Big brokers and investment Funds behind NBR, want to expel medium size brokers

—Representatives of Al Meezan Investment, JS Investment, Next Capital, Topline Securities, Arif Habib Securities with other 20 big brokers and Funds have prepared the brokers regime without consulting with the small and medium size brokers

KARACHI: The Securities and Exchange Commission of Pakistan (SECP) is now come up with proposed New Broker Regime (NBR) instead of taking measures against corrupt brokerage houses involved in market manipulation and short selling.

Recently, the SECP has proposed a three-tier broker regime with a view to mitigate the risks associated with custody and in order to segregate the functions of trading, clearing, settlements and custody.

Under the proposed scheme, the two categories of the brokers are allowed to have client asset’s custody based on a specific net capital balance, while the third category is restricted to trading only and neither allows a broker to have Client Asset’s Custody nor does it have any requirement of minimum net capital balance.

This new regime will not only remove almost 170-180 medium size brokers (out of total 206) from the Capital Market but it will also create unemployment as more than 3,000-4,000 employees directly or indirectly connected with them.

These medium size brokers, who were being used by big brokers for market manipulation and short selling etc, are nowadays helpless and looking towards the big brokers to get their support to resolve issue.

According to the market sources, representatives of big brokers like IGI, Al-Meezan Investment, JS Group, Askari Securities, Topline Securities, Arif Habib Securities and others has proposed the SECP to give option to the medium size brokers to wind up their businesses or merge with them.

A stock broker accused, “the SECP is playing in the hand of some big brokers like Ali Jahangir of JS group, Mohammad Shoaib of Al Meezan Investment and Najam Ali of Next Capital and others.” “They are not only instigating the SECP but also planning to capture the capital market,” he added.

Some of the senior brokers like Arif Habib and Aqeel Karim Dhedhi and other are silent over this issue and giving little support to the medium size brokers.

Some big brokers and executive officers of big Funds are very close to the Chairman SECP Policy Board Khalid Mirza, said brokers adding that they are forcing the SECP and government to implement proposed New Brokers Regime.  

The sources said that representatives of Al Meezan Investment, JS Investment, Next Capital, Topline Securities, Arif Habib Securities with other 20 big brokers and Funds have prepared the draft of new brokers regime without consulting with the small and medium size brokers.

The Association’s office bearer said, “There was no need to introduce the NBR and the SECP can achieve its objective by increasing the Net-Worth of the Stock Brokers.”

PSX Stockbroker is now representing more than 66 per cent of the Brokers Fraternity and has serious reservations on the NBR, but the SECP is giving value to few representatives of the big brokerage houses.

Clearing & Settlement Risk, as envisaged as Primary Objective, do not exist particularly when:

1 – Pre and Post trade margins are taken,

2 – PSX settles trade on T+2 basis,

3 – Minimum Rs 16 million per broker is being collected as margin under Base Minimum Capital (BMC) irrespective of any trade,

4 – Minimum Rs 5 million under Net Capital Balance and 5–Minimum Rs 7.5 million under Liquid Capita Balance (LCB).

Apart from the above, the Association said a total fund of more than Rs 7 billion is accumulated under Settlement Guarantee Fund and Investor Protection Funds collected by National Clearing Company of Pakistan Ltd (NCCPL) and Pakistan Stock Exchange (PSX) respectively.

Stock Market declined by more than 50 per cent from May 2017, from 53,500 Index to 28,000 Level without any clearing and settlement default. This clearly reflects that Exposure Margins, acquired by Front Line Regulators, have also minimized, if not eroded the existence of Clearing and Settlement Risk.

The association statement said as far as the Custody Risk is concerned, this Proposed NBR in fact increases the said risk, rather than reducing it. A simple calculation based on the parameters provided under the scheme would reveal that Stock Brokers would now be allowed custody by more than 200 per cent of what is allowed currently.

“The foregoing clearly reflects that none of the objective of this NBR will be achieved rather than Custody Risk will be concentrated more in few hands,” the association claimed. “Proposed increase in Net-Worth of Rs 65 million in the NBR cannot justify allowance of 200 per cent increase in Custody,” it added.

Therefore, it cannot be claimed that it “primarily aims to strengthen the Capital Market and restore Investor’s Confidence.”

Commission, while trying to aggravate using AML/CFT/FATF requirements, is unaware of the progress made by the Stock Brokerage Industry and we quote below extract from Pakistan National Risk Assessment (PNRA) Report, published in September 2019, by Ministry of Economic Affairs, wherein, clause 150 states that ‘Considering that all the transactions coming to the securities markets is through banking channel and the primary focus of investors in these markets is investment in securities of the companies, the securities markets are exposed to a lower TF threat abuse.’ Further, LEAs and FMU have so far not found any incident of TF having a link with the securities or commodities markets.

In this regard, representatives of Pakistan Stockbrokers Association had also met with Chairman National Assembly Standing Committee on Finance Faiz Ullah Kamoka and discuss the issues of brokers with him. He also assured them that he will raise this issue before the chairman SECP policy board and others.

Anti Money Laundering Act, 2010, was promulgated on March 27, 2010, and Stock Brokers being Sole Proprietors were not made part of it. Concept of Corporate Brokerage Houses was implemented after the Demutualization in 2012.

Furthermore, the claim by SECP’s insider that 27 brokers have defaulted during last 10 years resulting in defaulting of Rs 5.8 billion, is nothing but aggravating the situation as prior to Demutualization Stock Broker’s Membership Card was valued at Rs 150 million. Moreover, it would have been much better had the names and amount of defaulted brokerage house were also disclosed so as to give clearer picture. The average amount of Rs 200 million defaults as being painted in the media is misleading, the association said.

The hidden objective of this NBR can be visualized by Section 2.2.3 of the Concept Note on NBR issued in November 2019, which stipulates that, in order to save the compliant Brokerage Houses that have incurred substantial Compliance Cost, this NBR is being introduced and all the Brokerage Houses are therefore forced to adopt all the Compliance Requirements irrespective of the nature, size and complexity of business.

The brokers’ association has appealed to the Prime Minister Imran Khan, Advisor to PM on Finance and Revenue Abdul Hafeez Shaikh, Minister for Planning and Development Asad Umer to save the country’s only Capital Market from the planned collapse.

PSX Stockbrokers Association held its Extra Ordinary General Meeting on January 20, 2020, wherein, members unanimously and out rightly rejected the draft Regulations issued by SECP to give effect to NBR through S.R.O No. 26 (1)/2020, S.R.O No. 27 (1)/2020 & S.ItO No. 28 (1)12020 dated January 10, 2020.

The members expressed their indignation over the malafide/clandestine manner in which the SECP is trying to destroy the Capital Market by ousting 90 per cent of its third generation Brokers and encouraging concentration of risk and creation of monopolies.

The association said that the draft proposes concentration of wealth of Stock Market’s Investors / General Public in a few hands with devastating consequences and a huge systemic risk going forward. The proposed Regulations infringe upon constitutionally protected fair competition while creating monopolies to the detriment of general public and investors. Our regulators have completely disregarded our various proposals, ensuring:

• Complete Protection of Investor’s / Public Financial Assets

• Level Playing Field for all players of Financial Industry

• Healthy and Fair Competition benefiting both Local and Foreign Investors

• Stability and Sustained Growth of Capital Market of Pakistan

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