SECP new regulatory regime for securities brokers

SECP new regulatory regime for securities brokers

ISLAMABAD: (APP) In line with its efforts to strengthen the capital market and as part of subsidiary legislation under the Securities Act, 2015 (the "Act"), the Securities and Exchange Commission of Pakistan (SECP) has accorded its approval to the Securities Brokers (Licensing and Operations) Regulations, 2016.

The regulations, which have been published in the official gazette and placed at the SECP website, will take effect upon notification of commencement of Part V of the Act by the Federal Government, said a statement here on Friday.

While the regulations introduce various new requirements and strengthen existing requirements for the securities brokers to help achieve the objectives of risk management and enhanced investor protection, the same ensure continuity of business of the existing securities brokers through phased implementation of certain new requirements.

The new regime also takes into account the effect of integration of the stock exchanges and facilitates transition of brokers from the earlier regime to the new regime over an extended period of time.

A key aspect of the new regulations is categorization of brokers into trading and clearing categories, in line with global best practices, to allow custodial functions with financially sound brokerage houses only.

Such brokers will also be subjected to additional control, eporting, compliance and other requirements to ensure risk management.

To achieve the said segregation, the concept of professional or general clearing member is also in the pipeline to facilitate clearing and settlement of trading only brokers.

Also, brokers not involved in custody and clearing functions will be subjected to fewer requirements as opposed to brokers undertaking such functions. Additionally, due considerations have been made in order to facilitate the securities brokers by keeping the cost of doing business at a minimum.

The SECP had earlier invited public comments on the said regulations, subsequent to which open house sessions for all brokers of the three former exchanges were held.

To ensure maximum feedback from the brokerage industry, a committee of six TRE certificate holders of the Pakistan Stock Exchange, based on the nominations received, was constituted for detailed discussion on the subject regulations.

The regulations were finalized after various rounds of consultation with the said committee, in addition to considering feedback earlier received during public consultation.

The regulations introduce a new regulatory regime for the securities brokers based on international best practices and benchmarks specifically IOSCO principles of securities regulation, while addressing shortcomings in the earlier regime and aligning the same with the entire scheme of the Securities Act.

New and improved requirements have been prescribed pertaining to disclosures of financial risks to customers, adequate disclosures of conflict of interest, confidentiality of client and non-public information, order execution and recording, reconciliations and reporting of client asset segregation, complaint handling, short selling,  business contingency, formulation of policies and procedures for internal controls, trading by employees and other affiliated persons, compliance function, record maintenance and retention, regular audits etc.

Further, the new regime introduces improved entry standards, criteria for sponsors, directors and key executives of brokerage houses, and corporate governance requirements.

Through the regulations, enhanced risk-based financial resource requirements have also been prescribed for the securities brokers to ensure that only well-capitalized brokers operate in the securities market, given their crucial role.

It is expected that the new regime will strengthen investor protection and transparency by implementing enhanced risk disclosure, asset segregation and relevant reporting requirements.

The regulations are also expected to have a positive impact on the outreach of brokerage business in the country by allowing segregation of core responsibilities, and will improve standards of regulatory compliance for the brokerage industry in line with international benchmarks of securities regulation.