Brokers boo new Bourse rules

By Dinali Goonewardene
A Securities and Exchange Commission directive enforcing a single tier settlement cycle for equity transactions and limiting the extent of credit brokers may give their clients has met with mixed reactions from the Colombo Brokers Association.

The directive requires buyers to make a settlement at Trade day + 3 and sellers to make a settlement at Trade day + 3 with effect from 10th December. Present rules enforce a T+3 settlement cycle for buyers and a T+4 settlement cycle for sellers leaving a day between when buyers pay their broker and the broker pays the seller.

“This will put pressure on brokers cash flow requirements. They will have to have adequate funds and go chasing collections,” CEO, HNB Stock Brokers and former Chairman of the Colombo Brokers Association, Deva Ellepola told The Bottom Line.

“On larger transactions the brokers would have to collect funds at the time of the transaction or prior to it in order to allow the transaction to be realized in the brokers account to enable the seller to be paid on T+ 3,” he said and pointed out that the cost of infrastructure, such as RTGS system, required to facilitate this was prohibitive.

“The market has to be brought in line with internationally accepted norms,” Director Surveillance and Research, the Securities and Exchange Commission of Sri Lanka, Chandu Epitawala said.

Another bone of contention has been the SEC directive to the Colombo Stock Exchange on Rule 25 (III) of member regulations limiting the client exposure of borrowings not to exceed 50 per cent of the clients paid portfolio. “Monitoring hazards would not allow us to track this with ease,” Mr Ellepola said.

The percentage of credit brokers may extend to their client changed to 50 per cent instead of 75 per cent allowed currently. The directive comes into force from 1 January 2008. “Fifty per cent is the practice the world over- almost all developed markets carry that standard,” Mr. Epitawala said. The Commission is committed to use Rule 25 of CSE and Net Capital formula to prevent excessive credit expansion to the market and possible credit fueled speculation not to mention the risk to individual brokerages. Such a stance, we believe is in the interest of all stakeholders in the marketplace, the SEC said in a statement.

“The shifting of the settlement cycle to T+3 and moving from a two tier settlement to a single tier settlement and the 50 per cent margin on lending were both directives from the SEC which we acted on and I believe the directives were given in the best interest of developing the capital market,” CSE Assistant General Manager, Business Development Rajeeva Bandaranaike said.

The SEC also imposed a directive relating to the capital requirement of member firms requiring each member to have a minimum net capital which would be determined by the Board of Directors of the Colombo Stock Exchange with the approval of the SEC. The current requirement is Rs.25 mn and has been increased to Rs. 35 mn.

Amendments rules in section 9 required that the net capital requirement for members trading on their own account offering margin lending facilities and securities borrowing and lending be determined by the Board of Director of the CSE with the approval of the SEC. “Regulation can have a positive impact if it is implemented after taking into account the practical impact of application in a small market like ours,” Mr Ellepola pointed out.