By Ranjit Singh
BURSA Malaysia announced today (March 27) that it was relaxing its rules on margin financing to avoid sharp falls in the market due to forced selling.
A margin call occurs if an account falls below the maintenance margin amount. A margin call is a demand from the brokerage for the investor to add money to the account or close out positions to bring the account back to the required level. If the investor does not meet the margin call, the brokerage firm can close out any open positions in order to bring the account back up to the minimum value.
The brokerage firm can do this without the investor’s approval and can choose which position(s) to liquidate. If the investor cannot meet the margin call, the brokerage will force sell the investor’s shares.
The forced selling or “program selling” will have an adverse effect on the bourse as it will pull prices of stocks down.
Bursa Malaysia said in a statement that it will give more room and discretion to brokers by removing the requirement to automatically liquidate stocks if the equity in the client’s margin account falls below 130% of the outstanding balance.
“Brokers will also not be required to make additional margin calls or impose haircuts on any collateral and securities purchased and carried in margin accounts due to an unusually volatile market,” said Bursa Malaysia.
The stock exchange operator has also expanded the list of collaterals for purposes of margin financing. It will allow brokers to accept other collaterals, such as bonds, collective investment schemes, unit trusts, gold and immovable properties for purposes of maintaining their client’s margin account if such collaterals are valued as per the broker’s credit policy.
Bursa Malaysia has lost more than RM260 bil in share value since the outbreak of Covid-19 with many stocks trading at their all-time lows. Panic selling was one of the major causes of the sharp decline as investors sold on fears of the worsening spread of the virus.
Philip Mutual Bhd’s chief strategist Phua Lee Kerk told FocusM that the move by Bursa Malaysia was positive for the stock market.
“The recent selldown in the market was mainly caused by forced selling and this move by Bursa Malaysia to give brokers the choice to force sell shares will provide some respite to the market,” he said.
Meanwhile, senior analyst at MIDF Inran Yassin told FocusM that the move by Bursa Malaysia would provide some stability in the market.
“We believe that sharp falls in the market could be averted by this new policy by Bursa Malaysia,” he said. — March 27, 2020
