Two stockbrokers under fire for breaching CAR

Two stockbrokers are under fire for having failed to fulfil the newly introduced risk-based capital requirements by the Colombo Stock Exchange (CSE), even after an extended timeline was given to them, market sources said.

As a result, their share buying operations have been curtailed. In March, three stockbrokers were shown the ' red light' to comply with the stipulated requirement by a month and only one had complied, leaving these two to comply, the sources added.

The purchasing operations of these two stockbrokers have been suspended until they bridge the gap in their capital adequacy levels, they said noting that it will be difficult for them to sustain their operations. "They are in a tough situation," a source told the Business Times.

The Securities and Exchange Commission's (SEC) new rules in capital adequacy direct the implementation of a risk based Capital Adequacy Requirement (CAR) of 1.2 times the risk requirement of stockbrokers subject to a minimum liquid capital requirement of Rs. 35 million.

The earlier rules on minimum Net Capital applicable to stockbrokers firms do not address the different risks these firms are exposed to, the SEC says, adding that due the foregoing limitations of the then rules and in keeping with international standards, a dire need to establish stock brokers a risk-based capital adequacy requirement was felt. According to them, CAR is to ensure that stock brokering firms are strong enough to withstand any shocks and ensure a sound capital market.

The International Organisation of Securities Commissions ( IOSCO), which is the global standard setter for the securities sector sets out Principles of securities regulation, in its regulatory Principle 30 states that "There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake."

Having considered the capitalisation of stockbrokers firms, their current activities and CAR regimes implemented in regional markets, the CSE together with the SEC developed the methodology for the rules, the SEC has said.

The CAR requirement will meet IOSCO Principle 30 by defining and enabling the monitoring of risk on a daily basis and linking the capital required to be maintained to address risk. Furthermore, the implementation of CAR will enable the SEC and the CSE to set up trigger points and prompt brokers to proactively monitor and manage their CAR before it breaches the minimum threshold. CAR will also aid in the development a risk based supervision framework.

three stockbrokers were shown the 'red light' to comply with the stipulated requirement by a month and only one had complied, leaving these two to comply, the sources added.