‘Margins on share trade to mitigate clearing, settlement risks’

KARACHI: Stock brokers on Friday called for margins on every share trade to mitigate fundamental risks associated with clearing and settlement functions and custodial services, rejecting new rules proposing increase in financial resource requirements and qualitative benchmarks for brokerages.

Stock brokers said fundamental risk associated with clearing and settlement functions and custodial services has nothing to do with the net worth of a stockbroker. Rather these risks are associated with exposure taken by a stockbroker, they said.

“Hence all these risks cannot be mitigated through increase in net worth of a stockbroker,” a broker said, referring to the proposed ‘No Broker Regime’ (NBR). “These risks can only be averted through margins obtained on every trade executed by stockbrokers. Therefore, rather than increasing the net worth of a stockbroker, pre and post trade margins and exposures be increased progressively.”

The Securities and Exchange Commission of Pakistan (SECP) proposed the no broker regime last month to raise the bar for stock brokers.

The proposed NBR segregates functions of existing one window operation into three tiers: trading only, trading and self-clearing and trading and clearing. The underlying basis of NBR, as enumerated in segregation of different function, has been based on net worth of stock brokers.

“As far as custodian risk is concerned, the same could be addressed through implementation of direct payment system and mandatory investor account,” another broker said. “If broker takes high risk/exposure, collateral/margins should be increased through increasing the percentage of client’s assets under broker’s custody, which is presently inadvertently and irrationally capped at 0.31 percent of the highest amount of client’s assets under custody of brokers.”

Brokers said this would immediately curtail the custody risk.

They proposed that underlying basis of the NBR should be changed and proposed net worth of stockbrokers should be replaced with one, two or three years weighted average share in total market volume.

“If a stockbroker has a market share of more than 10 percent then he is more prone towards debacle rather than small and medium size stockbrokers whose market share is negligible,” a broker said. “Therefore, all kind of stringent rules and regulations, be it selection of A category auditor, credit ratings and code of corporate governance, public interest companies etc. be imposed on those who contribute sizeable part of business.”

Brokers said this measure would address what should be the major concern of any government to avert fatal incidence of primarily stock exchange and secondary protection of investors.

A broker said the proposed NBR seems to be specifically designed to cater high profile stockbrokers without taking into account the small and medium size stockbrokers “who will be out of the game after approval of the NBR”.

“It is also a cause of concern that how new regulations are being proposed, which will debar majority of stockbrokers from carrying on this family owned business,” a broker said. “At some stage, it will definitely raise issues pertaining to constitutional rights available to the citizens of Pakistan.”