CSE News Updates

By Ravishanka Withanachchi

Although Sri Lanka’s brokering community last week commended the move by the capital markets regulator, the Securities and Exchange Commission (SEC) on relaxing rules relating to the extension of brokerage credit to investors, they opine that market volatility is likely to still continue as some ten brokers fail in the new criteria imposed by the SEC. According to a top market source, if the SEC instead of linking the extension of credit with liquid assets had linked it to net assets, the Bourse would have been further boosted.
“I’ve heard that the new rules don’t help around 10 brokers of the 28 member strong community. Therefore, this means the respective brokers will have to boost capital through liquid instruments in order to lend to clients,” Head of Research at Asha Phillips Securities Ltd, Pasindu Perera told The Bottom Line.
He said that therefore these firms may be compelled to infuse fresh capital which would also be a little difficult situation at this point of time.
“However, it is also a good thing in a way as it will encourage most broking firms to opt for greater recapitalisation which in turn will improve their overall strength,” he opined.
Managing Director, JB Securities, Murtaza Jafferjee also voicing his opinion on the subject said that this directive seems to be more onerous on the firms as any unsettled debt beyond T+3 days now should be deducted from the liquid assets where as previously any unsettled debt beyond T+5 days should be deducted from the net capital of the brokering company.
“Deduction of any unsettled debt from the liquid asset base would pose a greater problem for the running of day-to-day functions of the firm where as if the deduction is to be made from the net capital the liquid asset base could be maintained,” he highlighted.
However, Director of Capital Trust Securities, Sarath Rajapaksa said that linking of brokerage credit to the availability of liquid assets is the right way forward since if it is based on Net Assets, it will lead to over lending leading to a liquidity crisis among broker firms.

Also supporting the claim was Prashan Fernando, Chief Operating Officer (COO) of Acuity Stock brokers (Pvt) Ltd who said that, “Lending to the investors based on net capital of the brokering company would lead to a speculative driven market as the ability to lend by a stock brokering firm is not restricted so there is a risk that a bubble can be created due to an excess liquidity in the market. However, lending based on liquid assets would avoid that situation as the ability of extending credits by an investor brokering company is at least restricted to the availability of liquid assets”.
SEC, which held a special commission meeting last week, reviewed the restriction imposed on Stock Brokers in extending credit to investors and decided to relax the said restriction subject to certain prudential requirements being met by the Licensed Stock Brokers, in order to facilitate retail investors to have access to credit by such Licensed Stock Brokers.