Tarin to launch Pakistan’s first third party clearing service provider for PSX

Regulatory change to bring Pakistan's capital markets at par with int'l standards, address chronic issue of misappropriation of customer assets

ISLAMABAD: Finance Minister Shaukat Tarin will soon officially launch Pakistan’s first Professional Clearing Member (PCM) e-Clear services, an entity set up by the Central Depository Company (CDC) under the Securities & Exchange Commission of Pakistan’s (SECP) new broker regime.

Globally called the General Clearing Member (GCM), PCM is an international practice of third party clearing service providers for clearing of principal transactions and client transactions on behalf of its clients. The procedure entails that clearing and custodial services are provided to trading members of the exchange by an entity that is normally not a trading member of the exchange itself.

According to officials privy to the matter, the launch is a major milestone in the country’s stock market that will result in leveling the playing field, promote transparent corporate structures, enhance confidence of investors, and ensure organised development of the market.

It may be mentioned here that SECP introduced the new broker regime under the Securities Brokers (Licensing & Operations) Regulations in 2020, categorising securities brokers into three categories namely trading and clearing, trading and self clearing, and trading only.

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One of the major requirements for the implementation of the new broker regime was the introduction of an independent third party custodial, clearing and settlement service provider for the clearing and settlement of trades executed by trading only brokers.

The effort is towards bringing Pakistan’s capital markets at par with international standards and addressing the chronic issue of misappropriation of customer assets.

As per details, around 25 trading only brokers have signed up for the services of the new PCM whereas by December, the SECP’s new brokers regime will be completely implemented and all trading only brokers will start using the services of PCM by shifting their clearing, settlement and custody functions to PCM.

Prior to the implementation of this regime in Pakistan, all brokerage houses retained custody of investor assets and were subject to the same compliance requirements regardless of their size or capacity. This made it difficult for many small brokers to fully comply with the law and ensure adequate investor protection.

Under the new regime, brokers who are unable to meet financial reporting requirements, and fail to develop a sound compliance system to meet AML/CFT guidelines will not be allowed to have custody of investors’ assets.

Industry experts said that this introduction of a stringent but advanced regulatory framework for brokerage houses is not only an essential step towards bringing Pakistan’s capital markets at par with the international platforms, but that it is equally relevant to ensure maximum compliance with the AML/CFT requirements.

They labelled SECP’s efforts on this new regulatory framework as a timely step in the right direction. PCM will aid in enhancing the country’s compliance with the FATF regime and also facilitate investor protection, capital market outreach and strengthening of the brokerage industry through enhanced financial viability of brokerage houses.

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Ghulam Abbas
The writer is a member of the staff at the Islamabad Bureau. He can be reached at [email protected]

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