Stock broking industry profits declined in 2012: SEC
View(s):Turnover and profitability of the entire stock broking industry declined whilst market indices slumped and trading volumes dropped in the Colombo Stock Exchange (CSE) last year, according to the Securities and Exchange Commission (SEC) 2012 annual report.
“Against this backdrop, credit extension rules imposed on stock broking companies were in the limelight and were reviewed at length,” it said. The stock broking companies constantly voiced their requirement for ease in restrictions on credit extension, to the SEC, the report said, noting that the SEC convened several consultative meetings with the officials of stock broking companies to discuss issues pertinent to existing credit extension rules.
“Consequently, in October 2012 the SEC relaxed the credit extension restrictions to a great extent with less stringent guidelines on Net Capital computation.”
Accordingly the Net Capital computation would reflect the deduction of the difference between the cost and market value of unsettled purchase transactions in the event the current market value is less than the purchase price. Further, the SEC repealed all previous directives on credit extension except for the directive issued in January 2012 which permits all licensed stock broking companies to extend credit up to three times of “Adjusted Net Capital”.
However minimum reporting and recording requirements were imposed on stock broking companies to enable the regulator to have a close watch on credit risk exposure, the report said, adding that a fortnightly debtor information reporting framework was introduced to strengthen the off-site supervision of credit risk exposure.
During the final quarter of 2012, the SEC initiated the implementation of a Risk Management System (RMS) and Common Broker Back Office System, to the stock broking industry. The regulatory oversight and the risk management framework of the entire industry are expected to be fortified by the above initiatives.
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