June 19, 2011 (LBO) - Sri Lanka's stock brokers should be allowed to give margin accounts to clients (credit) based on their capital but they should have better risk management and monitoring systems, market participants said.
Sri Lanka's Securities and Exchange Commission stopped broker credit last year amid speculative bubble-like trading and fears of defaults which may cause a broker to go under or the overall market collapse from a higher peak.
Brokers have been given time till the end of the year to clear credit accounts. They have been given the nod to operate margin accounts through a separately capitalized legal entity.
But brokers say transferring securities to separate accounts was cumbersome, costly and was not business friendly to their customers.
Beyond Plain Vanilla
SEC's surveillance director Chandu Epitawala said the decision to separate margin accounts were made as the regulator determined that lending was not a core function of a broker.
But Murtaza Jafferjee, head of JB Securities said lending to clients was a legitimate revenue opportunity for broking firms.
He said Sri Lanka's fees were narrowing and brokers had create business by moving to new areas.
Arittha Wickremanayake, a former director general of Sri Lanka's securities and exchange commission agrees.
"Small broking firms give plain vanilla services," Wickremanayake said. "Larger brokers push for more activity with higher levels of capital."
He said the regulator should look at a model where margin accounts were allowed based on their liquid capital using a risk weighted model tied to capital.
Tushan Wickremasinghe, head of Capital Trust Securities said brokers should at least be allowed to advance money to clients at least to the amount of their capital.
He said broking firms were required to have capital of only 35 million rupees, but some had excess capital of several hundred millions.
"This belongs to the shareholders of the company," he said. "They can take that money out and do anything they like, so why not give credit to the market. Brokers should be allowed to give credit at least without leveraging."
He says small investors were the clients who most needed money.
Margin regulation
Devanesan Evanson, a former market supervision officer of the Malaysian Stock Exchange said brokers were allowed to advance credit to customers provided there was 150 percent collateral, meaning that the leverage was less than one.
If collateral fell below 130 percent, (maintenance margin) a call had to be made to the customer to top it up or force sell securities to meet the shortfall. Brokers also had to furnish daily returns to the exchange and track client accounts electronically.
In the United States brokers give either cash accounts or margin accounts. Margins are only 50 percent in the US meaning that the initial deposit could be leveraged once.
However the maintenance margin can fall to 25 percent. In the US equity margin accounts are governed by the Federal Reserve's so called 'regulation T'.
The Fed put limits on margin trading after it fired a massive economic and stock bubble in the 1920s which collapsed and triggered the great depression.
SEC director general Malik Cader said they were examining the issue, but broking firms and the Colombo Stock Exchange had to have software and a risk management system prevent over-trading.
The SEC had twice extended its deadline for clearing broker credit, creating some unhappiness among brokers and customers who had complied with the first deadline.
Market participants also warned that broker net capital had to be raised as trading volumes were not high and the one-size-fits-all 35 million rupee capital no longer made sense.
Some of the capital was also not liquid but tied up in land, fixed assets and even intangible assets, they said.
source - www.lbo.lk
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