The new proposed Broker Regime by the SECP has panicked all stake holders of the Capital Market
Islamabad (Pakistan Point News / Online - 23rd January, 2020) The new proposed Broker Regime by the SECP has panicked all stake holders of the Capital Market.Under the proposed new regime the SECP intends to increase the Capital and Networth requirements of brokers many folds, which is unprecedented.The existing capital requirement of Rs.10 million is being increased to Rs.125 million.Contrary to the governments objective of ease of doing business, the already over complied Brokers are being asked to increase the compliance level to that of listedcompanies.
The Brokers are being divided into different categories, which would create difficulties for investors and Brokers.In the proposed new regime by the SECP intends to transfer the total custody of shares to only a handful of brokers.One big broker would be able to keep custody of 17.5 billion rupee of shares or even more as relaxation could be provided by the SECP.Brokers who are in business for three generations would be wiped out as they would be forced to route their business through one of the big brokers which is not practically possible.
SECP has totally ignored the concept of the concentration risk, which would increase the chances of mega debacles in future.The question is that if SECP has calculated that if one big broker fails under the new regime, how much damage would it do to the invertors and the capital market.In the past many years due to strong risk management, practically there had been no Clearing House default.In 2019 KSE100 index came as low as 28600 and all Brokers fulfilled their obligations and there has been no default to investors.
At present it is impossible for the Brokers to transfer or misappropriate shares held under custody of their clients.The only issue is of the cash held by the Brokers of their investors, which is payable on demand at any time.Brokers are required to keep the custody of cash of the clients in a separate bank account and cannot use this for any other purpose.The SECP developed a model to further safeguard the cash of the clients. This new system is called Direct Payment System.
Through this the payment of the shares sold by the broker clients could only be credited to the respective clients account through National Clearing Company and cannot be misused.Even the payment of one client cannot be made to any other client. This model has been successfully implemented internationally and in the Pakistan Mercantile Exchange as well.As per Directive of the SECP, this model was supposed to be implemented in December 2018 but SECP for no reason isdelaying the implementation of this.
This model when implemented would totally eliminate the risk of any embezzlement and also benefit the investors as they would get instant payments directly in their accounts without going through the bank's clearing.Investors are also demanding that like SECP has started direct credit of dividend through IBAN, this feature should be immediately introduced.Another model which the SECP itself suggested was the introduction of a Professional Clearing Company.
This company is supposed to keep custody of the investors of the Brokers who opts for this.CDC was asked by the SECP and it spent heavy amount to develop this company and the system. Investors were happy that their shares and cash would be safe with the CDC and the Brokers would not be able fiddle even a single penny. Again for no reason SECP delayed implementation of this model.Even more surprising under the proposed new regime, SECP is now allowing the big brokers to.
Where the investors, employees and the stakeholders associated with the Brokerage. Industry are in a panic state after this new concept was rolled out, the Lahore and Islamabad based Brokers are in deep anxiety as well because they are being affected the most.They gave up the licenses of their respective Exchanges during the integration process in order to come at par with the Brokers of the former KSE. Now they are being forced to forego their individual entities and work for the big broker.
All the former KSE brokers made money by selling their shares of KSE to the Chinese investors but the brokers of former LSE and ISE are still suffering.Brokerage Industry has been through hard times for over a decade now. The Brokerage Houses suffered losses and kept on injecting money in hope of good times.Many closed down due to low volumes and the over compliances. The remaining continued only because they were in the business from second or third generations.
Now the macroeconomic indicators are improving, volumes are coming back to the market, investor confidence is increasing and good time which was long awaited seems just around the corner.Rather that facilitating, SECP is just about to throw the Brokers who have passed through the tough times out of business without realizing that closure of these Brokerage Houses would result in unemployment and panic amongst investors, which would for sure hamper the growing capital markets. Would SECP and Big Brokers be able to achieve what that want to.