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January 25, 2020

SECP ‘decides in principle’ to implement new brokers regime


January 25, 2020

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has decided in principle to implement a new regulation regime for stockbrokers to meet the pressing conditions of Financial Action Task Force (FATF), a senior official said on Friday.

“The FATF has been demanding Pakistan to implement practical measures for preventing use of financial sector for money laundering and financing of terror, including in the area of capital markets,” the official, requesting anonymity, told The News.

“The new regime includes multifold compliance requirements for brokers having custody of investors’ assets.” The official said SECP board will take “three to four more weeks to deliberate news regulations and implement it accordingly”.

The official said of the total 225 brokers at Pakistan Stock Exchange (PSX), 98 with a net worth of up to Rs100 million, “possessing only six percent of assets, and having just seven percent share in market trading, are resisting the most to the SECP’s new regulatory regime”.

“There are 109 brokers, who have a net worth between Rs100 million to Rs500 million, custody of 36 percent, and a trading share of 43 percent, while 18 have a net worth of more than Rs500 million, custody of 58 percent assets, and their trading share is 50 percent have no issues with the new regulations.”

A SECP document showed that presently, top 60 brokers have more than 80 percent of customers. Further, top 50 brokers generate more than 80 percent of the trading volumes. The lowest 170 brokers have just 18 percent of the total clientele.

This when taken in conjunction with the investor/broker ratio, paints a picture of a much skewed industry with the market share concentrated with a very small number of brokers.

Small brokers argue that they cannot dedicate sufficient resources to meet financial reporting requirements and thus unable to develop a sound compliance system and meet FATF’s AML/CFT (anti-money laundering and combating financing of terror) standards.

Pakistan Stock Exchange (PSX) Stockbrokers Association (PSA) in its recent statement had warned the implementation of new regulations would drastically shrink the volumes of the market and would ultimately prove a deathblow to the capital market.

The new regulations bar the brokers from retaining custody of those investors’ assets who are unable to dedicate sufficient resources to meet financial reporting requirements and cannot develop a sound compliance system to meet AML/CFT guidelines of the FATF.

In the new regulations, the SECP has divided the brokerage industry into three categories i.e. small-sized brokers (trading only brokers), trading and clearing broker, and trading and self-clearing brokers.

The new financial resource requirements for brokers, net worth of the trading and clearing broker (TC) licence would be Rs500 million and above, net worth of trading and self clearing broker (TSC) license would be Rs150 million and above, and net worth of trading only broker (TO) license would be Rs15 million and above.

The SECP official said brokers are required to comply with AML/CFT regulations since they handle client assets.

“The brokerages require infrastructure to meet these comprehensive compliance arrangements and hiring of requisite staff including head of compliance,” official added.

They, he said, also needed to have minimum financial capacity and scale of operations to function as a financially viable business, while ensuring maximum investor protection.

As per international practices, the official said, custody and clearing functions were only performed by financially sound entities, having adequate financial resources and infrastructure.

“In Pakistan, all brokers, regardless of their financial standing and capacity are allowed to deal in public money, keep custody of customer assets and perform clearing with the NCCPL (National Clearing Company of Pakistan),” the official added.

Another SECP official said possibility of misuse of client assets with brokers is high and a major cause of people’s low confidence in the capital market and stagnant investor base in developing markets like Pakistan.

“Historically broker defaults have led to a loss of significant amount of client assets. In the past 10 years, an astonishing 27 brokers have defaulted, resulting in investor claims of around Rs5.8 billion,” he said. “On average two to three defaults were reported every year with a claim of more than Rs200 million.”