Brokers up against ‘draft new Stockbrokers Regime’

The Securities and Exchange Commission of Pakistan 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.

The Securities and Exchange Commission of Pakistan 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 balances, 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.

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

The Karachi based small brokers of the Pakistan Stock Exchange are very annoyed with the newly proposed regime and have termed it as a hatched conspiracy against the capital market and have called upon the apex regulator to revisit the proposal. Some of the market participants are of this view that a vast majority of the Karachi based brokers would become at par with the Lahore and Islamabad based brokers who were earlier denied equity in the PSX as a result of integration of the three stock exchanges in 2016.

The Brokers are concerned and bewildered over the harsh compliance requirement set under the preset of FATF review scheduled to take place in February 2020. According to FATF, the securities sector is one of the core industries through which persons and entities can access the financial system, providing opportunities for criminals to misuse the financial system A number of FATF studies have shown (i) how criminals exploit securities firms to launder money and finance terrorism and (ii) how illicit funds abet fraudulent activities.

PSX plays a key role in the trading-economy of Pakistan. A substantial chunk of high-net-worth individuals, local and foreign multinational financial conglomerates trade securities worth millions of US dollars through stock brokerage, it is with perspective that FATF compliance requirements are to implemented in the letter and the spirit.

The new regime has been drafted to ensure that the custody of customer assets is only allowed to brokers with sufficient capacity to meet the requisite level of compliance, particularly related to anti-money laundering/combating financing of terror (AML CFT).

The Custody appear to have been understood as the main bone of contention by the craftsmen of the new broker-regime as only those BIG-BROKERS which have sufficient capacity can hold custody of Client Assets. A trend of pump-and-dump driven market crashes and repeated acts of Client-Asset-Embezzlements is an undeniable history of Pakistani Capital Market. The March 2005, and August 2008 crashes are the large-scale instances of pump-and-dump instigated at the behest of hybrid-derivatives, while Hanif Moosa (Danka), Munir Ladha, M. R. Securities and AWJ are some of the cases client-asset-embezzlements worth billions by the brokers. Given below are some of the valid observations made by the small brokerage houses in context restricting the Custody in the hands of few BIG-BROKERS:

1.      When the Commission sounds like agreeing with the fact the Client-Assets-Custody in the hand of Brokers is an evil, then the valid question is, why is it wrong for small broker and why right for BIG-BROKERS?

2.      If the objective of the regulator is to safeguard the assets of Client, then this must be pursued without closing the 70% of the brokerage-houses. Again, if its an evil, all Brokers must be forbidden to have Client-Asset-Custodies and DSS, NCS or PCM must be made mandatory for all Brokers.

3.      By bowing down against the Big-Brokers, the regulator has actually forgotten a history when ECL defaulted and confiscated Client Assets worth millions of rupees and over 7000 retail customers who never came back to capital market after such a great embezzlement and bungling. The Commission and Policy Board must answer, as to who should be held accountable when one of the large brokers chooses to repeat the history of ECL?

Persistent reforms have failed to prevent the reoccurrences of the crashes, scams and confiscation of client asset held in the form of custodies with the brokers. The latest in the series of such scams was that of ACE Securities whose sponsors fled the country after defrauding 400 investors of Rs 533 million.

A bird’s eye-view at the historic landscape of Broker Management by the regulators reflects that few individual brokers have transformed into industrialists—at the cost of thousands of lost investors. The newly proposed regime does not dare to challenge the nexus between beneficiaries and BIG-BROKERS.

Despite the implementation of DSS (direct settlement system) in 2017, it is pity that the Securities and Exchange Commission of Pakistan has not yet made it mandatory. The implementation of same would close the doors of stealing of the client assets by the brokers. Incase when DSS/NCS is/are made mandatory, PSX Brokers will only be involved in the execution of trade while NCCPL or CDC shall provide clearing, settlement and custodial services for such trades. These direct settlement facilities enable the investors to maintain their cash and securities balances directly with NCCPL and/or CDC. Hence, the SECP’s claim the new broker regime is intended to segregate the functions of trading, clearing, settlement and custody is actually a misnomer.

Existing Broker regime is default-incentivized timebomb where equity-absolved former ISE and LSE members have little attachment and more sense-of-deprivation with PSX as an institution. The Integration had shunned competition among marketplaces i.e. KSE, LSE and ISE and Broker regime is now doing away with competition in intermediary layer of the Capital Market Industry that would only ensure fruits of Capital Markets neither reach to masses nor to macro-economy.

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