How to Trade Shares or Stocks in Bursa Malaysia

Ever wonder HOW SHARE MARGIN FINANCING WORKS to your benefit?

I am back!

This is my Part 9 of the series on How to Start Trading in Bursa Malaysia.

I was involved in various projects at work that I couldn’t find time to blog. Now that some of the projects have been delegated to my staff I can start to blog again (unfortunately still less frequent).

The topic today is on what is Share Margin Financing Facility (also known in short as SMF Facility). As the subject matter is more technical, I will explain them over a few postings.

For a start, there are TWO types of SMF available to the public to Trade Share in Bursa Malaysia. One version is provided by the Banks and the Second version is by Stockbrokers. I called them different versions because there are a few differences and restrictions due to the laws, rules and guidelines imposed by different governing bodies. I listed below the salient points for each version.

BANK’S SHARE MARGIN FINANCING

1. The Governing body is Bank Negara of Malaysia.
2. Based on Guidelines called ‘Garis Panduan - Garis Panduan’ or GPs from Bank Negara.
3. Customer can drawdown cash from Share Margin Financing Facility based on collaterals deposited just like a collateralised loan. I will explain this further later.
4. Their margin of financing ratio is defined as ‘Total Net Loan Outstanding’ over ‘Total Net Collateral’. This will also be explain in more details later.
5. Price capping is imposed for shares received as collateral.
6. Fixed deposit can be used as collateral.
7. Some banks might even accept fixed assets, such as properties, as collaterals.
8. Interest is charged based on X% + Based Lending Rate (or famously known as BLR).
9. Other than interest charges, there are also other fees such as Administrative Fees, Custodian Fees, Nominees Fees and Legal Fees. Administrative Fees are normally charged once when you applied for the Share Margin Financing Facility. Custodian Fees are fees charged due for administrating your shares collateral. Fees charged by Bursa Depository (or MCD) is part of the Custodian fees. Nominees Fees are charged whenever you received dividend or when you want to participate in corporate exercise as announced by the Public Listed Companies on those shares that you owned and pledged or deposited to the Bank as collaterals. Legal fees are charged at the onset for the Share Margin Financing Agreement that you signed when you applied for the SMF facility.
10. Banks give multiples to the collaterals provided. Each type of collaterals are given different multiples based on the risk assessment.

STOCKBROKER’S SHARE MARGIN FINANCING

1. The rules governing SMF provided by Brokers in Malaysia is government by Bursa Malaysia Rules. Although there are a few stockbrokers that have converted to Investment Banks, their Share Margin Financing facility adhered to Bursa Rules rather than Bank Negara GPs.
2. You can only use the Share Margin Financing account to Trade Shares in Bursa Malaysia (which is buy and sell shares) and not allowed to withdraw cash based on collaterals deposited.
3. A recent relaxation of Bursa Rules allow SMF facility with brokers to be used to subscribe for Initial Public Offering (IPO) shares or subscribe for rights issues just like the Banks’ Share Margin Financing Facility.
4. The defination for Share Margin Financing Ratio is ‘Total Net Collateral’ over ‘Total Net Outstanding’.
5. Price capping is imposed for shares received as collateral.
6. Only accept Cash and Shares as collaterals. Although some Bank backed stockbrokers do accept Fixed Deposits when the Fixed Deposit is deposited with the Bank (which is the parent or holding company).
7. Interest is charged on a fixed rate (no BLR is involved).
8. Share Margin Financing facilities under the stockbrokers are considered as short term thus will required to be ROLLOVER once every THREE MONTHS. Only the outstanding or unpaid Share Purchases are rolled over, not the interest or any other charges. The standard Rollover Fee is 0.25% for every rollover on the outstanding purchased contract amount. More on this later.
9. Most stockbrokers don’t charge Administrative Fees, Custodian Fees and Legal Fees. They normally considered them as ‘absorbed’ or waived. However stockbrokers do charges Nominees Fees for all corporate exercise just like the Banks.
10. Stockbrokers also imposed different multiples for different type of collaterals.

My first posting on How Does Share Margin Financing Works will end for now. Subscribe to my RSS Feeds to be updated on my next posting.

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.