‘Know your client’

An improved client disclosure mechanism and automation of the CDC will be introduced.

KARACHI: An improved client disclosure mechanism and automation of the Central Depository Company (CDC) will be introduced in a bid to protect investors and revive interest in the equity markets. This was decided during a meeting between Securities and Exchange Commission of Pakistan (SECP) Chairman Salman Shaikh and member-directors of the Karachi Stock Exchange (KSE) here on Monday.

The long-awaited margin trading system and selection of the KSE’s chairman from broker or non-broker directors of the exchange also came into discussion during the meeting. Besides five member-directors of the exchange, market stalwarts Aqeel Karim Dhedhi and Arif Habib also took part in the deliberations.

“Measures to strengthen investor protection and revive confidence, which include an improved know-your-client regime and implementation of automation of securities project at the CDC” will be implemented at all the three local bourses, according to a press release issued by the SECP after the meeting.

Experts explained that the automation of securities will enable investors to follow their portfolios through the CDC. “An update regarding any trade executed on behalf of an investor will be sent directly to his or her cell phone by the CDC, minimising the risk of brokers executing trades without permission,” commented a market observer.

The chief of the regulating body stressed the need for an adequate capital base for brokers and a robust compliance and inspection regime. This, he added, was aimed at revamping the areas of capital adequacy, code of conduct, credit rating and consolidation of brokers.

Deliberations were also held on certain aspects of the margin trading product recently approved by the commission. According to the official notification, it was agreed that during the course of developing the product’s regulatory framework, due consideration will be given to the operational and business aspects to avoid any inconsistencies.

Furthermore, various proposals for the development of capital markets also came under review during the meeting. KSE stakeholders assured the apex regulator of their support in introducing reforms for the demutualisation of stock exchanges.

The SECP had earlier fixed December 2009 as the deadline for all brokerage houses to obtain vital information, including official identity cards, from their clients and update it with the CDC.

However, these measures have not been fully implemented, said Hammad Aslam, Vice President of BMA Capital. “The know-your-client regime will improve transparency by forcing brokers to carry adequate information about those trading equities through them,” he said.

“More stringent capital adequacy requirements may even force smaller brokerage houses to merge,” he pointed out.

Published in The Express Tribune, September 21^st, 2010.