SECP launches public consultation on proposed broker regime

Securities and Exchange Commission of Pakistan (SECP) has initiated public consultation on the proposed new broker regime which primarily aims to strengthen the capital markets and restore investor confidence.

As per the proposed model, three categories of brokers will be created, an official of SECP told APP.

Trading Only (TO) brokers will only execute proprietary trades/trades by clients and will not keep custody of proprietary or client assets and will not settle trades. Trading and Self Clearing Brokers (TSC) can execute and settle trades of their clients and also keep custody of clients assets.

Trading and Clearing Brokers (TC) can execute and settle proprietary and client trades, keep custody of clients assets and also offer custodial and clearing services to brokers and their clients, the official added.

In order to understand the new regime it is first important to look at background and some important information pertaining to market and investors.

He said the past custody defaults by brokers have severely damaged investor confidence which is adversely affecting the growth of capital markets in Pakistan as evident by the lowest number of investors in Pakistan.

As per international practices, the custody and clearing functions are only performed by financially sound entities which have adequate financial resources and infrastructure.

In the case of Pakistan, all brokers are allowed to keep custody of client shares and money irrespective of their financial standing, corporate governance structure or capacity.

The official further said that the aim of the new regime is to ensure that 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 (AML) Combating Terror Financing (CFT) in the light of Financial Action Task Force (FATF) requirements and keeping in view the placement of Pakistan in the grey list.

The SECP is therefore seeking to create a structure in line with best international practices which will improve governance standards, transparency and also enhance investor protection It is important to highlight that before issuing draft amendments in the regulations, the concept note was circulated and consultations were done with all stakeholders.

Currently well capitalized brokers have market share exceeding 90 percent both in terms of client custody and trading quantum.

In order to avoid concentration risk, appropriate controls have been envisaged in the shape of stringent credit rating, limit on asset custody, auditor quality, high equity, strong corporate governance structure, more frequent inspection.

It is worth noting that the small brokers have very low market share and maintain custody around 6 percent of total custody while they contribute not more than 10 percent in terms of total number of customers and a low trading quantum.

On the other hand, the new regime provides the brokers with small capital to reduce compliance burden, transfer their custody function to institutes with adequate capacity and focus on their core competence of trading and investment advice.

He pointed out that as per the proposed regime and concept paper, the TO brokers will have multiple options to transfer their custody to CDC/NCCPL through DSS/NCS, or to banks in the form of PCM or to other brokers which fulfill stringent criteria of Trading and Clearing brokers.

Some alternate models were also evaluated while formulating the broker regime (such as Direct Payment system) however these did not adhere to the international benchmarks and had the potential to increase the systemic risk in the market, the official added.