Business Times

SEC stands firm on non-credit rule in Jan.

By Duruthu Edirimuni Chandrasekera

The Securities and Exchange Commission (SEC) has turned down a request from stockbrokers for more time beyond January 2011 to extend credit to traders beyond the T+3 (trading day+ three market days) without a margin trading account.

“We granted them sufficient time to ready themselves for this as the directive on this was issued in September,” Malik Cader, Director General SEC told the Business Times, adding that the SEC has denied the requests from brokers to extend the time frame.

He said that the SEC wants the share market to be cash-based. “An investor must possess cash against which credit facilities or margin arrangements can be granted. Day traders (from next year) will need to sign a risk disclosure statement and open a day trading account with a margin assigned which will show the trader’s day trading purchasing power.”

Some analysis said that brokers are readying themselves for January, which is the main reason why the market has witnessed a decline since October.

“If you have cash why do you need credit? This is discriminatory against small players with limited cash resources. This is discouraging more people to participate in share trading,” Sarath Rajapakse, Director Capital Trust noted.

Mr. Cader pointed out that with a margin trading account anyone can trade. But Mr. Rajapakse noted that only big players with portfolios over Rs.1 million go to banks. "What about the small timers with modest portfolios who are not accommodated by margin providing banks? These are the small investors who were catered to by the brokers who provided them with margin facilities,” he added.

Mr. Cader noted that if someone is not credit worthy, then they cannot be provided with a margin. “If they go beyond capacity, they can sink,” he added. Analysts say that there was foreign selling from early October onwards, which was one major reason for the market to decline.

“Foreigners think the market is overvalued. The second reason is this margin issue where brokers have cut down their margins (which has caused the downward trend) and also the Initial Public Offerings that that have recently come up have also dried up liquidity in the market,” Dimantha Mathews, Head of Research Capital Alliance said.

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