1/5/20161

Introduction to CFS-MK II  Facilitate transparent and efficient financing for the market.  CFS-MK II will create an institutional bulk pool of funds which will provide liquidity to market at the retail level.  No cap on CFS Funding.  No floor and ceiling on mark-up rate in CFS MK-II.  The pool of funds will ensure its availability for at least 90 days.  Beneficial for investors and financiers as they will not need to acquire the status of Authorized Financier (“AF”) for each Stock Exchange separately.  Financier will have the capacity to lend money to broker financees at any Stock Exchange of their choice. 3

 Eligible Participants are of two types: 1.Financier 2.Financee 1. Financier  All eligible financiers will need to acquire the status of Authorized Financier (“AF”) with the NCCPL in accordance with the criteria set out in the NCCPL’s Regulations.  There will be two categories of AF’s: 1.Non Broker AF 2.Broker AF 4

Following are eligible to become Authorized Financiers in CFS-Mk II Market subject to the criteria set out in the NCCPL’s Regulations: 1. All Schedule Banks 2. Mutual Funds 3. Non-Banking Finance Companies (NBFCs) 4. Development Financial Institutions (DFIs) 5. Brokers (Corporate & Individual) 6. Any other Corporate entity (as may be approved by NCCPL Board with the consent of SECP ) 5

2. Financee  Brokers of Karachi, Lahore & Islamabad Stock Exchange will be the only takers of finance from CFS Mk II Market by using their NCCPL’s CFS MK-II terminal.  Broker will have access to finance for their own account and on behalf of their clients. 6

CFS MK-II Transactions  Trading will be done on undisclosed basis in CFS-Mk II.  All offers and bids for the CFS MK-II will be displayed directly on the CFS MK-II Portal.  An AF shall specify the following while making offer in CFS MK-II:  CFS MK-II Eligible Security;  Rate of return;  CFS MK-II ID;  UIN Detail; and  Broker Code (only for Non-broker AF) NB: Non-Broker AF shall only be allowed to carry out proprietary transactions. 7

CFS MK-II Transactions  Financee shall specify the following while making bid in CFS MK-II:  CFS MK-II Eligible Security;  Rate of return;  Trader ID; and  UIN Detail;  Financees will have access to all unmatched offers available on each share, on their respective stock exchange, and will accept AFs offers directly through NCCPL’s CFS MK-II terminals.  On the matching of a bid with an offer, CFS-Mk II contract will be confirmed and become irrevocable.  The matching of a bid with an offer shall require an underlying long position of the Financee in the Ready market. 8

CFS MK-II Transactions  The CFS MK-II transactions shall only be allowed in CFS MK-II Eligible Securities (declared by NCCPL in consultation with KSE form time to time in accordance with the criteria stipulated in its Regulations).  Upon matching of a bid with an offer no modification/cancellation shall be allowed in CFS MK-II transactions.  Each CFS MK-II and CFS MK-II ( R ) transaction shall be settled in NCSS in accordance with the relevant provisions of NCCPL Regulations and Procedures.  Various statistical report will be made available to the public on daily basis 9

Certainty of Funding  AFs will commit to a given amount of funding to the CFS MK-II market.  CFS MK-II financing once committed cannot be withdrawn totally or partially for next 90 calendar days period.  Any withdrawal will require a written 90 calendar days prior notice to NCCPL. 10

Certainty of Funding  AF may provide additional funds over and above the committed amount without giving any notice.  AF may withdraw the additional funds over and above the firm commitment.  An average disbursement of 90% of commitment by an AF during each calendar month will be considered as fulfillment of his commitment. 11

CFS MK-II Contracts  AF will be locked in on each contract for 22 working days.  Financee may release availed CFS-MK II funds at any time at its sole discretion during the contract period i.e. within 22 working days.  Financee will be allowed to release the contract on the same day.  Same day release will cause a one day charge of funds to be impose as penalty on the Financee. 12

CFS MK-II Contracts  On expiry of 22 working days CFS-Mk II contract will automatically be liquidated and finance will be forced released.  Finance may release its open CFS MK-II transaction at any time prior to the Maturity Date. Roll-over in a CFS Mk-II Contract, by entering into a fresh Contract, shall be allowed during the entire CFS MK-II Contract period. 13

CFS MK-II Contracts  Financee may before the expiry of original contract partially or totally release the contract.  When CFS-Mk II funds will be released, AFs will re offer same at the then prevailing rate of interest to market at large through the system. 14

Cost of Finance  Cost of finance will be determined by market forces based on demand and supply of the respective CFS MK-II Eligible Securities.  Rate of markup applicable to each CFS MK-II Eligible Security, at which the CFS funds are lent/borrowed, will be determined by each AF and Financee based on their own assessment of risk inherent in that security. 15

A CFS MK II Protection Fund to be created to meet any losses that the  AF and Financee may incur in case of a default. Structure and Funding of CFS Mk II Protection Fund :  50% of the Annual fee of Rs. 1 m i.e. Rs million.  Seed capital to be contributed by the exchanges.  One half of all amount collected from AFs as protection levy of 0.003%.  2% penalty on Financier based on amount of commitment under lent to be imposed by the NCCPL. ◦ NB: Broker AF and Financee are not required to pay Annual Fee. 16

Margining Regime for Financees Initial Exposure Margins (VaR based Pre-Trade) 17

 Where any of the aforementioned financing limits of the CFS MK-II Market is exceeded then the respective cash margin requirement becomes applicable and shall remain enforced irrespective of the fact that such financing has reduced below that limit subsequently at any point of time.  Whereas Collateral deposited in the form of bank guarantee shall be considered as cash equivalent.  Mark-to-Market losses shall be collected in the form of Cash and/or Bank Guarantee.  Special margins shall also be collected in the form of Cash and/or Bank Guarantee. 18

Margining Regime for Authorized Financiers  Initial Exposure Margins shall be collected in the form of any of the acceptable Collateral  Mark-to-market losses shall be collected in the form of Cash only. Whereas, Collateral deposited in the form of bank guarantee and / or irrevocable undertaking (where applicable) shall be considered as equivalent to cash. 19

 Margins deposited by AF shall be retained by the NCCPL from the date of transaction till date of settlement to cover the settlement risk. However, Financee margins will remain with the NCCPL during the entire period of CFS MK-II Contract.  On taking CFS-Mk II financing by Financee member, margins held by the Exchange against ready market purchase shall be deemed to be the margins of the NCCPL on such CFS MK-II Transactions.  In case of AF, the CFS financed shares will automatically be transferred to a separate CDC blocked account in the name of the AF or its client (in case of BAF) upon settlement on T+2 and the Margins held against such AF, for the first 2 days, will be released and no further Margin will be required.  Only in case of broker proprietary position, BAF will have the option to pledge his proprietary CFS financed shares (lying in a CDC blocked account) for the purposes of pledge against Exposure with the NCCPL. However, such BAF shall meet his margin requirement with other means of acceptable collaterals. 20

◦ Following are the acceptable Collaterals in CF SMK-II: 1.Cash 2.Margin Eligible Securities 3.Listed TFCs – CDS Eligible only 4.Bank Guarantee: Banks having minimum credit rating of A, bank guarantee up to Rs. 400 million; and Banks having minimum credit rating of AA bank guarantee up to Rs. 1 billion 5.Irrevocable Undertaking (only applicable to commercial banks and DFIs having minimum credit rating of AA) 21

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