How to Trade Shares or Stocks in Bursa Malaysia

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.

This is my first posting after Pro Trade Shares changed its domain name from Fredchanblog.com to protradeshares.com.

Do you know that Bursa Malaysia composite Index consist of 100 stocks and their “membership” changes frequently. The composite index was previously known as KLCI or Kuala Lumpur Composite Index. Since Kuala Lumpur Stock Exchange has changed name to Bursa Malaysia, the composite index or CI has been known as Bursa Malaysia Composite Index. Pro Trade Shares list out below the current stocks under the Composite Index. They are sorted in alphabetical order.

No. Code Name 1 5185 AFFIN HOLDINGS BERHAD 2 5099 AIRASIA BHD 3 2488 ALLIANCE FINANCIAL GROUP BHD 4 1015 AMMB HOLDINGS BHD 5 6556 ANN JOO RESOURCES BHD 6 5076 ASTRO ALL ASIA NETWORKS PLC 7 1473 BANDAR RAYA DEVELOPMENTS BHD 8 1562 BERJAYA SPORTS TOTO BHD 9 2771 BOUSTEAD HOLDINGS BHD 10 4162 BRITISH AMERICAN TOBACCO BHD 11 1023 BUMIPUTRA-COMMERCE HLDGS BHD 12 1818 BURSA MALAYSIA BHD 13 2836 CARLSBERG BREWERY-MALAY BHD 14 7277 DIALOG GROUP BHD 15 6947 DIGI.COM BHD 16 1619 DRB-HICOM BHD 17 5266 EON CAPITAL BHD 18 5398 GAMUDA BHD 19 3182 GENTING BHD 20 1503 GUOCOLAND MALAYSIA BHD 21 3034 HAP SENG CONSOLIDATED 22 5819 HONG LEONG BANK BERHAD 23 1597 IGB CORPORATION BHD 24 3336 IJM CORP BHD 25 1961 IOI CORPORATION BHD 26 5122 KENCANA PETROLEUM BHD 27 3492 KFC HOLDINGS (MALAYSIA) BHD 28 5060 KINSTEEL BHD 29 5089 KLCC PROPERTY HOLDINGS BHD 30 7164 KNM GROUP BHD 31 2445 KUALA LUMPUR KEPONG BHD 32 2003 KULIM MALAYSIA BHD 33 5843 KUMPULAN PERANGSANG SELANGOR 34 5097 KURNIA ASIA BHD 35 3794 LAFARGE MALAYAN CEMENT BHD 36 1643 LANDMARKS BERHAD 37 6645 LINGKARAN TRANS KOTA HLDGS 38 2011 LINGUI DEVELOPMENTS BHD 39 2887 LION DIVERSIFIED HOLDINGS 40 4235 LION INDUSTRIES CORP BHD 41 8583 MAH SING GROUP BHD 42 1155 MALAYAN BANKING BHD 43 5014 MALAYSIA AIRPORTS HLDGS BHD 44 3786 MALAYSIAN AIRLINE SYSTEM BHD 45 5077 MALAYSIAN BULK CARRIERS BHD 46 3867 MALAYSIAN PACIFIC INDUSTRIES 47 1651 MALAYSIAN RESOURCES CORP BHD 48 4502 MEDIA PRIMA BHD 49 3816 MISC BHD 50 8893 MK LAND HOLDINGS BHD 51 2194 MMC CORP BHD 52 9768 MTD INFRAPERDANA BHD 53 5703 MUHIBBAH ENGINEERING (M) BHD 54 3905 MULPHA INTERNATIONAL BHD 55 3859 MULTI-PURPOSE HOLDINGS BHD 56 4006 ORIENTAL HOLDINGS BERHAD 57 5053 O.S.K. HOLDINGS BHD 58 6866 PADIBERAS NASIONAL BHD 59 5231 PELIKAN INTERNATIONAL CORP 60 7108 PETRA PERDANA BERHAD 61 5681 PETRONAS DAGANGAN BHD 62 6033 PETRONAS GAS BHD 63 5052 PLUS EXPRESSWAYS BHD 64 4634 POS MALAYSIA BERHAD 65 4065 PPB GROUP BERHAD 66 5304 PROTON HOLDINGS BHD 67 1295 PUBLIC BANK BHD 68 6807 PUNCAK NIAGA HOLDINGS BHD 69 1066 RHB CAPITAL BHD 70 8575 SAPURACREST PETROLEUM BHD 71 2356 SARAWAK ENERGY BHD 72 7158 SCOMI GROUP BHD 73 1783 SELANGOR PROPERTIES BERHAD 74 4324 SHELL REFINING CO (F.O.M.) 75 4197 SIME DARBY BERHAD 76 8664 SP SETIA BHD 77 6084 STAR PUBLICATIONS (MALAYSIA) 78 6165 SUNRISE BHD 79 6289 SUNWAY CITY BHD 80 6521 SURIA CAPITAL HOLDINGS BHD 81 5012 TA ANN HOLDINGS BERHAD 82 4898 TA ENTERPRISE BERHAD 83 4405 TAN CHONG MOTOR HOLDINGS BHD 84 2267 TANJONG PLC 85 4863 TELEKOM MALAYSIA BHD 86 5347 TENAGA NASIONAL BHD 87 5103 TITAN CHEMICALS CORP BHD 88 6888 TM INTERNATIONAL BHD 89 7113 TOP GLOVE CORP BHD 90 6327 TRADEWINDS PLANTATION BHD 91 7100 UCHI TECHNOLOGIES BHD 92 1775 UEM WORLD BHD 93 4588 UMW HOLDINGS BHD 94 5005 UNISEM (M) BERHAD 95 5142 WAH SEONG CORP BHD 96 9679 WCT ENGINEERING BHD 97 4243 WTK HOLDINGS BERHAD 98 3158 YNH PROPERTY BHD 99 4677 YTL CORPORATION BERHAD 100 2283 ZELAN BHD

The above list are not permanent, so you will have to visit Bursa website occasionally to find out the changes.