A delegation of Pakistan Stock Exchange (PSX) Stockbrokers Association (PSA) met with officials of Securities and Exchange Commission of Pakistan to discuss Concept Note (CN) on New Brokers Regime (NBR).

According to a press statement issued by PSA, during a meeting with Commissioner SMD and his team at SECP, PSA conveyed concerns of its members on the recently floated concept note to SECP. The objective of this regime is to reduce the risk of custody and clearing defaults at broker's end and to expand the market outreach through introduction of concept of trading broker.

PSA submitted its comments to cater for systemic risk, inherent risk, and settlement risk as well as custodian risk to meet the objectives of the Commission.

It was also discussed that to protect investors, both the risks, cash and custody, have been elaborated. Risk of cash balances of clients has been mitigated through segregation of bank balances and its audit from time to time.

However, for custodian risk, PSA is of the opinion that suggestions in CN on NBR, such as capital adequacy, credit rating and code of corporate governance will not address the risks associated with custody.

PSA proposed immediate implementation of Direct Payment System (DPS), mandatory investor account and increase in percentage of collateral for Assets Under Custody (AUC). In essence, PSA has proposed to take away 100 percent securities of clients from brokers.

Further, DPS should be activated to resolve, once for all, custody risk. It was also observed that certain refinements may be required to activate DPS, therefore, it was suggested that in the meantime opening of investor account be made mandatory, enabling brokers to immediately shift all custody to client's investor account.

It was further proposed that if time is the constraint to implement both the above proposals then custody risk be addressed on an immediate basis. Increase the exposure required to be maintained for Base Minimum Capital (BMC) which is presently @ 0.31% of client's AUC of brokers.

The attention of the Commission was also drawn towards the fact that after the introduction of NBR, 80 percent of the stockbrokers will be out of the business which will create monopoly, high risk concentration, invite a huge systemic risk situation down the road, volumes of the market will shrink drastically, etc, and ultimately will be a cause of killing of Pakistan's capital market.