Published :
Updated :
For all latest news, follow The Financial Express Google News channel.
The Dhaka Stock Exchange (DSE) has recently proposed introducing share netting to boost liquidity in the secondary market, but the market watchdog wants risk-minimising infrastructure to be in place before approving it.
Share netting offers investors an opportunity to adjust their position in a single security within a single trading session through multiple transactions.
The Bangladesh Securities and Exchange Commission (BSEC) is exercising caution against the backdrop of financial fraud and mismanagement committed by brokers.
"We agree in principle about the necessity of scrip netting. But the introduction of scrip netting before ensuring infrastructure may harm investors," said a BSEC commissioner, requesting anonymity.
The regulator has not yet rejected the DSE's proposal, he said, adding that the exchange would be advised to equip itself with risk management capacity for share netting.
Share netting refers to an intraday trading mechanism where an investor can buy and sell the same security multiple times within a single trading session. Netting is preferred as it helps boost market liquidity.
BSEC officials said many stock brokers had failed to manage margin loans and had fallen into negative equity. Moreover, clients of some brokerage firms are still waiting for compensation following share and cash embezzlement by brokers.
"In such a situation, the regulator is unwilling to allow scrip netting unless brokers put in place a risk management mechanism," said BSEC spokesperson Md Abul Kalam.
Risk arises when investors want to borrow a scrip and sell it in the open market, anticipating a decline in the share price so that they can buy it back later at a lower price to return to the lender-a financial dealing known as short selling. The difference between the buying and selling prices is the profit earned. However, if the share value increases, investors incur losses, which may multiply in a bullish market.
There must be agreements between parties for short selling.
Efficient risk management, along with facilities for short selling and market makers, is crucial for scrip netting. The securities regulator enacted rules for short selling in 2021, but the DSE has yet to introduce its own regulations. Similarly, the BSEC formulated rules for market makers in 2018, but these have not been adopted by the DSE in the absence of its own regulations.
A market maker can be an individual or, more commonly, a large financial institution that provides liquidity by continuously offering to buy or sell a specific security for its own account. They act as intermediaries, bridging the gap between sellers and buyers.
The regulator considers that the market and its stakeholders are not yet ready for scrip netting.
Earlier, share netting was allowed on the DSE for about three years immediately after the automation in trading more than two decades ago. The daily turnover was very limited at the time and brokers could easily settle traders' net positions.
Over the years, the market has expanded significantly, and it is no longer possible to allow share netting without adequate infrastructure.
"Investors will be affected if scrip netting is allowed without the necessary arrangements in place," said the BSEC official.
Sources at the DSE also echoed the view that infrastructure for share netting is currently absent.
mufazzal.fe@gmail.com