Regulator invites feedback on new brokers’ regime

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ISLAMABAD: Despite reservations by small and medium brokers, the Securities and Exchange Commission of Pakistan (SECP) on Monday introduced a new brokers regime.

Under the proposed setup, brokers have been divided into three categories, starting with “Trading only” for those with a minimum net worth of Rs15 million. Category II is for brokers with “Trading and Self Clearing” rights with a minimum net worth of Rs100m, while the Category III brokers have the right for “Trading and Clearing’ with minimum net worth Rs500m.

The regulator has floated the draft amendment in the Securities Brokers (Licensing and Operations) Regulations, 2016 for public comments and feedback.

Under the amendment, the “Trading Only” brokers can only execute its proprietary trades and trades on behalf of its clients but cannot settle executed trades or keep custody of securities or money owned by it and its customers.

The Category II brokers can execute as well as settle its proprietary trades and trades executed on behalf of their clients and can keep custody of securities and money owned by it and its customers subject to such conditions as may be imposed by the SECP.

While brokers falling under the Category III can execute as well as settle its proprietary trades and trades executed on behalf of their clients and can keep custody of securities and cash owned by it and its clients.

The amendment also allows the Category III brokers to settle trades of other securities brokers, their clients and keep custody securities and cash owned by other brokers and their clients.

Under the new regime, a securities broker, which does not comply with financial resource requirements for Category II that is Trading and Self-Clearing will have to apply for conversion to “Trading Only” (Category I) by April 15, 2020.

The regulator has allowed all conversions and settlements in this regard by July 1, 2020, mainly related to compliance with minimum net worth and net capital balance for each category.

The minimum net worth requirement for Trading and Self Clearing (Category II) will be increased to Rs125m from July 1, 2021.

Small brokers, while opposing the amendment on the grounds that it will result in concentrating the market in the hands of large brokers, have announced to oppose the move using all options including registering the complaint against the regulator to the Ministry of Finance, prime minister and in the court of law.

The PSX Stock Brokers Association (PBA) has already written a letter to the SECP against the proposed amendment describing it as a conspiracy to hand over the stock market in the hands of large brokers. The PBA pointed out that there should be separate clearing and settlement agents including banks and it should not be in the hands of large players of the same trade.

The association said that it has been proposed that Category I brokers will be dependent on Category III brokers for clearing rights of all settlements and even maintain custody of their shares.

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