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.

In my earlier posts on How to Open a Trading Account, I did not mentioned that your application to open a trading account could be rejected. We all assume no broker will reject a business.

However there are another condition other than being a bankrupt that will prevent a stockbroker from opening a trading account; its called Bursa Defaulter Lists.

Prior to Bursa Malaysia being listed, it was known as Kuala Lumpur Stock Exchange and its members were all the stockbrokers. After the financial crisis in 1997, it was found that there were customers that have multiple trading accounts with multiple stockbrokers. What these customers did were, they went to broker A and start to accumulate contra losses. After he is suspended in Broker A, he went to open an account in Broker B and did the same thing there while refusing to pay for the contra losses in the previous broker. As time went on, he would have contra losses in many brokers. If he had average contra losses of say, RM100,000 in each broker, he could accumulate a total contra losses of RM1,000,000 with 10 brokers.

Since the CDS account is not centralised, ie. a person can open 10 CDS accounts with 10 brokers, similarly a customer can open 10 trading accounts with 10 different stock brokers unlike Singapore where they have a centralised similar CDS account. With centralised CDS account, if a customer has unsettled losses in Broker A and if he continued to trade with Broker B, Broker A can take legal action to ‘force-sell’ customer shares in the CDS. Since in Malaysia a customer can have many separate CDS accounts, Broker A would not know customer CDS account with Broker B and under the MCD Act that governed CDS accounts, brokers are not allowed to divulge customer CDS information to any third party.

In order to prevent abuses by customer, the than KLSE members agreed on a rule to create a Defaulter Lists. A member or participating organisation of KLSE (now Bursa) can report to the Bursa on any of their customer with unpaid contra losses that exceed RM2,000. After Bursa has investigated (based on certain required documentations from the Broker), Bursa will list the customer in the Defaulter List (Name, Identification Card Number, Amount Owing) minus the name of the reporting Broker. This list is then circulated to all member Brokers and the name is uploaded in Bursa BFE. When the name is in the BFE, the customer with matching IC will not be able to make any further Purchases with any Brokers but the system allow the selling of shares. Member Brokers will upload the Defaulter List into their Back Office Computer System which will prevent the listed name to open a new trading account with member brokers.

So, are you a Defaulter ?

There have been cases of fraud, where a known or unknown party or parties used another person IC to open a trading account without the knowledge of the IC holder. These ’syndicate’ will create many stolen identity trading accounts and used them to create trading volume for a particular stocks to inflate the price before they ‘Cash Out’ in their own nominees accounts while creating huge contra losses in the other accounts with the stolen IC. When the geninue IC holder wanted to open its first or new trading account, he found that his name is listed in the Bursa Defaulter Lists with hugh amount of contra losses.

A good advice will be for anyone to visit a broker just to check whether he is listed as a Defaulter.