KARACHI : After a ban of over three months, the deliverable futures market re-started functioning at the share market from Monday. On its first trading day, futures volume was only 984,500 shares-one percent of cash market volume of 121.618 million shares. Analysts believed that it would improve, going forward, when market participants would observe the new changes.
"The perceived risk of lenders in the derivatives market after last year's crisis will reduce gradually, and not immediately", Muhammad Sohail, a leading shares market analyst said. In last 3 years (2006, 2007 and 2008) before the price freeze, average daily volumes in futures market amounyed to Rs 10.3 billion ($165 million) compared to cash (ready) market turnover of Rs 26.4 billion ($425 million).
The volumes of the futures used to be 39 percent of cash market. However, this time these volumes will be less due to stricter margin regime, Sohail said. Moreover, last time these futures were available on 42 scrips, having over 70 percent of market cap, against current 18 stocks, with 57 percent of market cap this time.
"Thanks to active role played by market participants and timely approval by regulators, derivatives market has started functioning once again in Pakistan after it was banned by the same regulators three months back", Sohail said, adding that actual trading in one month single stock futures has started after a gap of 11 months that is after the imposition of price freeze. There are chances that it will provide the much-needed support to the dwindling volumes at the Karachi bourse, which was once famous for its huge turnover of shares.
"We believe that though volumes in futures would not be as healthy as they used to be, but it is a step in the right direction as it will provide opportunity to hedge, leverage and short", he said.
These single stock futures will be settled through delivery and not on cash, as happened in many countries. For instance, in India, which is one of the biggest markets in the world for single stocks futures, the settlement is cash based. But in Pakistan cash settled single stock futures that were introduced in 2007 failed to attract turnover and investors attention.
Compared to the old futures contracts that were introduced in 2003, there are few differences in the recently introduced deliverable futures. The margin is 100 percent cash/bank guarantee versus 50 percent cash previously. Moreover, mark to market profit will be retained by the exchange that was distributed previously. And this time instead of special margin, concentration margin will be applied. All these indicate that trading in futures will not be as easy as it was previously because it will require a lot of cash margin.
Copyright Business Recorder, 2009
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