With growing displeasure from many stockbrokers over the recent credit rule relaxations not meeting their expectations, the Securities and Exchange Commission (SEC) says that as a responsible regulator, it will only ease those regulations which are best for the market.
“We can only give what we can. As a responsible regulator, this (what was relaxed) is the best we can do. Other jurisdictions are much more stringent and strict with their regulations,” a regulatory source told the Business Times.
The SEC allowed stock broking firms to lend to their clients based on the computation of Liquid Assets minus their Obligations, retaining leverage at zero percent last week after representations Colombo Stock Brokers Association
Stockbrokers lamented that SEC didn’t relax the credit rules as they had expected. "We wanted something completely different. What we got is not what we wanted. Also the SEC has limited us in certain ways. Earlier the norm was that if a large client had not paid, the brokers can borrow that shortfall from related party firms or/and financial institutions in order to settle the Central Depositing System. But with the recent relaxations, the SEC has said that we need to reduce these borrowings from the stockbroking company's liquid capital computation.
Also the banks can leverage up to 10 times and we only requested for one time which they couldn't agree to," a broker told the Business Times. The regulatory source insisted that this is bad practice. “They own only Rs 35 million capital. It's a joke if they want to lend billions,” he added.
The day of the announcement of the relaxation by the SEC, the retailers went into overdrive with the Colombo Stock Exchange (CSE) indices posting gains while market’s turnover was at Rs. 3.76 billion. But some analysts said that the market has lost all the gains made on August 16 when this relaxation of the broker margin credit provision restrictions was made.
Calling the as repressive regulations an analyst said that it looks as if the easing of rules affecting margin provision is not at all sufficient to repair the long lasting damage caused to the psyche as well as the pockets of the market participants.
He said retailers with share portfolios of less than Rs.1 million who were unable to obtain margin trading facilities have been forced to sell their stocks. Another analyst said that these two weeks had seen only 'pure' traders. "It’s buy today, sell tomorrow people and no long term investors," he added.
Last week, the SEC directive said that licensed stock brokers should reconcile daily positions taken against their liquid assets and that they need to submit on a monthly basis a declaration to the SEC and CSE confirming the position of liquid assets minus their obligations as it stands at the end of each month. Many analysts noted that now many brokering houses prefer to give credit to high networth clients and not many retailers.
In May the SEC extended the timeline to clear credit given by brokers to customers till the end of the year, with 25% of remaining credit to be cleared by September 30.
Dhanushka Samarasinghe, Director TKS Securities said that the SEC rules ensure that broking houses don't go into cash flow crisis. “It was a good move,” he said. According to analysts, with the new credit rules introduced last year, the estimated outstanding credit within broking industry had declined to Rs. 2 billion from Rs. 8 billion.