Wednesday, August 17, 2011

Brokers with liquid assets can lend: SEC

Small brokers compelled to improve net capital

The Securities and Exchange Commission (SEC) yet again changed its course yesterday by reviving the restrictions imposed on brokers providing credit to investors, stating that brokering firms who have liquid assets are permitted to extend margins to their clients.

Earlier, the market regulator wanted to completely curb brokers providing credit to investors due to fears of a possible market bubble stemming from high retail activity based on speculation.

The directive issued by the SEC yesterday said, the brokers can extend credit to investors over T+3 days if the brokering firm can maintain a leverage at zero level when liquid assets less obligations.

The SEC also asked to amend the relevant provisions of the Member Regulations of the Colombo Stock Exchange (CSE) to be consistent with the new directive.

As per the new directive, it’s mandatory for brokers to provide the SEC and CSE with reports confirming the positions of liquid assets less obligations according to its standings at the end of each month. The reports should be submitted within two market days after the end of each month.

The directive also noted that the decision was made by taking cognizance of the improving stability in the capital market together with the concerns expressed by the Colombo Stock Borkers Association and retail investors.

However, analysts pointed out, with the new directive, the brokering firms will have to beef up their net capital.

“It won’t be easy for the small brokers to beef up their net capital.  From time-to-time, small brokering companies will have to pump capital into their companies in order to lend to investors,” an analyst said.

It was in November last year that the SEC asked the brokers to end client exposure completely on December 31, 2010 and banned all stock broking firms from providing credit to customers and encouraged banks to provide margins.

The brokers lobbied against the decision and the regulator extended the deadline to the June 30, 2011 adding that by March 31 the brokers should reduce client exposures to 50 percent.But again in May, even before the set June deadline, the market regulator rewarded the brokers with another extension of the deadline on “improved market conditions”, saying that a “majority” of stock broking firms have cut exposure to debtors to 50 percent by March 31.

This extension, which was done due to “representations made by market participants” gave time to brokers to cut 25 percent of exposures to debtors— out of the balance 50 percent— on September 30 and the next 25 percent on December 31, 2011.

A SEC source said that these deadlines have not been revived or changed by the new directive and brokering firms are bound by them.

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