The Dhaka Stock Exchange is facing pressure from brokers to raise the free trading limit, but is carefully weighing the associated risks before reaching a decision.
TREC (Trading Right Entitlement Certificate) holders operating under the premier bourse want the free limit widened so that they can continue doing business without depositing any margin with the exchange.
As the secondary market has started witnessing higher investor participation leading to higher turnover, brokers are now required to deposit margins for buy orders surpassing the limit.
As per the existing provision, DSE TREC holders are allowed to place buy orders worth up to Tk 100 million without depositing any margin with the exchange. Any amount above this threshold requires a deposit with the exchange before trades are executed.
The higher the free trading limit, the higher the risk of trade settlement. In the event of any failure in settling trades due to non-payment of funds by a TREC holder, the exchange is required to settle them using its own funds.
"The DSE board is yet to take any decision. The board is likely to deliver its decision after examining the pros and cons of the matter," said a DSE official, who preferred anonymity.
Sources at the DSE said a group of TREC holders had been demanding a further expansion of the free limit from weeks before the February national election.
The country's long-dormant stock market began experiencing a recovery trend as expectations ran
high of economic stability and a change in the regulatory body following the election.
The DSE posted a turnover of Tk 7.90 billion on February 10, and the figure jumped to Tk 12.75 billion on February 15 - the first trading session after the national election held on February 12.
Following a change in leadership at the Bangladesh Securities and Exchange Commission (BSEC), with the appointment of new Chairman Masud Khan and three other commissioners on June 4, the DSE's daily turnover crossed the Tk 15 billion mark.
The increase in daily turnover helps brokers earn higher income through trade commissions, but they also want a higher free trading limit so that the cost of doing business remains manageable.
Cost of doing business
Beyond the free limit of Tk 100 million, a broker is required to deposit 20 per cent of buy orders worth up to Tk 10 million.
The deposit margin rises to 30 per cent for additional buy orders between Tk 10 million and Tk 20 million, and further to 50 per cent for transactions between Tk 20 million and Tk 40 million. For buy orders exceeding Tk 40 million above the free trading limit, brokers must deposit the full amount before the execution of trades.
The exchange collects funds from brokers prior to the execution of buy orders to mitigate any possible risk of settlement failure.
As each broker receives a free limit of Tk 100 million, the 278 active TREC holders have collectively been availing of a free trading limit worth Tk 27.80 billion.
The existing free limit offered to all brokers already represents a form of liability for the premier bourse.
Brokers provide bank guarantees against margins charged by the exchange. To obtain these guarantees, ntermediaries must maintain funds in bank accounts in addition to paying annual fees to banks. As a result, the cost of doing business rises as daily turnover surges.
Speaking to The FE, Managing Director of Midway Securities Md. Ashequr Rahman acknowledged that the possibility of failed trade settlement could increase at the end of a trading session if the free limit were raised. Asked whether it would be rational to further increase the limit, he said smaller brokers might have made the demand as it would be difficult for them to conduct trades following a rise in turnover.
DSE officials noted that such a free limit is not typically offered to brokers in other countries, where clearing companies receive settlement guarantees directly from brokers. In the absence of a clearing company, the exchange currently provides clearing services. Once a clearing company is established, TREC holders will be required to comply with stricter requirements tied to trade settlement.
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