December 15, 2020 (MLN): Government has reportedly decided to introduce a new regime for stockbrokers wherein all brokers will be required to give custody of client assets to a professional clearing member.

According to the Business Recorder, securities brokers are allowed to retain customer assets’ custody and clear or settle transactions for trades performed on behalf of their clients and their proprietary accounts under the Securities Act, 2015. Though, the defaults of stockbrokers have resulted in significant losses to investors.

The Securities and Exchange Commission of Pakistan (SECP) resolved in its meeting that the Federal Government may notify a professional clearing member as a “regulated securities activity” under its Securities Act 2015,  For the purposes of the Act, the professional clearing member shall be the clearing member as defined in the Act and may include brokers, or financial institutions. Under the regulations of clearinghouses, a clearing member is the one who is admitted as a clearing member for clearing and settling transactions on his own as well as on behalf of others.

The purpose of informing the Professional Clearing Member (PCM) is to provide a particular term to be used in the regulations formulated by the SECP for licensing of specialized companies such as independent companies, banks, NBFCs, DFIs, etc as a professional clearing member.

Another purpose of notifying the PCM is to introduce a regime of third party clearing services for investors by professional independent bodies without any rights to trade at the stock exchange with superior governance standards by allowing these institutions to provide independent services to increase investor protection, minimize conflict of interest and manage consumer assets. Under the new regime, all other brokers shall be required to move custody of customer assets to a professional clearing member, the BR research said.

According to sources, a company with professional clearing membership will be licensed by the SECP as a regular individual under the Securities Act, 2015. Once licensed, it will be a member of Central Depository Company of Pakistan Limited and National Clearing Company of Pakistan Limited to provide custody, clearance and settlement services to securities brokers who are not allowed to maintain custody of client assets.

It was further stated that under the Securities Act, 2015, in order to license a professional clearing member, it has to be informed by the Federal Government as a regular securities activity under section 63(i).

As per BR, the following notification was drafted for this purpose: “in the exercise of the powers conferred by clause (i) of section 63 of the Securities Act, 2015 all of 2015), the Federal Government is pleased to notify that the business activity by the professional clearing member, as defined in the regulation under the Act, shall be a regulated activity.”

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