Brokerages by banks/DFIs: SBP modifies rules

KARACHI: The State Bank of Pakistan (SBP), while consolidating and modifying instructions regarding the establishment of subsidiaries/brokerage by banks and development financial institution (DFIs), directed banks or DFIs on Friday to appoint new chief operating officer (CEO) from outside their respective organisations.

Earlier, banks and DFIs were allowed to depute a bank employee for the brokerage house.

The central bank also allowed 50 percent internal board of directors for subsidiaries/brokerage businesses. In the circular issued in February, the central bank had asked to appoint 40 percent of the banks/DFIs and 50 percent of independent individuals.

The circular said: “The banks/DFIs are required to establish separate subsidiaries if they wish to undertake asset management or conduct brokerage business.” “However they may at their own discretion, establish other subsidiaries as admissible under the law.”

It said banks/DFIs desiring to establish any subsidiary shall obtain prior approval of the SBP and added that the subsidiary can either be a public limited company or a private limited company.

It said the board of directors of the subsidiary should be completely independent and different from the board of directors of the bank/DFI. The bank/DFI may nominate its employees on the board of directors of the subsidiary up to 50 percent of the total directors and the remaining directors nominated by the bank/DFI should be independent individuals, the SBP said.

The SBP said the bank/DFI will fulfill all the other legal and regulatory requirements needed for the establishment of proposed subsidiary. In case of banks, it should be ensured that the subsidiaries are established only for activities as are admissible under section 23 of the Banking Companies Ordinance, 1962, it added.

The banks/DFIs shall ensure that all the sale or support services performed by them or premises provided by them to the subsidiaries are on arms length and on commercial basis and appropriate fees are charged for these services. The bank/DFI will ensure that it is not assuming any sort of legal liability on behalf of its subsidiaries and its products. For this purpose, besides taking other necessary measures, the bank/DFI will also obtain professional legal opinion, it added.

Investment in equities: The central bank said: “The banks/DFIs shall obtain prior approval of SBP before increasing their investment in the equity of the subsidiary.”

The circular clarified that the per party exposure limit proposed by regulation R-1 of prudential regulations for corporate/commercial banking will be applicable on exposure to the subsidiary and any type of placement in the form of deposit, purchase of COI, certificates, units, etc. shall be considered part of the exposure of the bank/DFI.

Further, the exposure of the bank/DFI on mutual funds launched/administered by the subsidiary shall also be considered exposure on the subsidiary.

The circular said: “The non-bank finance companies set-up as subsidiaries will be regulated by the SECP.”

Additional regulations: Following additional regulations are announced for banks/DFIs intending to undertake brokerage business through subsidiaries:

— In case, the members of the board of directors of the bank/DFI and their family members or employees of the bank/DFI and their family members wish to conduct sale and purchase of shares or securities or any other trading through the subsidiary, they will disclose all the transactions conducted through the subsidiary to the bank/DFI by submitting periodical statements on regular basis. The format of such reports and their periodicity may be determined by the banks/DFIs themselves.”

— The subsidiary will not undertake, either on its own or on behalf of its clients, sale and purchase of the shares of the bank/DFI or securities issued by the bank/DFI.”

— While it is expected that banks/DFIs would have instituted effective checks and balances and internal controls in their dealing rooms, deals conducted through their subsidiary should be monitored more closely. It said all deals of the bank/DFI conducted through the subsidiary must be made from designated fixed telephone lines installed in the dealing room and connected to a voice recording system.

— The sale and purchase of shares and securities conducted through the subsidiary, in the first year of operations of the subsidiary, should not exceed 50 percent of the trading undertaken by the bank/DFI. In subsequent years, the trading through their own subsidiary should not exceed 25% of the total trading conducted by the bank/DFI. For the purpose of this regulation, the shares and securities will be valued at market rates.

— The bank/DFI will not provide any non-fund based facility to the subsidiary. However, fund based facilities and margin financing may be provided by the bank/DFI to its subsidiaries under the relevant regulations of SBP. —Staff Report

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