Transcript Initiatives for investor asset protection

Measures for
investor asset
protection
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7/16/2015
Measures taken to protect client assets
Initiatives for investor protection
Legal
mandate
Client level
margining
system
Timely
information
to clients
Automation
of
securities
settlement
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Restriction on free movement of securities
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In 2008 brokers were able to freely transfer the client
securities held under their custody in the Central
Depositary System (CDS) without any requirement for
reporting or submitting supporting documents
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This lead to misuse of client assets in the form of pledge
from sub-accounts in the favor of exchanges and banks
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Where the banks did not accept pledge from the subaccount of clients, the shares were transferred to the
house account and pledged thereon
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SECP Directive
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SECP issued a directive to CDC on September 9, 2008 in
order to restrict movements of listed securities in CDS
which were not supported by market transactions or did not
adhere to prescribed reporting requirements.
transactions on account of sale/ purchase of shares
were only allowed if carried out through exchanges, or,
in the case of off-market transactions, reported to
exchanges;
proper documentation was required to be submitted to
CDC in respect of lending and borrowing transactions
and transfers on account of gift between family
members.
These restrictions were subsequently incorporated in the
CDC Regulations
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LEGAL MANDATE
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As per the Central Depositories Company Act, 1997 (“CDC
Act”) a broker can only handle the client securities under
authorization from clients.
The authority required under the CDC Act was typically
obtained through the sub-account opening form which usually
contained a general purpose authority, authorizing the broker
to enter into all types of transactions, including pledge
transactions on behalf of the client.
In order to curtail the misuse of general purpose and blanket
authorities obtained by the brokers from their clients, a
standard sub-account opening form was prescribed through
the CDC Regulations in 2009
The new form abolished all blanket authorities and instead
provided a standard format for authority for handling of shares
in the CDS
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LEGAL MANDATE
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As per the standard format, authority is provided by the
client to broker only for specific purposes such as market
based transactions, off-market transactions, recovery of
dues, lending and borrowing, gift transactions and
pledges only in respect of transactions of such client
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In case of all other transfers or pledges, broker has to
obtain a specific authority and for cases where the
securities are worth more than Rs.500,000, such
authority must be obtained on non-judicial stamp paper
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LEGAL MANDATE
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Under the system operative in 2008, the shares
purchased by the clients were received by the
broker in a transitory account known as the Main
Account. These were then transferred by the
broker to the sub-account of the client
Similarly in the case of sale of shares, the shares
were transferred from the client’s sub-account to
the main account
Initiatives for investor protection
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CDC strucutre
House account
(beneficially owned
by broker)
Broker
Sub-account
(beneficially owned
by client)
CDS
CDC
Initiatives for investor protection
Main account
(transitory
account)
Investor Account
(beneficially owned
by investor)
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SETTLEMENT OF SECURITIES PRIOR TO
AUOTMATION
NCCPL
[shares purchased/ sold]
Main
Account
House Account
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Sub-Account
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AUTOMATION OF SECURITIES
SETTLEMENT
 In order to address situations where a broker did
not transfer shares purchased by a client to
relevant sub-account from the main account,
manual handling of shares in respect of market
sale/ purchase transactions was removed in 2010.
 A system of automated settlement was introduced.
Shares are now transferred directly to/ from the
sub-account of a client by NCCPL, pursuant to a
transaction executed on stock exchange or an offmarket transaction
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SETTLEMENT OF SECURITIES POST AUOTMATION
House Account
Clearing
Company
Sub Account
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CLIENT L LEVEL MARGINING SYSTEM
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As noted above, some brokers used to pledge
securities owned by clients to cover margin
requirements in respect of trades of brokers or
other clients.
a client level margining regime was introduced in
2009 and the risk management system of stock
exchanges was upgraded.
System now calculates the margin requirement of
each UIN under broker’s umbrella.
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Pledge from a sub-account will only be accepted
to the extent of margins applicable on trading
exposure of the client
Broker therefore cannot pledge securities of a
client against margin requirements of other
investors or its proprietary trades
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TIMELY INFORMATION TO
CLIENTS
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Investors need to be provided accurate and
authentic information of their portfolios on a timely
basis so that any misuse can be immediately
reported
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MEASURES FOR PROVIDING INFOMRATION TO INVESTORS
IVR
CDC [CDC access]
SMS
email
NCCPL
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UIS
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CDC access
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Interactive Voice Response System (IVR) which
enables a client to obtain information regarding his
securities through telephone call
SMS service which provides intimation to an
investor in case of any transaction in its securities
held in the CDS
Web service is also provided which allows
investors to view their account information through
the internet
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CDC access
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CDC access services were launched in 2010 and
were optional
Broker was responsible to provide client details
such as mobile number, email to the CDC if the
client opted for CDC access
After complaints that broker deliberately persuade
clients to opt out of this services, now it has been
made mandatory.
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UIN Information System (UIS)
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This system was launched in 2009.
Investors are provided user IDs and passwords
directly by NCCPL
Investors can log on to the website of NCCPL and
get information regarding their trades.
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Protection of investors-new products
Direct Settlement Service by CDC
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To prevent unauthorized use of clients’ securities by broker
participants in the Central Depository System (CDS), Direct
Settlement Service (DSS) mechanism has been introduced whereby
investor accountholders may obtain direct settlement facility through
the CDC in addition to custody service.
Investor accountholders willing to avail DSS will execute their trades
through their respective brokers and will provide settlement
instructions in respect of such trades to CDC through a web portal.
DSS will also bring increased efficiency and transparency to the
clearing and settlement process by eliminating the need for the
investor to open a sub-account with a broker and this will also
reinforce SECP’s initiative in respect of segregation of trading and
clearing brokers. Regulatory framework for DSS has been already
improved and the commercial launch of the product will be made
shortly.
Presentation Name/ Company Name:
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Protection of investors-new products
National Custodial Services - NCCPL:
 In order to promote secure alternatives to investors for safe
guarding their assets, National Custodial Service (NCS) are
being offered by National Clearing Company of Pakistan
Limited (NCCPL).
 Under NCS, the NCCPL will offer investors an opportunity of
centralized clearing, settlement and custodial services without
the involvement of brokers as these functions are currently
being performed by the broker clearing members (BCM).
 The introduction of NCS will minimize the chances of misuse
of investor’s assets by the brokers. Regulatory framework for
DSS has been already improved and the commercial launch
of the product will be made shortly.
Presentation Name/ Company Name:
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Protection of investors-new products
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Asset under Custody (AuC) Regime - CDC
Regulatory framework has been approved for the CDC to
introduce Asset under Custody (AuC) regime for curtailing the
unlimited custody of investors’ assets with the broker. This
need has been felt considering the threat and uncertainty
faced by an investor in an event of default by the broker.
Under the said regime, a broker shall be allowed to keep
client assets up to 25 times of its Capital Adequacy Level.
Non-compliance with the said regime will result in disciplinary
proceedings against the said broker which may lead to
restriction and suspension. This is a significant advancement
towards the protection of an investor that will enhance the
investors’ confidence in the capital market operations.
Presentation Name/ Company Name:
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Restriction on Negotiated Deals Market
(NDM)
 In order to curtail misuse of NDM and to protect
securities of clients from misappropriation, SECP
issued a directive in April 2014 to restrict all NDM
transaction from sub-account of clients to the
House Account of brokers or transactions between
sub-accounts under the control of brokers.
Presentation Name/ Company Name: