The Securities and Exchange Commission of Pakistan (SECP) has decided to introduce the concept of electronic/online brokers in the stock market to provide investors with worldwide access to a variety of financial services.

According to a concept note on the “Online Only Brokers” issued by the SECP here on Monday, the new proposed category will offer different benefits. It includes increased investor outreach and financial inclusion; enhanced investor convenience as they can make perform activities such as account opening, investments, divestments and modifications without having to physically visit a brokerage office/branch and lower entry and overhead costs for new entrants.

The proposed licensing regime for Online-only Broker revealed that the applicants desirous of obtaining Online-only broker license shall comply with all the licensing, reporting and ongoing compliance requirements as applicable on Trading-only brokers under the Securities Brokers (Licensing and Operations) Regulations, 2016.

The online-only broker shall maintain a minimum Net worth of PKR 7.5 million. The issuance of TREC by PSX to Online-only broker at significantly reduced rates along with minimal documentation; The reduced license fee, reduced license renewal fee and reduced documentation requirements for obtaining license. The SECP may reduce its licensing fee for Online only broker to Rs50,000 instead of Rs100,000 and renewal fee to Rs25,000 instead of Rs50,000.

For brokers, technology can help to boost information flows and value-adding analytical capabilities on one side and take costs out of distribution and service on the other. Electronic/ online brokers are either: i. Extensions of existing brokers, who view the Internet as another channel through which they can provide their clients with access to a variety of services, or ii. Purely web-based, office-less brokerages that take advantage of low overhead costs. The explosive growth of electronic brokers has provided investors with worldwide access to a variety of financial services. This essentially borderless environment requires securities regulators to determine when and how their regulations will apply to these activities.

The SECP stated that the objective is to expand market outreach through introduction of concept of the ‘Online Only Broker’; reduce the risk of clearing and custody defaults and encourage new participants to start brokerage business at lower preliminary infrastructure and operational costs by using electronic means only. It would also allow existing brokers to switch to this new category to lower their overhead costs and use electronic means to focus on the core business of trading instead of clearing and settlement.

It would utilize the new broker regime, where Online Only brokers will focus on trading and customer onboarding like a Trading Only(TO) broker and use Professional Clearing Member(PCM) or Trading and Clearing(TC) brokers to perform clearing function and hold custody of securities.

Under the proposed Structure and Permissible Activities, the Online Only Broker shall mandatorily offer online account opening as per the online onboarding framework approved by the Securities and Exchange Commission of Pakistan.

The Online Only Broker shall operate as a sub-category of TO broker that by using online means can only execute trades on behalf of its customers and shall not be allowed to undertake proprietary trading.

The Online only broker shall not be eligible to settle executed trades or keep custody of securities or money owned by its customers. d) Limited custody model shall not be allowed.

Online Only Broker shall not deal in cash. Every dealing in cash shall be handled through PCM and the client segregation requirements shall not be applicable on the Online Brokers.

The license for Online-only broker shall only be granted to applicant who has entered into arrangement with a PCM or TC broker for clearing and settlement of trades.

The Online Only broker may also provide advisory services, subject to compliance with the Securities Adviser Licensing Regulations. All trading services shall be provided through online mode only and no trading terminal will be provided to customers in any office. It shall ensure that no physical place be made available for trading at any premises of Online Only Broker.

The Online Only broker shall not have any agent or branch for providing trading services. However, they shall be allowed to open customer/account facilitation centres as per PSX Regulations. Online only broker shall be allowed to trade in Ready, DFC and MTS markets only and its customers may avail financing extended by PCM only through MFS market in first phase. However, the Only Online broker shall not act as financier in MFS market, the SECP added.

This report was first published in Business Recorder on February 22, 2022.