SECP tough on capital adequacy of brokerage houses

Battered by the economic turmoil that roiled financial markets around the globe during the last decade, regulators are busy conjuring up and setting more stringent capital adequacy requirements for financial intermediaries. Following in the footprints of the State Bank of Pakistan (SBP) and its policy of encouraging consolidation in the banking sector; the Security and Exchange Commission of Pakistan (SECP) is all set to forge a plan to tighten the capital adequacy requirements for brokerage houses. The regulators concerns are legitimate given that the brokers are currently required to abide by a menial minimum capital requirement of Rs2.5 million as paid-up capital, as formulated back in the 1970s. For those brokers who are on a shoestring and toiling with a higher cost of operations amid low turnovers; the higher MCR could lead to closure of smaller houses. By reducing the number of players, the rationale behind a MCR is to fortify stock traders financial health, in view of the fact that the stock brokers are custodians of the investors financial assets. On the other hand, when contacted by BR Research, larger brokerage houses appear unshaken by the higher MCR. After all, brokerage cards for the Karachi Stock Exchange are a coveted commodity, typically sold at handsome prices. Still, many are irked to find the regulator turning hawkish on brokerage firms, while general investor-confidence in equity markets remains in the doldrums. Although, the SECP has stepped up efforts to improve market volume; brokers point to corporate governance issues such as low dividend payout ratios as well as taxes on trading and companies on the default counter. Besides, many adverted to the problem of a heap of unutilized capital on brokerage house balance sheets, raising concern that a higher capital requirement will have an adverse bearing on their cost of operations. However, the ever-savvy SECP is mulling over devising a risk-based or activity-based approach to determine a benchmark for capital adequacy to match risk exposure of an intermediary. Deliberations with the brokers may lead to further finger pointing towards the lack of corporate governance and other distractions from the MCR-issue. But experts have welcomed the SECPs move to consolidate the brokerage industry. The regulator now has its work cut out to ensure that policy revisions help the emergence of more sizeable players in the industry; without jeopardizing the future of the equity brokerage sector.