The Securities and Exchange Commission of Pakistan (SECP) has approved the regulations of the National Clearing Company of Pakistan Limited (NCCPL) to provide for the clearing and settlement mechanism of the Direct Settlement Services (DSS) which is operated and managed by the Central Depository Company of Pakistan Limited (CDC). Currently, the investors of stock market can only settle their trades through the sub-accounts which are under the control of the brokers.
It is important to highlight that the investors also have the option to open the Investor Account, which is operated by CDC itself only upon the instructions of the client and eliminates the risk of misuse of securities by the broker. However, as per the prevailing settlement mechanism, the investors were not able to settle their trades through their Investor Accounts.
The introduction of DSS removes this weakness and enables the investors to settle their trades form their respective Investor Accounts without the involvement of brokers. The DSS is expected to be made operational by the CDC from June 2, 2014 as per the instructions of the SECP.
The approval of DSS regulations is another landmark achievement of the SECP in its strive to protect investors' interest and prevent misuse of assets of clients by the brokers. The introduction of DSS is also another step towards empowering the investors and strengthening capital market infrastructure through innovative products.
In the past, SECP has focused in implementing a robust risk management regime to reduce systemic risk and prevent any disruption in the smooth functioning and settlement of trades in the capital market. As a result, in the recent past, the risk management system has displayed resilience and no settlement losses were witnessed even in the wake of significant market declines. However, a different kind of menace has evolved whereby certain brokers resorted to misuse of client assets under their custody to meet their liquidity demands. As a result, subsequent to 2008 crisis, significant investors' claims surfaced against some brokers on account of misappropriation of client securities under their custody.
To address this issue, SECP has taken various measures which include introduction of client level margining regime, automated settlement system, abolishing general purpose/ blanket authorities to handle securities by brokers and imposition of restrictions on movement of securities in the CDC. In addition, the SMS alerts to the clients in the case of movement of securities from their sub-accounts have also been made mandatory.
Despite all such measures there are still several instances where brokers misappropriated clients' securities and absconded. In this regard SECP has introduced new products which offer more protection to client assets. First of these products is the Direct Settlement Services (DSS) of CDC. Currently an investor is required to obtain a CDC sub-account with the broker for settlement of his market trades. The CDC sub-account is under the control of broker. On the contrary, the CDC Investor Account is operated by CDC itself only upon the instructions of the client and eliminates the risk of misuse of securities by the broker. However, currently there is no mechanism whereby investor can settle his/ her trades directly from the Investor Account. This weakness has now been removed by introducing DSS. Investor account holders willing to avail DSS will execute their trades through their respective brokers and will provide online settlement instructions in respect of such trades to the CDC through a web portal. DSS will also bring increased efficiency and transparency to the clearing and settlement process by eliminating the need for the investor to open a sub-account with a broker. The SECP has approved the regulatory framework for the DSS and the product is expected to be launched from June 2014.
Another initiative in this regard is the direct settlement services by NCCPL whereby the NCCPL will act as the custodian and clearing agent of the investor. The investor will be able to hold securities and cash under custody of NCCPL and settle trades executed at stock exchanges though NCCPL without the need of maintaining sub-account or cash account with the brokers. This product is expected to be launched from July 2014 by NCCPL.-PR
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