Net capital balance statements: Brokers directed to submit explanatory notes

PSX ‘switched off’ trading terminals of one brokerage house for violating NCB rules

KARACHI: The Pakistan Stock Exchange (PSX) has directed stock brokers not to submit their statements of net capital balance (NCB) without the required explanatory notes.

In a letter to stock brokers on March 22, PSX Chief Regulatory Officer Shafqat Ali said most brokers submit NCB statements without explanatory notes, which makes it difficult for the exchange to evaluate them.

The NCB position of a broker helps determine its maximum leverage limit in order to minimise market risks. PSX rules prescribe that the maximum exposure in the ready market of a broker must not exceed 25 times of its NCB.

According to the Securities and Exchange Rules 1971, a member of the stock exchange must maintain at all times a net capital balance of Rs2.5 million in case the stock exchange had a turnover of securities exceeding 15 billion in the preceding calendar year.

Under the PSX regulations, all brokers must submit bi-annually a certificate from its last statutory auditor confirming their NCB on a prescribed format. “It has been observed that most of the submitted NCBs are without explanatory notes to the statements, which are helpful for the exchange in evaluating/reviewing the figures of NCB statements,” Ali said.

He directed the brokers to obtain explanatory notes from their statutory auditors on the latest submitted NCB statements and provide the PSX with it by March 25.

Last week, the PSX “switched off” the trading terminals of Quality Islamic Investments and Securities, a brokerage house, for violating the NCB rules. The NCB of Quality Islamic Investments and Securities was lower than Rs2.5 million as on December 31, 2015, according to the PSX.

Moreover, its NCB statement on March 14 was submitted without an auditor’s certificate, which is “not acceptable” under the prevailing regulatory framework.

“The trading terminals of the brokerage house shall remain switched off until the revised audited NCB along with valid reasons for violation of the SECP rule is received by the exchange,” said last week’s suspension notice of Quality Islamic Investments and Securities.

Published in The Express Tribune, March 24^th, 2016.

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