KARACHI: The Securities and Exchange Commission of Pakistan (SECP) proposes to provide retail investors a facility to settle their trades directly through the Central Depository Company (CDC) or the National Clearing Company of Pakistan Limited (NCCPL), without involving brokers, SECP chairman Tahir Mahood told the press on Friday.

He said that the reform, Direct Settlement System (DSS), will be a paradigm shift from the existing setup wherein investors have to mandatorily use broker-controlled CDC sub-accounts for settlement purposes.

“The step is taken to protect investors where some brokers misappropriated client securities under their custody,” he said.

The conceptual idea behind development of Direct Settlement System is to extend to the local retail investor the facility currently available to foreigners who maintain their assets with custodian banks and brokers are only involved for trade execution. The regulatory framework has been approved for the DSS and the product is expected to be launched from June 2014.

Explaining the new product, SECP chief said that certain brokers have resorted to misuse of client assets under their custody to meet their liquidity demands.

As a result, subsequent to 2008 crisis, significant investors’ claims surfaced against some brokers on account of misappropriation of client securities under their custody.

To address this issue, the SECP has taken various measures which include introduction of client level margining regime, automated settlement system, abolishing general purpose/ blanket authorities to handle securities by brokers and imposition of restrictions on movement of securities in the CDC.

Tahir Mahmood asserted that despite all such measures, instances have come to light where brokers misappropriated clients’ securities and absconded.

In this regard, the SECP has introduced new product which offers more protection to client assets.

First of these products is the Direct Settlement Services (DSS) of CDC.

Currently the CDC sub-account is under the control of broker and there is no mechanism whereby investor can settle his/ her trades directly from the investor account.

This weakness has now been removed by introducing DSS. The product would 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.

Another initiative in this regard is the direct settlement services by the NCCPL where it would act as the custodian and clearing agent of the investor.

The investor will be able to hold securities and cash under custody of the NCCPL and settle trades executed at stock exchanges though the NCCPL without the need of maintaining sub-account or cash account with the brokers. This product is expected to be launched from July 2014 by the NCCPL.

SECP commissioner specialised companies’ division Imtiaz Haider, commissioner Insurance Asif Arif and commissioner securities market division Zafar Abdullah also spoke on reforms within the areas of their jurisdictions.