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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.

Related Posts:

• How does Share Margin Financing (SMF) Works in Malaysia ?
• Are You a BURSA Defaulter?
• Introduction to Collateralised Trading
• How to Open a CDS Account and a Trading Account ?
• How to Start Trading Stocks in BURSA MALAYSIA?

In the following series of articles on HOW TO START TRADING STOCK IN BURSA MALAYSIA I will try to convey the meaning of the various terms used by the stockbroking industry in Malaysia. The articles will start from the very basic to the more complex workings of the stockbroking business. If you are a Malaysian or a resident of Malaysia you will be able to easily understand some of the terms. If you are not? I will provide legends or notes to explain the terms or maybe links for you to find out more about the terms.

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If you hope to find investment advice here, you will be dissappointed. I will not be making any statement or giving any investment advice. You can try other sites. I will also not go into the very details of what is a stock or what is an exchange. You have to find out about them in Economics books available in the online or offline bookstores.

Ok….lets begin.

In Malaysia the man in the street often refer to stock as ‘share’ so I will use either one in all my posting….I hope you won’t get confuse. I will use the word ‘Bursa’ to mean Bursa Malaysia which again the most people in Malaysia will use.

In order for you to start buying or selling stocks that are listed in Bursa, you will first need two to open two (2) types of accounts.

Note: Bursa was previously known as Kuala Lumpur Stock Exchange or KLSE. The company that managed the exchanged is listed under the name ‘BURSA’ with the trading code ’1818′.

The two accounts required are:-

(a) CDS account.

CDS stands for Central Depository System which is an electronic account maintain by Malaysian Central Depository (“MCD”) or now known as Bursa Depository. However most stockbroking people still refer Bursa Depository to its acronym ‘MCD’ which I will use in my articles. The CDS account is just like your bank account. Whatever stocks you buy will be credited into your CDS account on due date. When you sell the stocks will be debited from your CDS account. There is no physical movement of stocks (also known as scripless trading).
(b) Trading account.

A CDS account alone will not allow you to buy and sell stocks. You will need to open a Trading Account with any of the registered stockbrokers with Bursa (also known as Participating Organisations or ‘POs’ in Bursa website). Bursa required you to reveal 4 basic information in your Trading Account application form. All POs’ Trading Account application form will have areas for you to fill these 4 informations:-

(i) Your annual income (just a gross estimate will suffice, you don’t need to give the exact figure),
(ii) Your networth. This is an estimate of all your assets such as car, house, Fixed deposits etc.,
(iii) Type of investor. Whether short term, medium term or short term investor (see note below),
(iv) The number of years trading in stock market, local or overseas.

Note:
Short term investor refer to people who buy and then sell their shares in short period of time such on the same day or within a few days or within a few weeks. Medium term investors are those who will hold for a few months before selling their shares and Long Term refer to investor who normally buy shares in expectation to hold them for few years in hope of receiving dividends payout and share price appreciations.

Who can open a CDS or Trading Account?

Basically anyone above 18 years old, Malaysians or non-Malaysians or a private limited company or a limited company again local or foreign.

As the MCD rules are more restrictive, all POs will follow the MCD rules when it comes to approving any application.

According to the MCD a non-bankrupt individual above 18 years old, private limited or limited company can open a CDS account. Sole proprietorial companies and partnership companies are not allowed to open a CDS account. For example; if you own a shop under ABC Enterprise, you are only allowed to open a CDS account under your personal name and not under the company’s name.

Since MCD has such restriction, you will also not be able to open a trading account under the same conditions because the Trading Account name must be the same as the CDS Account name opened with MCD. Otherwise it will be a breach of the MCD Act which has been enacted by the Parliment of Malaysia.

When you go to any PO to apply for a Trading and CDS account, you better bring the following supporting documents otherwise you will have to make a second trip.

Steps to open an Individual Account

Step 1. You can request for a CDS Opening Account Form (form FMN01) from one of the listed stockbrokers. Remember that you must be at least 18 years old to open an account.

CDS FMN010 form

Step 2. Complete the Opening of CDS Account form and sign on TWO (2) Specimen Signature Cards. Some brokers require you to sign 3 cards but the minimum is 2.

CDS Signature Card

Step 3a. For Malaysians you have to submit the form and specimen cars together with two (2) certified true copies of your Malaysian National Registration Identity Card (“NRIC”). If you know of any licensed Dealer’s Representative (“DR”), you can ask for these documents and have the DR to certify the copy of NRIC. If you don’t know any DR and you can also walk in to the PO’s customer service counters and the PO’s staff will normally ask one of their company’s DR to witness the documents.

Step 3b. If you are a foreigner, you will have to submit two (2) certified true copies of your passport instead of the Malaysian NRIC.

Step 4. Pay RM10.00 to open the CDS account. This is charged by MCD.

Malaysian or non-Malaysian that are not in Malaysia can still apply for the accounts. You can request via phone or online for the forms but the forms and the supporting documents must be certified by a Notary Public.

Example of a Notary Public are the Ambassadors of Malaysia in the respective foreign countries.

Steps to open a Company Account

Step1. Complete the CDS Opening of Account Form (form FMN01) and two (2) Specimen Signature Cards.

Step 2. Submit the above documents with two (2) copies of all the necessary supporting documents (e.g. Certificate of Incorporation, Board Resolution, etc) together with the Account Opening fee (RM10.00). The POs’ will provide a list of required documents.

Step 3. Please ensure all the supporting documents (except the specimen signature cards) are certified true copies by the company secretary or by one of the director of the company. Each director must sign on 2 copies (or 3 copies as required by the POs) of the specimen signature cards. You will also need to place the company rubber stamp on the card (just like the bank).

Note: Only company with the specific clause(s) in their Memorandum of Articles and Associations (M&A) that state to the effect that the company is allowed to buy and sell stocks are allowed to open a Trading Account. Please check for the clause(s) in the M&A. All POs will provide sample of the Board Resolutions for you to type under your company letter head.

Note: In Malaysia there two types of licensed DR; a paid or salaried DR is known a company Dealer while a commission based DR is known as a Remisier.

In my next posting I will explain the process of trading. Don’t missed out on my next posting by subscribing to my Feed.

Related Posts:

• BURSA MALAYSIA Stock Trading Fees and Charges
• How to Start Trading Stocks in BURSA MALAYSIA?
• Are You a BURSA Defaulter?
• How Does Share Margin Financing (SMF) Works?
• BURSA MALAYSIA – Market and Off-Market Trades

In the following few postings, I will cover areas on How to Start Trading Stocks in Bursa Malaysia. This subject is completely a different niche from my first series of articles.

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I have drafted the articles and found that it will need a few postings due to its length. Therefore you will expect another of my series posting to cover How to Start Trading Stocks in Bursa Malaysia.

I know it is quite specific to my country but why not since I have some reasonable knowledge and experience on the subject.

Wait for my posting next week.

Cheers!

Related Posts:

• Buy, Sell and Contra Stocks in BURSA MALAYSIA
• How to Open a CDS Account and a Trading Account ?
• Minimum Quantity for Purchase or Sales of Stocks in BURSA
• How Does Share Margin Financing (SMF) Works?
• BURSA MALAYSIA – Market and Off-Market Trades