Thursday, November 1, 2012

Brokers’ association lauds SEC

The Colombo Stock Brokers’ Association (CSBA), perceived to be extremely critical of the Securities and Exchange Commission (SEC) under the leadership of Ms. Indrani Sugathadasa and Thilak Karunaratne, who both resigned under tremendous pressure for trying to clean up the country’s capital market, has commended the latest moves by the regulator, which is now headed by Dr. Nalaka Godahewa.

"The CSBA welcomed the change made by the SEC in the formula of computing credit and pledged to promote the country’s capital markets to local and international Investors, in a bid to give much-needed boost for the Colombo Stock Exchange (CSE) through a collective effort to regain investor confidence," the association said in a statement, a late response to recent regulatory changes which raised serious concerns amongst those pushing for a cleaner, fairer market.

Earlier this year, four broker firms had broken away from the association and defended the former SEC leadership’s regulatory stance, which has since been reversed.

"We wish to place on record that the new SEC Chairman and commission members reviewed our requests within a very reasonable time and were quick to understand and implement some of the urgent needs of the moment e.g. computation of net capital. We specially appreciate the timely action taken by the Chairman and the commission members since on many occasions we brought this anomaly to the attention of the authorities to which there was no tangible response," the CSBA said.

"According to CSBA, the net capital calculation formula resulted in continuous selling which kept the market depressed and inhibited the attraction of retail players to the market.

"In our view retail players are vital to create a sustainable market and our suggestion was well received the Chairman and commission members. We equally appreciate some of the changes made that were not part of our requests. As an association we fully endorse the view that recent changes will go a long way to rekindle the market in the short run and create liquidity in the long run and thereby sustain a vibrant market in the future

"However one should not expect miracles overnight since the positive market sentiment was destroyed for more than a year which drove the retailers away from our stock market, he added.

"Whilst on one hand the SEC had made the appropriate changes, it has introduced strict reporting guidelines to be implemented by the Stock Broking companies. As an association the CSBA we welcome these checks and balances that are necessary for the operation of a fair and transparent stock market."

"It must be noted that buying shares on credit was brought to the market over a decade ago. Prior to 14 September 2010, brokers were allowed by the regulator to lend up to 10 times of a broker’s net capital. But post war when markets reacted positively the benchmark - All Share Index (ASI) reached 7,000 levels at which point the brokering community by themselves requested the regulator to limit credit to three times the net capital, in order to restrain systematic risk. This was a move rightly done at the right time to limit counterparty risk to a lesser level from where it was, they claimed.

"However as it would have not eliminated the risk totally, as a further step the regulator introduced a haircut rule on debtors of brokers instead of the then used Mark to Market (Fair Value) Rule for the calculation of the net capital or liquidity ratio of broking firms.

"With the market (ASPI) drastically dropping below 5,000 levels brokers were confident that the haircut rule would be replaced with the mark to market rule.

"Nevertheless we did not request for the number of times of credit that a broker could extend to clients be reinstated to former levels as members felt that it was necessary to keep the counterparty risk under control until such time a proper Risk Management System was in place.

"The majority view of the CSBA was that it may have been much more beneficial and desirable to investors if the measure was taken when the ASI was around 5,000 levels as the investors would have had the chance to utilize credit facilities at much lower market price levels.

"Furthermore, CSBA also called for the amendment of the Staff Trading Rule.

"As per the previous rule, staff of broker firms were entitled to trade under their names and those of their family members subject to all orders being placed under a designated adviser and the same being approved by the Compliance Officer and / or CEO of the firm. This practice undoubtedly was fully transparent. Furthermore, all staff trades were reported to the SEC and CSE so as to monitor/control any irregularity that may arise."

"However several months ago this sound and accepted practice was suspended due to certain transactions taking place.

"The majority view of the industry was to allow staff to deal under their names and that of their family members which is more transparent. If anyone was found violating action could have been taken against them as per the rules of the stock exchange.

"So in this regard we the CSBA is much appreciative of the initiative taken by The Chairman of the Securities and Exchange Commission (SEC) of Sri Lanka, other Commission Members and to the Management of the SEC to reinstate the former formula of calculating of debtors of stock brokers and allow staff trading to take place in a transparent manner.

"The above was a result of deliberations with members of the CSBA & the present Chairman of the SEC who swiftly responded to remove an anomaly which prevailed in the market.

"We also wish to state in addition to the individual efforts taken by stock brokering companies to develop the industry, the CSBA is in the process of working jointly with the SEC and the CSE on developing the capital market and broker infrastructure. We are also committed to educating investors and promoting the Colombo Stock Exchange among both local as well as international investors.

"The CSBA has been in existence since 1995 and its members have played an active role in the overall best interest of developing the Colombo Stock Exchange (CSE)."

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