The Commissioners at their 306th meeting yesterday decided to make extension of credit by brokers to their clients easier as well as for a freer flow of trading activities lift some of the temporary restrictions placed earlier.
Prior to yesterday’s Commissioners’ meeting, the SEC also had discussions with the Colombo Stock Exchange Chairman and CEO last week.
As per the statement issued by the SEC the key decision made to be effective from today was to amend the Net Capital computation in order to relax the credit granted by stock broking companies to their clients. In that the stock brokers are now permitted to extend credit to their clients three times the adjusted net capital. The latter is computed on the basis of net capital minus 50% of the fixed assets without having to deduct outstanding debtors from the net capital.However stock brokers are required to compute the net capital adjusting all unsettled purchase transactions (over T+3) to reflect the excess of cost over market value.
The previous formula triggered regular forced-selling thereby impacting the market.
As a standard stance SEC said stock brokers are required to ensure strict compliance with all rules and regulations applicable to extension of credit as previously announced
The Commissioners also decided to lift the upper limit of 20% imposed on the price of transactions carried out on the crossings board of the CSE and to re-establish the status quo that prevailed previously in the Automated Trading Rules.
The other decision was to lift restrictions imposed on executive directors, employees, their spouses and nominees of stock brokers and dealers from selling listed shares purchased from the secondary market for a period of six months from the date of purchase.
These two restrictions were imposed as interim measures soon after the unprecedented fiasco involving the NSB-The Finance transaction.
Brokers and analysts welcomed the improved formulae for net capital computation and lifting of temporary restrictions. The latter was in the context of market having settled down and overall risk management and surveillance measures having taken root.
Whilst the Colombo Stock Brokers Association (CSBA) has been repeatedly urging for more pragmatic rules on credit to clients, around four other brokers, who are more focused on institutional clients, have opposed to relaxation of credit rules. They have also been comfortable with prevailing regulatory framework. Nevertheless, the CSBA’s membership who deal heavily with retail clients, have been insistent that relaxed credit rules were critical for a more vibrant and inclusive capital market.
The positive outcome at yesterday’s meeting was expected, as exclusively reported by the Daily FT yesterday.
The forerunner for SEC’s decisions yesterday was 10 recommendations made by CSBA following their meeting with capital market regulator in mid-last month. Other proposals included ways to deal with settlement failures if any; use of CRIB data to assess credit worthiness of clients; assistance to improve front-end and back-office infrastructure of brokers; expedite demutulisation process of the CSE; a formal consultative mechanism; and a task force to prepare a capital market development roadmap.
Some of these recommendations don’t come under the purview of the SEC but it will facilitate to its best ability whilst a few others are under consideration and review.
Meanwhile stock market edged down on Monday to their lowest in nearly three weeks in thin volume as investors booked profits in banking and beverage shares ahead of their September quarter results. The rupee gained as banks sold dollars.
The Colombo Stock Exchange’s main index ended 0.55 per cent, or 32.52 points, weaker at 5,847.17, its lowest level since 19 September.
Turnover was Rs. 434.9 million ($ 4.27 million), well below half of this year’s daily average of Rs. 960 million.
The Bourse saw a net foreign outflow of Rs. 138.3 million. However, foreigners have been net buyers to the tune of Rs. 32.39 billion this year.
The rupee closed slightly firmer at 128.25/35 to the dollar compared with Friday’s close of 128.40/50 as banks sold the US unit, dealers said.