WEBODIGY Business & Finance Journal

The forced sale or action which is better known by the term forced sell, often blamed as one factor that led to the crisis in the stock market. In fact, a forced sell-owned rights-related securities of margin facilities in Indonesia Stock Exchange (BEI).

Well, in this opportunity detikFinance will try to give an idea of what is called a forced sell.

For some investors, especially for the layman, the term may be forced associated with all the scary specter of investment in capital markets. Many who do not understand, even pointing nonsense about this facility.

Almost every occurrence of a sharp correction in the Composite Stock Price Index (JCI) which occurred within a short time after opening at 09.30 JATS, was forced to sell gossip as if it is a taboo act to be done.

Call it, falling quickly to JCI collapse 119.297 points (5.09%) to the level of trading Thursday 2235.387 (29/10/2009). Thin transaction value is inversely related to the sharp decline in the discourse surrounding the JCI makes forced sell back into the warm conversation.

According to the Managing Director of PT Mandiri Securities Wirjoatmodjo Kartika, when it was forced action by the crowded sell securities and causing a lot of JCI dropped sharply. But this does not mean the action is the wrong action.

“It was a lot done during the forced sell it. Naturally, after days of JCI fall, forced to sell securities for their clients shares that can not top up (plus insurance),” he said when contacted detikFinance, Wednesday (4 / 11 / 2009).

JCI’s are in decreasing trend during the previous two weeks. In trading Monday (19/10/2009) JCI closed at the level of 2520.924. In trading Thursday (29/10/2009), the lowest point in the level of JCI 2235.387 or 285.537 crash (11.32%).

“With the decline in a row for it, it’s natural that many customers who use margin facilities to make top up because the ratio of collateral (collateral) ratio has exceeded agreed,” he said.

So what to do with the facility forced sell margin? Thus, customers can make purchases of shares by two sources of funds, which own funds and borrowed funds.

Now, authorities are giving permission stock for stock transaction with loan funds. This facility is included in what is called a transaction margins (margin trading).

It’s just that there are some specific requirements set out relevant stock exchange authorities anywhere can be transacted with the facility where margins and customers are able to transact margin.

Beginning of each month, BEI issued a list of effects that can be transacted in a margin, is also a list of short selling stocks. Customers also must pass the criteria. For example, based on the regulations of Capital Market Supervisory Agency & Financial Institutions (Bapepam-LK), the customer must have a special account used for
margin transactions.

“So if the current mechanism, customers who want to trade margins should open a special account separate from the account for regular transactions. In these separate accounts, funds or stocks that put there automatically serves as a guarantee unttuk clients can transact margin,” said
Kartika.

Now, each of the securities have their respective criteria on the amount of funds that can be loaned to the margin clients.

“It depends on the agreement between the customer with the securities,” he said.

So the loan amount can vary. But the ideal is 1-to-1, in a sense, the customers who placed a guarantee amounting to Rp 1 billion, could trade up to USD 2 billion.

For the record, profits from securities by providing loan funds from the interest margin is imposed under the agreement.

Securities also benefits from the transaction costs (transaction fees) is bigger, because the value of customer transactions will become larger if you use the loan funds.

Then there are the so-called collateral ratio of shares (collateral ratio). These ratios were also different magnitude, depending on the agreement between the customer with the securities.

This ratio set forth in the margin agreement or loan agreement between the two. The function of this ratio stipulation is to determine the lower limit value of shares bought with borrowed funds or margin.

“This ratio serves to see how far stock prices that customers bought with margin funds may decline, according to the amount of guarantee given customer in margin accounts,” said Kartika.

Suppose that in this way, a customer bought a 1000 shares at price of Rp 1,000 per share or a total value of Rp 1,000,000. Assume that all transactions are done with borrowed funds.

Now, consider the ratio limits agreed by 30%. That is, if the stock price moves down a 30% (USD 300) to Rp 700 per share, customers who originally bought shares at a price of USD $ 1000 it would need an additional warranty (top up).

If customers who purchase shares with a specific reason can not top up, the securities have the right to do forced sell shares purchased by the customer margin funds and execute a stock or fund guarantees the insured the previous customer, if necessary.

“The purpose of doing forced sell securities are securities that do not take a loss due to falling prices bought stock with the margin facility. In this case, a securities intermediary only act as a transaction, so if this ratio exceeded limits and customers do not want to top up, the securities have full right to do forced sell, “he said.

Put simply, this is similar to the customers who obtain loans from banks. Of these customers provide collateral or guarantee to the bank.

If at any time customers can not pay the loan installments in a protracted contract touching limit delays payment, the bank has the full right to take over the assets of customers who used credit collateral.

So, forced sell rather than an action in violation of capital market mechanisms. As Kartika, is forced sell securities, if the ratio exceeded collateral and borrowers do not do top up.

Then why forced sell often considered as a factor that could worsen the situation when market conditions are in sharp decline trend.

The logic is like this, the margin facility is not only done by one customer, but at the same time thousands of customers every day. Well, if capital markets are in a trend decline in a row, then the logic would be a lot of customers who touched the ratio of collateral constraints.

Of course not all customers can top up. This situation creates the potential for a mass forced.

Why?

The reason is, securities that wants to forced sell, would seek the highest price in the market to prevent forced to sell the value does not exceed a given value of customer collateral in margin accounts so that all customer margin debt could be covered.

Ideally like that and the same mindset over there in the minds of all securities that wants to forced sell. Sure securities to sell shares that will be forced sell quickly, before it be preceded by other securities.

Now the trend of the market decline protracted, the best price for selling shares that will be forced sell it is close to market opening. Because, in a trend decline, prices are assumed to decline in the trade.

This situation which later led to soaring sales position at the opening of the massive trade. And unfortunately, the trend decline in the market, purchasing power is usually not too big.

This condition then causes the stock prices experienced rapid correction in early trading. Forced mass sell amid decreasing trend was briefly seen as a factor pushing the market collapse.

But actually it is a consequence of the existence of margin transaction facility. So it was not made unilaterally by the alias of securities violation.

“So it’s full rights are owned securities, we do everything according to the corridor anyway,” explained Kartika.

Indeed Kartika admitted, the mechanism guarantees the ratio limits or forms of other agreements related to the margin facility does not have a general reference forms provided by the authorities formal exchanges.

“So in practice, it all depends on agreement between the customer with the securities. It is sometimes difficult to make some customers, because the mechanism of margin transactions in other securities may differ from other securities,” said Kartika.

According Kartika, have compiled a reference margin transaction that formally issued by the authority of exchanges, including the mechanism forced to sell, so customers can also be easily find out the risk margin trading.

“We (securities) are asking this to KPEI (PT Indonesia Securities Clearing Guarantee Corporation). With this common reference, either customers or the securities become easier to provide margin facilities, primarily related to the forced sell,” he said