Monday, January 16, 2012

Credit Boom

The SEC further relaxes stock broker credit extension – additional credit available will increase by Rs. 5 billion resulting in total credit available in the market to Rs. 8.7 billion

At the Commission meeting held on 16th January 2012, the Securities and Exchange Commission of Sri Lanka (SEC) decided to permit Stock Broking Firms to leverage 3 times adjusted Net Capital with immediate effect. “Adjusted Net Capital” is the Net Capital computed as per the Colombo Stock Exchange (CSE) Member Regulations less 50% of Fixed Assets. In line with other regional markets, 50% was deducted to take into account the concerns of realizing illiquid assets into cash.

By permitting the Stock Broking Firms to leverage 3 times adjusted Net Capital, the additional credit available in the market will increase by Rs 5 billion resulting in the total credit available among Stock Broking Firms to Rs 8.7 billion.

Having considered the dimensions of credit extension and to establish a balance between the two principals of lending norms and risk management the SEC reviewed the Credit Extension by Stock Broker Firms.

As a Capital Market Regulator, it is a core function of the SEC to ensure that capital and other prudential requirements are sufficient to address the level of risk taking by the Stock Broking Firms in extending credit with adequacy in the financial strength, disclosures, systems and governance processes which should be monitored on a regular basis in order to prevent any systemic risk to the Capital Market.

At present the Stock Broking Companies are permitted to extend credit based on the Liquid Assets of the company less obligations.

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