What is Discretionary Financing (DFA)?
Filed Under (Discretionary Financing) by Webmaster on 31-08-2008
Tagged Under : DF Fee, Discretionary Financing, extend contract due date, force sell, overdue interest, purchase contract, sell out, T+3, T+7
What is Discretionary Financing article is Part 8 of my HOW TO START TRADING STOCK IN BURSA MALAYSIA series of articles.
You can follow my previous posting 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
PART 7 : DIFFERENT TYPE OF COLLATERALISED TRADING ACCOUNT
As promised in Part 7 (What is Collateralised Trading), today I will introduced to you a product called ‘Discretionary Financing’ (“DF”).
As I have mentioned in Part 2 (Buy, Sell and Contra), all Purchased trade must be paid or sell out by you the latest at 12.30pm on T+3 (which is 3 trading days after the Purchased date). If you don’t pay by the due date, the Broker has the right to ‘SELL-OUT’ or also known by the Broker as ‘FORCE SELLING’ your unpaid (outstanding) Purchase contract on T+4. The Broker can Sell-Out at any price during T+4 and if the Sell-Out resulted in a Contra Loss, you will be responsible to settle it.
However Bursa has introduced via a guideline on 23 December 2005 to allow Broker to provide customer like you to hold on to the unpaid Purchase contract upto T+7. It means you can delay your payment upto 12.30pm T+7. If payment or sell out is not done by you by the due date, Broker shall execute Sell-Out on T+8. Basically you have been given extra 4 trading days to pay for your Purchase contract. However client must open a DF account with their Broker for monitoring by the Broker and reporting to Bursa. The DF account can be client existing normal trading account with client personal CDS account but most Brokers has policies that the DF account must be a collateralised account.
HOWEVER, DF means to ‘Finance’ the extra 4 trading days. I the 4 trading days cross over the weekend, the ‘Financing’ period is for 6 calendar days. Since the Broker is ‘Financing’ the extra days, Bursa allow Broker to charge a ‘DF Fee’ on the outstanding Purchase Contract value. If your contract value is RM100,000 the DF Fee will be RM50.00 and on top of that you will also be charged ‘Overdue’ interest for every single day the Purchase contract is unpaid or outstanding. The overdue interest charged by Malaysian Brokers are between 6% to 12% per annum.
TIPS : The DF Fee is a one time charge and Brokers will share with the Commission Dealer’s Representative (‘DR’) either at 50:50 (DR:Broker) or 40:60. Most Broker entertained request of lower DF Fee due to market competition but there is a certain floor or minimum rate or minimum amount set by each Broker. DF Fee will not be charge if you sell or pay the Purchase Contract by T+3.
Generally there are not many DF accounts opened with Broker because most Brokers will insist that customer convert their Normal Trading Account to Collateralised Account to lower Broker’s risk. Furthermore the one time DF Fee is considered ‘High’ as it will be added to the Purchase Contract cost which will directly caused the breakeven price of the stocks higher.
Note: Breakeven price refer to the Sales price of the Contract whereby the Sales contract value is equal or just sufficient enough to pay for the Purchase contract.
Example:
Assumption – you buy 100,000 shares at RM0.90 and your brokerage is at the minimum 0.6%
Assumption – you utilise the DF facility and sell your shares on T+7 (last day of DF) at RM0.95
Purchase Contract
Gross Value = 100,000 x RM0.90 = RM90,000.00
Stamp duty = RM90,000 / 1,000 = RM90.00
Clearing fee = RM90,000 x 0.03% = RM27.00
Brokerage = RM90,000 x 0.6% = RM540.00
Total Net Contract Value = RM90,000 + RM90 + RM27 + RM540 = RM90,657.00
DF Fee = RM90,657 x 0.5% = RM453.29
Overdue interest (at 8% per annum) = RM90,657 x 8% x 4/365 = RM79.48
Therefore your total cost = RM90,657 + RM453.29 + RM79.48 = RM91,189.77
Sales Contract
Gross Value = 100,000 x RM0.95 = RM95,000.00
Stamp duty = RM95,000 / 1,000 = RM95.00
Clearing fee = RM95,000 x 0.03% = RM28.50
Brokerage = RM95,000 x 0.6% = RM570.00
Total Net Contract Value = RM95,000 – RM95 – RM28.50 – RM570 = RM94,306.50
If we compare the net profit of your trade :
Without DF = RM94,306.50 – RM90,657.00 = RM3,649.50
With DF = RM94,306.50 – RM91,189.77 = RM3,116.73
You make LESS PROFIT by RM532.77 which the DF Fee and the overdue interest.
The above example is a Profit if the stock price goes up during the DF period (ie. T+4 to T+7). What if the stock price goes down by the same amount? You would have to a higher Loss position due to DF Fee and overdue interest.
TIP : Bursa guidelines stated that a client can request the client normal trading account to be converted to DF Account by T+3 of the outstanding Purchase contract. Therefore if you are unable to get a good price to sell for your outstanding Purchase contract and you don’t want to pay for the contract, you can request to your Broker to convert your Normal Trading Account into a DF Account on T+3 itself. Once approved, your settlement due date will be stretch from T+3 to T+7.
I hope you benefitted from today’s topic on Discretionary Financing. Subscribe to my Feed to be kept updated of my next posting.
