Under the new financial resource requirements proposed for brokers, net worth of the trading and clearing broker (TC) licence would be Rs 500 million and above; net worth of trading and self clearing broker (TSC) license would be Rs 150 million and above, and net worth of trading only broker (TO) license would be Rs 15 million and above.
Brokers which are not compliant with the financial resource requirements and fall in the category of Zero Custody as on the applicable date shall have the following options: a) Brokers may use Direct Settlement Services (DSS)/ National Custodial Services (NCS) for providing custodial services to the client. The broker shall enter into arrangement with CDC/NCCPL for opening investor accounts or sub-accounts of their clients. b) Broker may enter into arrangement with the TC broker for custody and settlement of trades.
The requirement for at least Rs 150 million net worth for keeping custody of client assets shall be applicable on the basis of financial statements of December 30, 2019 and shall be implemented from March 31, 2020. Brokers which do not fulfil minimum requirement of Rs 150 million on March 31, 2020 shall be required to shift custody to DSS/NCS/TC brokers/PCM.
The SECP has been undertaking a reform agenda to revitalize the capital market and promote expansion of investor base. It is felt that small and medium sized brokerage houses, alongside large ones, have a critical role to play in this regard.
Based on representations received from various stakeholders including small sized brokers and recommendations of the Stock Market Reforms Committee, the SECP has issued a concept paper to introduce categorization of brokers for addressing the issue of custody of client assets. This concept is in line with international best practices and tailored to local market requirements.
In the proposed regime, in order to provide maximum facilitation to small sized brokers, which would be categorized as trading only brokers and shall not retain custody of client assets, the minimum capital requirements for a brokerage license are being reduced to Rs 15 million. Further, such brokers shall have the flexibility to have a satisfactory QCR rating auditor. These brokerage houses would be allowed to carry out transactions in all markets, including derivatives and leveraged products, with no restriction on number of branches.
Moreover, they would be allowed to provide securities and futures advisory services by charging a fee and sell/ distribute financial products and also act as consultants to the Issue. Several compliance requirements relating to client asset segregation, clearing membership, depository participant etc. shall not be applicable on trading only brokers and they would also not be subject to multiple audits/inspections during the year.
For promoting ease of doing business for small sized brokerage houses, the SECP had earlier removed the requirement to provide separate Net Capital Balance certificates which is now required to be made part of audited accounts of brokers. Requirement for auditors to provide limited assurance report of brokers has also been abolished.
Furthermore, two additional categories, i.e. trading & clearing broker and trading & self clearing broker have been proposed which shall be subject to enhanced net worth, corporate governance, compliance and rating requirements as they would be retaining custody of client assets.
These steps are aimed at strengthening the brokerage industry, enhancing commercial viability of brokers, improving regulatory compliance and ensuring robust growth of the capital market. The SECP shall initiate a consultative process for finalizing the concept paper in the coming week, the SECP added.