Traders at breaking point on margin calls, lobby for moratorium
Agroup of investors, seeking to 'protect the ( stock) market and stabilise it', is targeting investors in an email campaign 'requesting' authorities to stop margin providers from forced-selling shares.
They are requesting the Securities and Exchange Commission ( SEC) and the Central Bank ( CB) to issue a directive to banks to refrain from forced selling their shares. The group says that this will stop banks and finance companies from placing selling market orders to further ' distort prices'. They are intending to request the CB to remove the requirement to make impairments based on market prices but use fair values of shares for margin facility providers.
They also want to pay normal interest without penal interest to margin providers. But an analyst said the financial institutions have a fiduciary responsibility towards depositors and any special moratorium will endanger their depositors.
The banks functioning as margin providers said that this is a slippery slope and the shares are collateral to the credit they extended to these traders and if the loan to value ratio comes below 70 per cent to either sell the shares or bring the ratio below this percentage.
For context, it is important to understand why the stock market went to such heights in the first place and why these traders have such high margins.
Most new investors driven by a speculative market rather than an informative one charged into certain stocks without sufficient due diligence, Murtaza Jafferjee, CEO of JB stockbrokers told the Business Times on Thursday. Certain market analysts noted that the younger traders were investing simply for the fear of missing out (FOMO).
A maximum of 10 investors is exposed to large margins and they are at breaking point.
The main contributors to the market's incline were cutting corporate taxes, printing Rs.1.8 trillion money, controlling imports, and slashing interest rates. These were magnets for the new traders and the seasoned ones - especially those who were in the pump and dump game a decade ago.
Adding insult to injury, what most traders failed to ( didn't want to) see is that corporates in '21 that posted 'highest ever' profits did so due to external factors.
This means that tax reduction contributed highly to corporates' profit growth. This further attracted traders greedy enough to borrow cash ( as interest rates were low) and invest. To top this money printing added fuel to the fire and gave investors such a sugar high fetching them windfall profits.
Certain retail investors said that some stockbrokers had advised them to mortgage their fixed assets such as houses and park that money into certain recommended stocks.
There is nothing short of a revolution taking place in the country and it seems that the old guard has still not got the message; even after over 10 years.
It is important to know that none of the investors was forced to trade in the market. "The market rise was not stopped when it touched unexpected highs and traders could buy. Similarly, no one should stop them from selling," a stockbroker told the Business Times on Wednesday.
Another stockbroker agreed pointing out that the same people who bought when the CSE went up are scrambling to get out now.
The CSE has Rs.52 billion in margin credit. Analysts put the blame on certain market intermediaries such as margin providers saying that they also failed the market run for getting their fiduciary responsibilities which require imparting advice to investors based on suitability tests.
The investors that came to the market during the past two years were relatively immature and it was up to them to advise not to take excessive amounts off risks by extending margin credit than what those traders can afford, a senior analyst said.
However those who want a moratorium point out that with high inflation and high interest rates the exchange gets depreciated. With the depreciation all good sense services including stock market shares will get repriced.
“All these years the repricing happened over a certain period. But now the sudden collapse in the exchange rate didn't allow repricing at the same speed that investors were used to,” an investor, who wanted the moratorium, said.
He added that listed companies are reporting higher profits parallel to the current exchange rate depreciation and high inflation. “We are requesting a moratorium till the repricing of shares take place.”