New chapter in stock market as 90-day DFCs open tomorrow

July 25, 2021

KARACHI: The maiden Deliverable Futures Contracts (DFCs) of 90-day maturity will be opened on the Pakistan Stock Exchange (PSX) on July 26 — a move aimed at curbing the market volatility witnessed in the last week of every month when traders roll over their contracts to the next month to avoid settlement.

DFCs are forward contracts to buy or sell stocks at a certain price with actual delivery in the future. The PSX is now offering DFCs with a longer maturity period besides revising the criteria for DFC eligible securities.

The 90-day derivative product will allow traders to gain exposure to DFCs of three different maturities — current month’s expiry, next month’s expiry and last month’s expiry — at the start of each contract month.

In effect, the new regime will reduce the liquidity pressure of the roll-over week. Investors get jittery in the last week of every month when they have to either settle their futures contracts or roll them over to the next month. The availability of the 90-day DFCs means investors will have more time and flexibility in rolling over their existing positions.

“It’s a good step because we have seen volatility in the last week of every month due to a limited (five-day max) roll-over period. The extended futures contracts will reduce that volatility and provide ample time for leverage buyers to convert their positions into next month’s futures,” Topline Securities CEO Mohammed Sohail said while speaking to Dawn.

In a statement last month, PSX Managing Director Farrukh H. Khan had said the new DFC regime would increase both trading volume and liquidity and improve the depth of the stock market.

However, Mr Sohail said he didn’t expect any major increase in the trading volume because of the new DFC regime. “This will help (resolve) the roll-over issue. Moreover, if someone wants to borrow, lend or hedge for more than one month, then the product will be available to them,” he said.

He added that a large chunk of volume is expected to remain concentrated in the near-month contracts (30 days) while the contracts of later months (60 and 90 days) will have limited volumes only.

The PSX has also revised the criteria for the selection of securities eligible for trading in the DFC segment. The revision means more companies are now eligible to trade on the futures counter. Based on a recently notified list quoted by the PSX MD, as many as 84 companies and one exchange–traded fund are now futures eligible.

The regulatory changes have received criticism from some stakeholders who allege that the 90-day deliverable futures will artificially inflate the index possibly to 90,000 points.

“If you’re a genuine investor, why would you need 90-day leverage? And even after 90 days, you’re not sure whether the buyer will have the money,” said Sani-e-Mehmood Khan, an independent capital market expert who formerly served as general manager of the PSX. “I simply call it a crime. They’re facilitating a few to (carry out a) repeat of the 2005 crash and make billions in just three months,” he said.

As for the changes in the eligibility criteria, he said they have been carried out “without following the due process and without ascertaining public comments” as required under the law.

“It’ll be a thinly traded market, which will operate like a casino without absolute money — as your regulator is kind enough to allow 90-day leverage.”

Dawn

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