Stock brokers express serious reservations on proposed new regime

KARACHI: PSX Stockbrokers Association has issued rebuttal on propaganda of Securities and Exchange Commission (SECP) through media to pass the proposed new brokers regime (NBR).

In a press release issued on Monday, it said that firstly, the so called “Small Brokers” term do not exist.PSX Stockbrokers Association (PSA) being representative of more than 66% of the Brokers Fraternity has serious reservations on the Proposed NBR. Regulators approach to defuse the tension by using Small, Medium and Large Size Brokerage Houses is an effort to divide and rule.

None of the objectives, used to float this NBR, can be achieved by merely increasing the Net-Worth of the Stock Brokers. Clearing and Settlement Risk, as envisaged as Primary Objective, do not exist particularly when:

1. Pre and Post trade margins are taken

2. PSX settles trade on T+2 basis

3. Minimum Rs.16 million per broker is being collected as margin under Base Minimum Capital (BMC) irrespective of any trade

4. Minimum Rs.5 million under Net Capital Balance

5. Minimum Rs.7.5 million under Liquid Capital Balance(LCB)

Apart from the above, a total fund of more than Rs.7 billion is accumulated under Settlement Guarantee Fund and Investor Protection Funds collected by National Clearing Company of Pakistan Ltd (NCCPL) and Pakistan Stock Exchange (PSX) respectively.

Stock Market declined by more than 50% from May 2017, from 53,500 Index to 28,000 Level without any clearing and settlement default. This clearly reflects that Exposure Margins, acquired by Front Line Regulators, have also minimized, if not eroded the existence of Clearing and Settlement Risk.

As far as the Custody Risk is concerned, this Proposed NBR in fact increases the said risk, rather than reducing it. A simple calculation based on the parameters provided under the scheme would reveal that Stock Brokers would now be allowed custody by more than 200% of what is allowed currently.

The foregoing clearly reflects that none of the objective of this NBR will be achieved rather than Custody Risk will be concentrated more in few hands.

Proposed increase in Net-Worth of Rs.65 million in the NBR cannot justify allowance of 200% increases in Custody.

Therefore, it cannot be claimed that it “primarily aims to strengthen the Capital Market and restore Investor’s Confidence”
Commission, while trying to aggravate using AML/CFT/FATF requirements, is unaware of the progress made by the Stock Brokerage Industry and we quote below extract from Pakistan National Risk Assessment (PNRA) Report, published in September 2019, by Ministry of Economic Affairs, wherein, clause 150 states that:

Considering that all the transactions coming to the securities markets is through banking channel and the primary focus of investors in these markets is investment in securities of the companies, the securities markets are exposed to a lower TF threat abuse. Further, LEAs and EMU have so far not found any incident of TF having a link with the securities or commodities markets.

Anti Money Laundering Act, 2010, was promulgated on March 27, 2010, and Stock Brokers being Sole Properties were not made part of it. Concept of Corporate Brokerage Houses was implemented after the Demutualization in 2012.

Furthermore, the claims by SECP’s insider that 27 brokers have defaulted during last 10 years resulting in defaulting of Rs5.8 billion, is nothing but aggravating the situation as prior to demutualization Stock Broker’s Membership Card was valued at Rs150 million. Moreover, it would have been much better had the names and amount of defaulted brokerage house were also disclosed so as to give clearer picture. The average amount of Rs200 million defaults as being painted in the media is misleading.

The hidden objective of this NBR can be visualized by Section 2.2.3 of the Concept Note on NBR issued in November 2019, which stipulates that, in order to save the compliant brokerage houses that have incurred substantial compliant cost, this NBR is being introduced and all the brokerage houses are therefore forced to adopt all the compliance requirements irrespective of the nature, size and complexity of business.

This is to ensure that these third generation brokerage houses should be compelled to incur the same amount of expenses as incurred by the brokerage houses with research facilities. Regulators have overlooked the concept of discount brokerage houses, exist worldwide.

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