Brokers unable to comply with SECP regulations


ISLAMABAD: The stock market brokers, conducting small scale operations, have expressed their inability to the Securities and Exchange Commission of Pakistan (SECP) to dedicate sufficient resources to meet financial reporting requirements, develop a sound compliance system and meet FATF standards.

According to the new brokers regime issued by the SECP, brokers through letters to the SECP have highlighted their small scale of operations and inability to dedicate sufficient resources to meet financial reporting requirements, develop a sound compliance system and meet FATF standards.

In addition to compliance with capital market laws, the AML/CFT requirements have evolved over time and now form a major part of the compliance system of financial institutions. Due to Pakistan’s placement in grey list by FATF, there is a more pronounced need to upgrade the compliance system of brokerage houses, including the appropriate human resource and the specialized software to demonstrate adherence with the risk-based approach prescribed under the FATF recommendations and to implement sound KYC/CDD policies and procedures.

The said situation not only compromises the discipline and compliance level of capital market intermediaries but it also places compliant brokerage houses that have incurred substantial compliance costs at an unfair disadvantage, the SECP said.

The investor size in Pakistan paints a dismal picture of the capital market depth. Sustainability of the secondary capital market and its intermediaries is directly linked with the investor size. In order to increase the investor base, the brokerage houses need to explore new distribution channels which include partnerships with banks, telecom companies and exploring innovative solutions by taking advantage of technological advancements. This requires investments in infrastructure and sufficient financial capacity and standing in the market. Well-capitalized brokers will be in a much better position to increase investor outreach and enter into collaboration with other market players, the SECP added.

The commission has also proposed to allow commercial banks, development financial institutions (DFIs) and deposit taking non-banking finance companies (NBFCs) to offer custodial and clearing services for Trading Only (TO) Brokers.

According to the new brokers regime issued by the SECP, considering the feedback received from brokers and in line with international practices, the concept of Professional Clearing Member (PCM) may also be introduced as an alternative for custodial and clearing services for TO brokers.

Accordingly, commercial banks, DFIs and deposit taking NBFCs which fulfill the eligibility criteria shall be allowed to offer these services. The eligibility criteria will be in line with the conditions for TO brokers such as minimum net worth of Rs 500 million; minimum credit rating of (A-); statutory auditor from SBP Panel A and compliance with Code of Corporate Governance etc.

The SECP proposed that the brokers which are not compliant with the financial resource requirements and fall in the category of Zero Custody as on the applicable date shall have the following options: a) TO Brokers may use Direct Settlement Services (DSS)/National Custodial Services (NCS) for providing custodial services to the client. The broker shall enter into arrangement with CDC/NCCPL for opening investor accounts or sub-accounts of their clients. TO Broker may enter into arrangement with the TC Broker for custody and settlement of trades. Clients of TO Broker will open sub-accounts with TC brokers.

In case of Trading and Clearing (TC) Broker, such brokers shall develop requisite infrastructure including software, adequate human resource, systems and processes for providing custodial and settlement services to TO brokers. The TC broker shall implement Chinese wall between its brokerage business and custodial services to TO brokers to manage conflict of interest and ensure confidentiality of trading and customer information of TO brokers.

The TC broker and TO broker shall enter into contract which shall require TC broker to maintain separate sub-accounts for all clients of TO brokers, maintain confidentiality of customer registration information and trading information etc of the TO broker and its clients, restriction on approaching the customer of TO for the purpose of soliciting business, TC brokers shall be subject to annual inspection and monitoring to ensure compliance with the requirements relating to conflict of interest and confidentiality, the SECP added.