CSE to give brokers time before implementing capital adequacy rules
The Colombo Stock Exchange (CSE) will give time for stockbroker firms to get their accounts in order before implementing the Risk-based Capital Adequacy (RBC) Requirement that would ensure that stockbrokers retain an appropriate level of liquid capital in relation to the total risks faced by them when trading in securities, a CSE official said. ”We plan to give them about two months to get their balance sheets and rectify certain gaps the CSE has pointed out,” an official told the Business Times. He said the requirement would replace the minimum Net Capital requirement of Rs. 35 million, which is currently applicable to stockbroker firms.
Other sources said the new RBC rule would be more than a Rs. 35 million capital requirement. The Net Capital is derived by deducting items which are not immediately realizable from shareholder funds of the stockbroker firm, as set out in the CSE Stockbroker Rules. Now the minimum Net Capital requirement is fixed for all 29 stockbrokers regardless of the risk undertaken by each firm. This Rs. 35 million does not provide sufficient weightage to different types of risks that a stockbroker would be exposed to, such as the risk exposure arising from trading activities and their operation. The Business Times reported this on February 7.
Meanwhile, all broking houses are gearing up for RBC. In three months the Colombo stockbrokers are set to have their systems, especially their back offices integrated and hi-tech making it seamless for them to transact, a broker told the Business Times. ”The RBC requirement compares the risks of stockbroker firms, arising from the transactions and operations carried out, with the amount of Liquid Capital that they maintain on an on-going basis. The methodology would identify the amount of liquid capital that they would maintain as opposed to various types of risks the stockbrokers are exposed to. There are four types of such risk factors that have been identified by the CSE when developing the risk and the ‘position risk’,” a CSE release explained.
The RBC requirement, measured in the form of a ratio is called the “Capital Adequacy Ratio” (CAR). The minimum CAR ratio that has been recommended by the International Organisation of Securities Commissions and practised by most of the developed stock exchanges in the region is 1:2 (assets to liabilities). The CSE, taking into consideration the best practices adopted by these markets and upon an analysis of the trading patterns and the operational capabilities of the stockbroker firms operating in the Sri Lankan market, has also recommended a minimum CAR ratio of 1:2 to be applicable to stockbrokers,” the release added. ”Taking into consideration the limitations of the reporting requirements of the present Net Capital requirement, all stockbroker firms will be required to compute and report their respective CAR Ratios to CSE and SEC on a daily basis.”