To boost activity on the local bourse and help brokerage firms survive, the Capital Market Authority (CMA) has approved margin trading (or secured financing for share trading) and announced incentives to encourage broking firms to merge. Under margin trading, an investor borrows money from a broker to purchase stocks. Margin trading helps investors purchase more stocks than they would normally be able to buy.
Speaking to Muscat Daily, Ahmed Saleh al Marhoon, director general of Muscat Securities Market (MSM), said, "The aim is to introduce the tools that generate activity in the market. CMA has taken the decision to allow margin trading with more efficient rules and a supervisory setup, we call it secured financing. We believe that this will create confidence and boost activity in the market.
It can be allowed anytime soon. Brokerage companies are required to submit their requests and need to fulfill the requirements. It can be started immediately depending on the eagerness of firms. The security factor is much higher in secured financing. CMA is very serious about monitoring to avoid violation of rules."
CMA has also announced incentives to encourage brokerages to merge in order to consolidate their operations, which might help reduce operating costs and increase profits. The incentives include exempting merging firms from licensing and annual subscription fees for three years and from payment of the market share in trading commission for one year from the date of the merger coming into force.
"Given the prevailing international market conditions, we feel that we should provide some incentive to brokerages to consolidate. The incentives can help brokerages and will leave free cash for those who are merging. If the companies want to merge they will have to apply by the end of this year," Marhoon said.
Analysts and brokers have said that given the small market which is crowded by brokerages firms, the firms may have no other options left but to combine.
Shankar Kailasam, senior vice president of Gulf Baader Capital Market, said, "It is hard for small brokerages to survive. Unless a brokerage become sizeable it will find it difficult to continue in the business. It is a good sign that the CMA is encouraging brokerages to merge. Small brokerages will have to consolidated, otherwise they will not survive."
"Margin trading will attract a lot of investors into the market. Unless you have a large balance-sheet it is very difficult to operate in margin trading. To have a decent balance sheet to offer margin trading smaller brokerages will have to consolidate," Kailasam added.
© Muscat Daily 2011
