KARACHI, Jan 28: The State Bank has issued a modified set of guidelines for banks and development finance institutions keen to set up brokerage houses.
According to these guidelines, the banks and DFIs intending to set up brokerage houses or undertake asset management will have to establish separate subsidiaries for this purpose with the prior approval of the State Bank.
A circular issued by the central bank to all banks and DFIs on Friday says 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 50pc of the total directors, and the remaining directors nominated by the bank/DFI should be independent individuals.
In order to allow the subsidiary to take benefit of the brand name, the brand name of the bank/DFI is allowed to be used in the name of subsidiary. However, it shall be ensured that the word 'Bank' is not used in the name of the subsidiary.
Before commencement of business by the subsidiary, the bank/DFI will prepare written procedures for creating/building firewalls between the bank/DFI and the subsidiary. It will be ensured that the relationship is not used to access the confidential information of the customers/clients of the bank/DFI.
The bank/DFI may provide services like human resource management, administration, accounting, information technology and other secretarial and general services for the subsidiary and share costs of overheads and fixed assets on predetermined terms and conditions.
The banks/DFIs shall ensure that all the sale or support services performed by them or premises provided by them to the subsidiaries are at arms length and on commercial basis. The bank/DFI will ensure that it is not assuming any sort of legal liability on behalf of its subsidiaries and its products.
The bank/DFI may utilize their distribution channels for selling the products of the subsidiary. However, for this purpose, the bank/DFI will execute written agreement with the subsidiary.
The bank/DFI will take appropriate measures to disclose to the buyers of such products that they are buying the products of the subsidiary and not that of the bank/DFI and the bank/DFI is not guaranteeing or undertaking the repayment of any sort.
The banks/DFIs should also ensure that the products offered by the subsidiary and distributed/sold by them do not resemble the products of the bank/DFI. The Banks/DFIs shall take measures to ensure that the Bank/DFI is not exposed to risks, especially reputation and legal risks, on account of its subsidiary. For this purpose, it should be ensured that:
The transactions with the subsidiary should be conducted at arms length basis and appropriate fees should be charged for the services rendered by the Bank/DFI in this respect.
The Bank/DFI should avoid involvement in day-to-day operations of the subsidiary. Steps should be taken to make the customers/clients of the subsidiary aware that the subsidiary is an independent organization and it should not be construed as a part of the bank/DFI.
The Chief Executive and other employees of the subsidiary shall not be in the employment of the Bank/DFI. A regularization period of six months i.e. up to 30th June 2005 is allowed in case of subsidiaries already established by the banks for undertaking brokerage business.
The banks/DFIs shall obtain the SBP's approval before increasing their investment in the equity of the subsidiary. The per party exposure limit 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 Non-Bank Finance Companies set up as subsidiaries will be regulated by the SECP. Banks/DFIs intending to undertake brokerage business through subsidiaries will also observe the following additional rules:
a) 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.
b) 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.
c) 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.
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.
All trades of the bank/DFI executed through the subsidiary during the day, for which contracts and bills are received, must be matched with recorded conversations as well as all verbal orders given during the day, that have been taped, must be backed by contracts/bills at the end of the day to ensure that all deals have been properly taken into account.
d) The sale and purchase of shares and securities conducted through the subsidiary, in the first year of operations of the subsidiary, should not exceed 50pc of the trading undertaken by the bank/DFI. In subsequent years, the trading through their own subsidiary should not exceed 25pc of the total trading conducted by the bank/DFI.
e) 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.