How does Share Margin Financing (SMF) Works in Malaysia ?
Filed Under (Bursa Malaysia, Direct Business Trade (DBT), Share Margin Financing) by Webmaster on 30-06-2008
Tagged Under : discounted value, pn17, pn4, Share Margin Financing, shares collateral, smf, SMF Ratio
As I wrote in my earlier article about Share Margin Financing, there are two type of share margin financing in Malaysia; margin financing by stockbrokers and margin financing by banks.
PRO TRADE SHARES will try to explain the technical aspect of share margin financing provided by stockbrokers in Malaysia. Stockbrokers, whether they are boutique brokers, Universal Brokers or Investment Banks, have to follow Rule 703 of the Rules for Stockbrokers as issued by Bursa Malaysia.
The rules prohibit stockbrokers to provide share margin financing to ‘staff’ and its immediate family members. Staff include dealers, remisiers and directors of the brokers.
Note: Brokers here includes boutique stockbroking companies, Universal Brokers and Investment Banks.
Bursa allows the margin accounts to be used for trading, subscription of IPOs (pre-listing shares), subscriptions to rights issue and redemptions from other brokers and other financing companies as approved by Bursa. The finance companies refer to licensed banks in Malaysia.
Note : Redemption means the takeover of the loan outstanding from the financier under the same beneficial name.
However one cannot use the margin account to redeem or cross-over the outstanding contracts from a trading account of the same beneficial owner within the same broker.
For example:
If a person A has outstanding purchases in a trading account with stockbroker P and this person A then opened a share margin financing account with the same broker P. Under Bursa rule, person A cannot cross over or execute a married deal (DBT) from his trading account to the margin account of broker P as both the accounts have the same beneficial owner.
However if person A has a share margin account with loan outstanding with other broker Q and person A wanted to ‘Redeem’ the outstanding position from broker Q using his SMF account with Broker P, then person A is allowed to use his margin account in broker P to transfer over the loan outstanding. The mode of transfer will be explain further in later part of this post.
Bursa rules also stated that broker must ensure client share margin of financing ratio to be at or above 150% at all time. When a client Share Margin Financing (also referred as SMF) ratio falls below 150%, the broker is to do a margin call on the facility. Client is given 3 trading days to rectify his SMF ratio, failing which the broker must take step to sell the shares collateral in the account.
Client can either top up his SMF with cash or additional ‘acceptable’ shares collateral to bring the SMF ratio above 150%.
Note: I quote the word ‘acceptable’ because sometime certain brokers might not accept certain stock counter due to certain reasons. Some of the reasons are the brokers has too many of the particular stocks or internal policies prohibit giving value to particular stocks as the listed company could be a major shareholders of the broker or the particular stock is listed under PN4 or PN17 or it could also be due to the broker’s policy not to give value to derivatives (such as warrants).
Bursa Malaysia Rules 703 also states that when a client SMF ratio falls below 130%, the broker must institute selling-out on the same day unless client can rectify the position immediately. If you have a share margin account, you must remember that brokers have to report daily all their SMF accounts position. Therefore brokers cannot differ rectification of SMF accounts with ratio below 130% to another day as they will have to report to Bursa why no action is taken in their following day report. Unless the reason is reasonable, Bursa can impose a fine on the particular broker. Normally the only reasonable reason acceptable is because the SMF only has one type of stock and that particular stock has no buyer for the day. This can happen if the particular stock goes limit down.
Note: Limit down means a particular stock price goes down by 30% of the last done price. For example, stock A’s previous day last done price was RM1.00 and when the stock open for trading today, there are no buyer but there are many seller trying to sell. Since there are many seller, all seller will try to sell at the lowest price in order to get their sales order done. Bursa Malaysia only allow the maximum lowest price per trading session as 30% from the previous last done price. So the seller price will be listed as 70sen. However since there are no buyer, there will not be any selling done.
In the above situation, the broker will not be able to rectify client’s SMF position to bring the ratio to above 130% on the same day.
The method or equation to SMF ratio is:
SMF ratio = {Total Equities/Total Loans Outstanding}
Total equities = Discounted shares collateral value
Total loans outstanding = outstanding purchases contracts, interest charges, debit notes and rollover fees less cash deposit less credit notes less credit interest from the cash deposit (if any).
For example:
Case A
Cash deposit = RM100,000
Purchase 250,000 units of stocks A at RM1.00 = Outstanding purchase contract (ie. loan) = RM250,000
Shares collateral value = 250,000 units of stock A x RM1.00 (day end closing price) = RM250,000
Assuming that the broker give full value to the shares collateral (from the purchased contract) = RM250,000
SMF Ratio = collateral value / (outsanding purchase contract value – cash deposit)
==> SMF Ratio = RM250,000 / (RM250,000 – RM100,000) = 167%
Result = SMF Ratio is within the approved / allowed ratio.
Case B
Assuming all other criteria same as the above except that the broker only accept 80% of the collateral market value = 250,000 shares x RM1.00 x 80% = RM200,000.
==> SMF Ratio = RM200,000 / (RM250,000 – RM100,000) = 133%
Result = SMF Ratio is below 150%, therefore margin call is issued.
Client will have 3 market days to rectify his position.
Based on the above example, its easy to understand the calculation of SMF Ratio, isn’t it?
REDEMPTION
As explained above, a client with a new SMF can redeem from another financier. Here how it works;
1. We use the same example from above. Assuming you have a SMF account with Broker A. However, Broker A only give your collateral share value at 80% of the market price.
2. You manage to apply for a SMF with Broker B that is willing to give you 90% of the market value for you share collateral.
3. After your SMF account with Broker B is approved, you write in to instruct Broker B to redeem your SMF account with Broker A. You also need to write a letter to Broker A to tell them that you have instructed Broker B to redeem you SMF account.
4. Broker B will then write to Broker A to inform them of our instruction and request Broker A to provide your SMF account position (ie. the loan outstanding amount and the available shares collateral).
5. Once Broker B has confirmed that you shares collateral is sufficient to maintain your SMF ratio at the minimum 150%, Broker B will confirm the redemption instruction with Broker A. Broker B proceed to issue payment to Broker A and Broker A will transfer your shares collateral to Broker B. The new SMF loan amount with Broker B will be RM150,000.
6. Based on Broker B agreed 90% of the market value for the share collateral, you SMF ratio will be:-
==> SMF Ratio at Broker B = (250,000 shares x RM1.00 x 90%) / RM150,000 = 150%.
Result = Your new SMF Ratio is within the approved limit and no margin call.
Note : It is therefore better for you to scout around for Brokers or Banks that give you better value for your shares collateral.
I hope PRO TRADE SHARES has given you some beneficial informations about Share Margin Financing facility with stockbrokers to enable you to better manage your trading portfolio.
ur explanation is simple yet understandable. example makes it more clearer to define what SMF is all about.
By the way, do you call redemption as ‘refinance’? for me, it may have the same meaning but in LAW, it can give thousands differences.
Redemption of a margin facility by a new financier from another financier technically is a ‘refinance’ transaction. Bursa does not allow a crossing over of contracts between two stockbrokers for the same same beneficial owner thus Bursa introduce guidelines to allow redemption.
very good answer, accurate & clear, better than the module 6 study material. luckily i come here, thank you!!
Don’t tell that to SC or Bursa or they will start to ‘steal’ material from our site to set as test questions. Ha..Ha..