SECP mulling to make different criteria of existing Stock Brokers
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SECP may also give brokers’ power to DFIs, Deposit taking NBFCs and other banks which fulfill the eligibility criteria of this business.
KARACHI: The Securities and Exchange Commission of Pakistan (SECP) is mulling to change the criteria of all stock brokers in line with international best practices and to reduce the risk of clearing and custody defaults.
According to the SECP source, segregation of trading, clearing & settlement and custody functions of the brokers so that brokers and institutions having prescribed financial resource requirements are only allowed to perform clearing function and hold custody of securities on behalf of clients.
To expand market outreach, the SECP is going to introduce a concept of the ‘trading broker’ so as to encourage new participants to start brokerage business at lower preliminary and operational costs.
In this new region of the brokers, the SECP may also give brokers’ power to Development Financial Institution (DFIs), Deposit taking Non-Banking Financial Companies (NBFCs) and the Banks which fulfill the eligibility criteria of this business.
SECP is working to make three categories of the existing stock brokers. The first category (Trading and Clearing Broker –TC- Licence), which must have capital deposit of above Rs 500 million to deal with all trading rights of the clients and other brokerage houses, while 2nd category (Trading and Self Clearing Broker –TCS- Licence) to have capital deposit of Rs 150 million and to below Rs 500 million and 3rd category (Trading Only Broker –TO- licence) must have capital-deposit of Rs 15 million to below Rs 150 million.
Presently every broker is allowed to provide custodial and clearing settlement services, the SECP document said adding, “dealing with customer assets is a highly sensitive service and requires adequate infrastructure, resources and internal compliance regime.”
It further claimed, “past instances of the broker defaults have shaken investor confidence and are hampering growth of the capital markets.” In order to restore investor confidence, it is imperative that brokers which are allowed to keep custody of client assets and which clear/ settle trades on behalf of clients have a sound system of internal controls and stringent compliance arrangements to prevent any misuse of client assets.” “It is also important that such brokers are financially sound and meet enhanced capital adequacy requirements to prevent over indulgence, have the ability to absorb adverse market trends and contain the risk of institutional failure which is often the root cause of malpractices associated with unauthorized dealing of client assets and results in negative consequences for investors,” it added.
The financial system is under transformation and locally as well as internationally, regulators have increased compliance burden on the intermediaries to control systemic risk, preserve integrity of the system and protect interest of investors and the general public.
As a result, compliance function of brokerage houses needs to be equipped with adequate human resource that has requisite qualification and expertise. In addition, enhanced reporting and monitoring requirements require deployment of appropriate IT infrastructure and software by the brokerage houses to enable timely and efficient compliance.
The paper said that in addition to compliance with capital market laws, the AML/CFT requirements have evolved over time and now form a major part of the compliance system of financial institutions.
Due to Pakistan’s placement in Grey List by FATF, there is a more pronounced need to upgrade the compliance system of brokerage houses, including the appropriate human resource and the specialized software to demonstrate adherence with the risk based approach prescribed under the FATF recommendations and to implement sound KYC/CDD policies and procedures.
The SECP document said that the small brokerage houses lack the resources and capacity to meet the compliance burden. Through letters to the SECP, brokers have highlighted their small scale of operations and inability to dedicate sufficient resources to meet financial reporting requirements, develop a sound compliance system and meet FATF standards.
The SECP said, “the above situation not only compromises the discipline and compliance level of capital market intermediaries, it also places compliant brokerage houses that have incurred substantial compliance costs at an unfair disadvantage.”
The investor size in Pakistan paints a dismal picture of the capital market depth.
Sustainability of the secondary capital market and its intermediaries is directly linked with the investor size.
In order to increase the investor base, the brokerage houses need to explore new distribution channels which include partnerships with banks, telecom companies and exploring innovative solutions by taking advantage of technological advancements.
The above requires investments in infrastructure and sufficient financial capacity and standing in the market. Well-capitalized brokers will be in a much better position to increase investor outreach and enter into collaboration with other market players.
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