If the enraged stock brokers are to be believed, the Pakistan Stock Exchange (PSE) is going to be a national bourse meant for trading only by the 'fat cats'. The PSE, which came into being after the recent integration of Karachi, Lahore and Islamabad bourses, would be formally launched on January 1 next year. About 350 TREC holders at the country's three stock exchanges are up in arms to reject, what a senior broker at Karachi Stock Exchange (KSE) said, "in toto" the draft Securities Broker Regulations, 2015.
As the apex regulators at Securities and Exchange Commission of Pakistan (SECP) sought on November 5 the brokers' feedback on the proposed brokerage licensing rules within a fortnight, the latter found in the same at least 18 clauses as "unfair" thus unacceptable. Formulated under Securities Act 2015, most damaging of the draft regulations, brokers claimed, was SECP's requirement of TREC holders to maintain a paid-up capital ranging from Rs 30-100 million.
Under the new regime, brokerage services have been categorised into three: trading only, trading and self clearing and trading and clearing. Presently, brokers work under the second category maintaining Rs 20 million paid-up capital. Seeking a trading license under new laws, brokers would be required to maintain Rs 30 million, Rs 70 million and Rs 100 million paid-up capital under the first, second and third category, respectively.
This, a senior broker told Business Recorder, was beyond majority of the brokers' financial capacity. Nor was it feasible in terms of brokerage business. Citing official data, he said currently the number of Unique Identification Numbers (UINs) stood at 0.25 million of which 35,000 were the active clients. "By active clients we mean those who trade at least once a month," said the broker adding that for brokers the number of cliental trades stood the only source of income.
"This would move out (of business) 100 percent brokers at LSE as much at ISE and 90 percent at KSE," he said, requesting anonymity. The brokers point to the financial resource regulations prevalent at India's Bombay Stock Exchange. The paid-up capital requirement at the neighbouring country's bourse stands at Rs 3 million for all three categories.
Other prominent regulations the brokers are resisting include holding of their shares in Central Depositary Company (CDC) custody, compulsory hiring of compliance and custody officers, risk manager and internal auditor, non-recognition of the trade body, listed companies-style appointment of an independent director, insuring customers' assets, disallowance of value of TREC and KSE shares and the conversion of brokerage firms from private to public company.
"What good becoming a public company brought to brokerage firms like First Capital Equity, First National Equity, InvestCap and JOV Company," asked another broker critically. "They all are sunk". About hiring of the proposed officers, another broker said the 220 square-foot office space and the current volume of business at KSE were not enough to allow "a battery of chartered accountants" physically as well as financially.
The new regulations, according to an SECP draft available with Business Recorder, aim to benefit investors as well as the brokerage industry by creating a regulatory landscape which encourages consolidation, strong and well-established intermediaries and promoting investor confidence.
"The regulations provide improved licensing requirement for brokers along with the fit and proper criteria to ensure that persons with appropriate knowledge set, expertise and satisfactory track record are admitted into the brokerage industry," it said. The SECP claims to have introduced in the new rules the "concept of liquid capital" which, it says, reduces systemic risk in the market by ensuring existence of financially sound intermediaries in the clearing and settlement system.
The creation of different categories of brokers, the commission says was aimed at segregating the trading rights and the right to keep custody and settle trades of the customers. When contacted, a SECP spokesman just said the proposed regulations would provide "investor protection" at the country's bourse. Interestingly, while the stock brokers, through KSE Stockbrokers Association (KSE-SA), are openly challenging the SECP draft regulations at different fora as all the brokers this reporter contacted liked not to be named in the report.
Brokers gave a cold shoulder to SECP when the apex regulator summoned 24 "fat cats", as a broker described it, to its Karachi office Thursday for a briefing on the issue. Instead, the KSE-SA convened Friday an emergency general body meeting to deliberate on the emergency situation. Till the filing of this report, officials from SECP were in talks with stock brokers at KSE Auditorium Friday.
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