Rs 400 million paid-up capital for brokerage houses suggested

The Securities and Exchange Commission of Pakistan (SECP) has proposed paid-up capital requirement up to Rs 400 million for stock brokerage houses within three years. The value of (KSE membership) card will not be counted as part of the capital. In a concept paper on "New Brokerage Registration Regime" the SECP has said the existing regime is inconsistent with framework of the proposed Securities Act and Demutualization Act.
"In post demutualization scenario and after implementation of the Securities Act, the existing regime would be totally obsolete and would not cater to the requirements under the proposed regulatory regime. Hence, the existing framework for brokerage houses needs to be completely revamped to bring it in line with stipulations of the different legal and regulatory changes made during the past few years, having all requirements under one set of the regulations and meeting the needs of upcoming legislation; thus making and having a coherent document that caters to all existing and future needs in line with IOSCO standards," the paper said.
According to the concept paper, the salient features of the new Broker registration regime are as follow:
i. Corporate entity:
In a new broker registration regime, only corporate entities with minimum prescribed amount of capital will be eligible to act as an intermediary. Changes in directorship, shareholding, management, memorandum of association and voluntary winding up of the corporate entity would be possible after prior written approval of the stock exchanges and the Commission.
Majority shareholders and directors would be required to deposit their shares (representing ownership in the brokerage house) with CDC in an account marked as blocked and such shares will not be sold or transferred without prior written approval of the exchanges and the Commission and will be required to be kept unencumbered.
---- The sponsors/directors shall declare in writing the assets owned by them at the time of registration. Value of card will not be counted as part of the capital.
---- The brokerage house will be prohibited under the law to undertake any financial activity other than brokerage business unless registered with the relevant authority under applicable laws.
---- The individual company/group will be prohibited from holding beneficial ownership of more than one brokerage house.
---- There will be a limit on minimum share capital that must be subscribed by the sponsors. Moreover, sponsors directors would be required to have at least 20 percent representation on the Board of Directors.
---- A time frame would be proposed whereby the existing individual broker may be allowed to be converted into corporate entity after meeting certain capital requirements.
Moreover, all assets and liabilities including office room that are leased out in individual broker name, will be transferred to corporate entity upon conversion of individual member to a corporate entity.
ii. Financial Strength:
---- At the time of obtaining registration, the proposed brokerage house will have to prove that it has sound financial strength which will be judged from the capital structure of the entity. The capital requirements help protect the securities community as a whole by reducing the possibility of systemic risk.
---- The brokerage house will have to maintain minimum prescribed amount of paid up capital. The minimum prescribed amount of capital will be determined after considering market requirements and prevailing practices in the financial sector with a view to induct only financially sound entities as brokers.
---- Every brokerage house will be required to maintain positive equity at all times, which shall not be less than the paid up capital amount in any case. Procedures will be defined to monitor the positive equity at all times.
---- The corporate brokerage house would be required to maintain liquid capital to be prescribed by the Commission from time to time. Trading in stocks will be linked with the liquid capital.
---- The required level of capital and liquid capital will be different for different categories of brokers (ie trading only member, clearing member etc) and for different market activities such as proprietary trading etc.
iii. Organisational Competence: The corporate brokerage house would be required to prove that it has facilities, procedures, personnel, financial resources, policies, procedures, systems and controls that are adequate to ensure that the applicant will meet its obligation as a broker and to comply on continuous basis with all the requirements imposed by the Commission.
iv. Registration of Agents & Fit and Proper Criteria for key appointments: The concept of registration of agent was introduced when outcry system was in place for trading. Subsequently various reforms especially pertaining to IT has practically demolished the original role of agents. Moreover, over the years it has been observed that no concrete results have been achieved by registering the agents; rather substantial number of complaints against agents regarding unauthorised trading has been noted.
Keeping this in view, in a new regime, the concept of the agents will be done away with. Agents will be replaced by branch managers/representatives. If a brokerage house intended to operate at any other location, the brokerage house would need to open a branch office at that location.
A broker shall be responsible for all acts and/or dealings of its branch office. The branch office shall be regulated by the exchanges as per their regulations with suitable amendments therein. In addition, all key appointments including CEO, directors, head of operations, head of compliance, compliance manager, risk manager, trading terminal operators and head of branch offices etc would be fit and proper and such appointments will be monitored by the respective stock exchanges and the Commission.
v. Detail information to be submitted along with the application: Applicant will have to submit along with the application complete detail as prescribed by the Commission from time to time along with the application fee that will be in line with fee structure for NBFC sector. Such information will be aimed at knowing the brokerage house, its directors, shareholders and sponsors in detail. In the concept paper it was stated that the SECP is continuously striving to ensure that standards and principles adopted in the Pakistani capital market conform to the international best practices. In view of the same and considering need for revamping as mentioned earlier, it is considered essential that the existing regulatory regime for brokers is revamped and brought in line with the international best practices and standards.
A consultative group was formed in 2009 for the same purpose. The consultative group furnished its recommendation regarding capital adequacy, code of conduct and minimum entry standards. Adopting the proposals submitted by the consultative group, the Commission considered it essential to bring about change in the entire regime rather than restricting to only three aspects mentioned above.
After a comprehensive review of the existing laws, rules and regulations, other jurisdictions and a proposal put forwarded by the consultative group, a new broker registration regime is being proposed in order to ensure a more effective regulatory framework which is in line with the IOSCO principles for market intermediaries. The new regime would also cater for requirements of the proposed Securities Act and Demutualization Act.
The new broker registration regime would help in strengthening the market by allowing only fit and proper brokers to operate in the market. It will provide a framework where only qualified, experienced, sustainable, technically and financially strong market participants would operate as brokers. The improved code of conduct will aim at protecting the interests of the clients and ensure proper management of risk. The capital adequacy regime will be aligned to a risk the broker is exposed to. All these measures combined together, would help in better protection of the interests of the investors and would lead the country's capital market to another step closer to acceptable best international standards.
The adoption of new broker registration regime would help in improving the image of the Pakistani capital market world-wide as it would adhere to IOSCO principles relating to market intermediaries. The improved confidence will open new avenues for foreign as well as local investments in our market, the concept paper said.