lot-sizes KSE shall soon be revising lot-size to 1 and CSF contract multiplier Cash Dividend? In case where cash dividend is declared in a scrip, no adjustment would be made by the exchange The market to re-adjust in consideration of cash dividend. Pakistan Stock Exchange Limited 20

21 CSF TRANSACTION LIFE CYCLE CORPORATE ACTIONS Adjustment of Bonus Issue? Open positions to attract Ready Market VaR Margins applicable at client level When there is a 1-for-2 bonus shares issue i.e. for every 2 existing shares, the holder gets one additional shares The Exchange: shall adjust the prices in the following manner Existing Contract Contract Vol Futures Price Contract Value , Conpany Announces Shares for each share Revised Contract Contract Vol Bonus Multiple Bonus Shares , Original Volume Revised Contract Volume =======> 1, New Contract Price is determined by dividing Old Contract Value by Revised Contract Size Old Contract Value 270, Revised Volume 1, Revised Price Pakistan Stock Exchange Limited 21

22 PRODUCT REVIEW, STOCK INDEX FUTURES Stock Index Futures is simply buying or selling a specified number of contracts, whose mark-to-market difference is settled in cash on daily basis. Contract Duration Contract Start Date Contract End Date Daily PLS Settlement Final Settlement Contract Multiplier Contract Unit Exposure Margin and Deposits Standardized 90 days Contracts first day following the last Friday of Each Month Last Friday of respective Month Volume weighted average value of last half hour of trading in relevant stock index futures contract multiplied by contract multiplier. Same as of CSF, except that SIFC uses underlined index values RS 5/=, Minimum Fluctuation one index point of KSE-30 Numerical Value of underlined Index i.e. KSE-30 VaR marginsof exposure Pakistan Stock Exchange Limited 22

23 PRODUCT REVIEW, STOCK INDEX FUTURES OPERATING PARAMETER OPERATING VALUE Contract Unit Value of Underlying Index Contract Multiplier RS 5 Margin Requirement VaR values around 6% CURRENT KSE-30 INDEX = 6000 TRANSACTING VOLUME = CONTRACT VALUE = 30,000 ============================================ *3750 exposure margin, and RS 5 per index point movement is the gain or loss Pakistan Stock Exchange Limited 23

24 TRADING SCENARIO, READY/DFM TRADING Delivery Based Products Cash Management Bank/ Personal Borrowing (K+4) DVP T+2 Settlement Traded at PSX Settled by NCC Features DVP 30 days contract Traded at PSX Settled at NCC Settle Ready on T+2 Ready Future Arbitrage Borrow Cash Go long in Ready Sell in DFM (K+4+n) Bull Run Go long in DFM pay at the end of DFM Bearish Run Go short in DFM Buy/lift delivery at the end of contract Past Experiences March 2005 Crises was triggered due to delivery pressures in the 4 th week of March 2005 SECP advised to introduce non-deliverable-csf to avert delivery requirement on the end of long position holders syndrome appear to be a mere re-occurrences, PSX introduced CSF in Pakistan Stock Exchange Limited 24

25 TRADING SCENARIO, READY/CFS TRADING Delivery Based Products Cash Management CFS Financier offer (K+4) DVP T+2 Settlement Traded at PSX Settled by NCC Features DVP 22 days contract Traded at PSX Settled at NCC Settle Ready on T+2 Buy in Ready Market Get CFS on a agreed premium rate Release CFS Trade with Cost of Carry Sell in Ready Market Always for Bull Run Doesn't Support Bearish Trend Past Experiences Carrying one transaction forward involves 3 additional transaction. Exorbitantly high cost of transaction, brokers lending risk is on the clearinghouse. Carries huge incentive to default. Pakistan Stock Exchange Limited 25

26 TRADING SCENARIO, READY/CFS TRADING Cash Settled/Non-Deliverable Products Cash Management Use of Futures and Financing tool. Lender should go short in CSF and go long in ready to earn return at KIBOR+n DVP T+2 Settlement Traded at PSX Settled by NCC Features Hedging Buy in Ready Market Go short in CSF No need to square the trade in CSF Lend in Ready and earn money Loss is hedged against down-trend CSF 90 days contract Traded at PSX Settled at NCC Supports Bull Run Support Bearish Trend Past Experiences Investors tend to use CSF. The fear factor prevalent at Brokers is impeding the volumes in this product. Presence of Circuit Breakers is yet another impediment in the growth of this product. Institutions are allowed to do financing in CFS. However, they Mutual Fund cannot trade on CSF. Pakistan Stock Exchange Limited 26

27 TRADING SCENARIO, READY/SIFC TRADING Cash Settled/Non-Deliverable Products Trading Strategy The SIFC price will follow the level of a hypothetical portfolio of stocks (KSE- 30) to increase or decrease their exposure to Country s only Capital Market DVP T+2 Settlement Traded at PSX Settled by NCC Choices Buy KSE30 Basket Sell the Index (SIFC) Do Not buy KSE-30 Basket Just Go Short in SIFC Features CSF 90 days contract Traded at PSX Settled at NCC Supports Bull Run Support Bearish Trend Past Experiences International consultants have regarded this as an excellent arbitrage and hedging tool. Yet the fear factor and Presence of Circuit Breakers remains a key impediment in the growth of this product. Institutions are allowed to do financing in CFS. However, Mutual Fund cannot trade on CSF. Pakistan Stock Exchange Limited 27

28 THANK YOU For any further information or queries please contact: or Serving Investors & Industry Stock Exchange Building, Stock Exchange Road, Karachi-74000, Pakistan. Tel: (+92) , Website: