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.

his is Part 7 of my HOW TO START TRADING STOCK IN BURSA MALAYSIA series of articles. We will discussed the Different Type of Collateralised Trading Accounts.

If you missed my earlier posting, you can read them from the link below:

PART 1: OPENING OF CDS AND TRADING ACCOUNT
PART 2 : BUY, SELL AND CONTRA
PART 3 : BURSA MALAYSIA STOCK TRADING FEES AND CHARGES
PART 4 : MARKET AND OFF MARKET TRADES IN BURSA MALAYSIA
PART 5 : TRADING LIMIT AND TEMPORARY LIMIT FOR TRADING STOCKS
PART 6 : COLLATERALISED TRADING ACCOUNT

There are generally two types of COLLATERLISED TRADING ACCOUNTS. I prefer not to include Share Margin (”Margin”) Account as a Collateralised Account because Margin Account is more complicated and functions differently from the basic Collateralised Account.

Brokers in Malaysia either have one or both or variation of both type of Collateralised Account.

As I have mentioned in Part 1 that every trading account need a CDS account. The two type of Collateralised Account differs by the type of CDS account that links to the Trading account.

(1) Client Personal’s CDS Account

This type of Collateralised Account only classify your personal trading account in the Brokers’ computer system as Collateralised Account. The shares are technically still in your name in your CDS account. However, you will need to sign a document or an agreement to allow Broker to sell your CDS shares if you don’t make payment for your contra losses.

TIPS : According to BURSA Depository Rules, the CDS account holder has the right to transfer out shares from his CDS account unless he has been declared a bankrupt or his assets has been frozen by the authorities or he has passed away (ie. died). There have been cases where Bursa Depository instructed Brokers to execute the transfer of shares out to another Broker eventhough the person has contra losses with the Broker. The Broker can only take legal action to recover the contra losses. Therefore Brokers has to take action early to sell client shares or face the consequences of loosing the collateral shares without recovery of contra losses.

It is because of the above reason, Broker will give lower multiple for these type of Collateralised Account. Some Broker don’t even want to give this type of Collateralised account. Too risky.

(2) Broker’s Nominees CDS Account

For this type of Collateralised Account, the Broker will open a CDS account under the Broker’s Nominees company name.

Note: All Brokers registered at least one Nominees company for the purpose of holding clients’ shares as custodian.

You will have to transfer or move your shares from your personal CDS account to the Broker’s Nominees CDS account as collateral. Once your shares are in the Broker’s Nominees CDS account, you can’t transfer out your shares yourself eventhough you are still the end beneficial owner of the shares. You will have to ask the Broker to transfer out the shares and the Broker, under this circumstances, has the right to refuse your request to transfer out your shares if you have unpaid contra losses with the Broker.

Since this type of Collateralised Account is less risky, Brokers will give higher trading multiple to the shares collateral.

For both type of accounts, you can still opt to deposit Cash as collateral but in the end the shares you buy will end up in the CDS until you sell them. Similar for shares collateral, Brokers will give higher trading multiple for Cash deposited as collateral for Collateralised Account Type (2).

There maybe more sophisticated type of Collateralised Account that I may not know about in the market. You will have to scout for them if you like. This end today posting. In my next posting I will introduce a product called ‘Discretionary Financing’. Interested? Subscribe to my Feed to be kept updated.