Securities insurance to cut investor risks demanded

KARACHI: A group of stock brokers on Monday urged the Securities Exchange of Commission of Pakistan (SECP) to introduce insurance of securities or portfolios held with the stock broker as per international practices especially in lines with USA.

They said the investors, when invest in stock market, have to deposit cheque/securities with stockbrokers to execute transactions. When transactions are executed, payments/receipts in the form of cross cheques and transfer of their inventories in their central depository company (CDC) investor account should be done by end of settlement day.

However, this process becomes complicated when investors do not request stockbrokers to transfer either their cash balances or balance of securities, at the end of the day, in their own investor account. The reason may be due to daily movements in securities balances and reliance on stockbrokers.

“This habit of investors gave rise to fears that stockbrokers, on whom they have entrusted their cash balance and securities, may abuse investors assets which could led to all kind of debacles and fiascos,” a broker said. In order to protect investors SECP makes rules and regulations for stockbrokers to avoid any debacle.

Brokers said SECP penalise stockbrokers, due to bad habits of investors, who are not even conscious on their investments. The spirit is willing but the flesh is weak or we can say, complainant is lazy but witness is active. “We all know that anyone can get insurance for cash-in-transit and/or goods-in-transit while inventories’ insurance is also in place," another broker said.

“We also know that custody of goods, on which insurance obtained, remains with the client and insurance companies protect themselves with re-insurance and other measures suitable to their needs.”

It should be noted that insurance of securities will be to the extent of number of shares and nothing to do with the value of such securities. Furthermore, the existing Investor Protection Fund and Clearing House Protection Fund, both created by stockbrokers, where entire contribution, to both the funds, are made by stockbrokers and managed by Pakistan Stock Exchange (PSX) and National Clearing Company of Pakistan (NCCPL).

These funds have approximately Rs8 billion and shall also be considered while evaluating insurance of Client's assets under broker's custody. These are similar to what USA has in the name of Securities Investors Protection Corporation (SIPC). SECP being common regulatory body, should encouraged insurance companies to come up with a proposal to insure Client's assets under broker's custody.This will definitely address main concerns of regulators as to custodian risk and will erode many regulations.