KARACHI: The Pakistan Stock Exchange (PSX) Stockbrokers Association has asked the Securities and Exchange Commission of Pakistan (SECP) to fix Minimum Net Worth for Trade and Self Clear (TSC) brokers of Rs 35 million only as agreed in the original SBR-2016 for smooth transition to the new Broker Business Model (BBM).
In a letter to SECP, Basharat Ullah Khan, President PSX Stockbrokers Association said that the Commission might consider the proposed amendments, in SBR-2016, a routine matter, but for the Stockbrokers and the Capital Market, this has created a “make or break” situation.
These amendments if implemented, will have the effect of altering the business model of the stockbroker for the 3rd time in a span of three years.
The letter said that the Securities Brokers (Licensing & Operations) Regulations 2016 were promulgated and enforced w.e.f. Jun 30, 2016. The said regulations (in original form) provided for 3 categories of Brokers namely: Trading Only (TO), Trading and Self Clearing (TSC) and Trading and Clearing (T&C). The original SBR-2016 also provided for setting up of Professional Clearing Members who were to handle the clearing, settlement and custodial needs of the Trading Only category of brokers.
In the original SBR-2016, the Financial Resources Requirement (FRR) such as Minimum Paid Up Capital, Minimum Net Worth, Minimum Net Capital Balance and Minimum Liquid Capital, for every category were agreed between the Apex Regulator and the Representatives of the Brokerage Industry. Although the brokerage industry had reservations on certain points, yet to provide for an agreed “structural foundation” for Broker Business Model, for the post Demutualization era, the parties agreed to accept and proceed with the new framework.
Unfortunate for the Brokerage Industry and the Capital Market, the Team that had given the agreed Broker Business Model (BBM) to the industry was soon replaced by another set of Team. Incapable of handling the given BBM, the new team without any consultation with the stakeholders, did away with the Trading Only and Trading and Clearing categories of brokers. With that the concept of Professional Clearing Members also got evaporated. As a result, only Trading and Self Clearing category of brokers was left in the field.
Since then, although many of the brokers have not been able to meet with the laid down standards of Minimum Resources Requirement for TSC brokers, yet our Exchange and the Apex Regulator are dragging with the non-compliant brokers and are allowing them to continue as TSC brokers, the letter added.
In the intervening period, many Chairmen came and left but none of them focused on the flaws in the “basic structure” of the Broker Business Model and no remedial steps were taken.
He appreciated the present Chairman SECP and his team has taken cognizance of this basic issue which had long been ignored.
Trading and Self Clearing (TSC) Brokers:
Of the three categories of brokers, TSC category is the one which has been targeted, in the proposed regulations, for elimination. This objective has been tried to be achieved by fixing Minimum Net Worth requirement at exorbitant figure, imposition of onerous Codes of Corporate Governance and compulsion to have “Ratings” of various agencies operating in Pakistan.
Financial Resources Requirement for TSC Broker:
Had the SECP restored the BBM, without disturbing the ‘financial resources requirement’, the parameters of corporate governance, and without pre-condition of “ratings”, as envisaged in the original SBR-2016, the industry would have accepted it with an open heart. The Regulator on the other hand, tried to bring in a BBM of its own. It raised the Minimum Net Worth requirement for a TSC Broker, to stay in business, from Rs 35 million to Rs 125 million. Compliance of all types of Codes of Corporate Governance have also been imposed. In addition to that, requirement of “rating” of various Rating Agencies is intended to be made a pre-condition to stay in business.
According to Regulations, Net-Worth of a broker is used to determine the “limit” of a broker to the extent of which, it may hold assets of its customers in its custody. In the case of TSC broker the limit is worked out by multiplying the NW with 25. In the original SBR-2016, the agreed Minimum Net-Worth (MNW) for TSC brokers was at Rs 35 million. With a multiple of 25, lowest limit of AUC for a TSC broker comes to Rs 875 million. This limit of AUC for a TSC broker of an average size is quite sufficient. It has already been pleaded with the Regulator that if along with that, the TSC broker is allowed, to shed the unwanted-securities imposed upon him by his client, through mandatory opening of “Investor Account” by the clients, even the TSC broker, larger in size can do its business quite well, even with the Net-Worth of Rs 35M.
Brokers interested in TSC category are at a loss to understand as to why the Regulator is adamant in fixing the MNW for them at Rs 125 million. Market potential does not justify employment of such huge funds for TSC brokerage business. Four times increment in funds employed is not likely to enhance their revenue from brokerage in the same proportion.
TSC brokers are also astonished that on the one hand, the Regulator is obsessed with the insecurity of clients’ assets in the custody of the broker, and on the other hand, is compelling the TSC broker to hold AUC worth Rs 3125 million by taking its Net-Worth to Rs 125 million.
Code of Corporate Governance:
Most of the TSC brokers are operating as family owned Private Limited Companies. In many cases, number of shareholders of the company does not exceed a few family members. Brokerage business being in their families since generations, the shareholders not only acquire the knowledge and experience of this business in routine, but the family members interested in pursuing it as a career also acquire the relevant educational qualifications. As a result, most of the members also participate in the day to day business activities of the company, as Directors, Senior Management employees etc.
Many a times, it has been pleaded before the Commission, that their perception that there was extra ordinary income in brokerage business was misconceived. A glance at accounts of various brokerage houses would show that the Brokerage business becomes feasible, only through income from allied sources such as “dividend” from listed companies (House Investments) and “profit on debt” earned on their own-cash kept in banks.
The Commission which has a lot of qualified accountants at its command is requested to work out the cost of Code of Corporate Governance / ratings intended to be imposed upon such Private Ltd. Companies. Such exercise would surely convince the Regulator that the level of receipts from “Brokerage operations” of a TSC broker operating as a private limited company does not justify imposition of costly CCG and rating requirements, especially when regulator’s own controls are so exhaustive and effective that since imposition of SBR-2016 not a single default situation has arisen at Karachi.
We have also pleaded before the Commission several times that the CCG Requirements already in place in SBR 2016 are more than enough. Any additional burden of Corporate Governance / ratings either in the name of “Protection of Investors” or “International Best Practices” would only ruin the brokerage industry and along with that the Capital Market.
In the light of above facts, it is humbly requested that the TSC brokers operating as family owned private ltd. companies may be spared of the costly and burdensome requirements of CCG applicable to Listed Companies.