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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Developing story-SEC and the brokers, likely to be meet on either Thursday or Friday

Developing story-SEC and the brokers, likely to be meet on either Thursday or Friday

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windi5

windi5
Moderator
Moderator
Brokers and regulator are scheduled to meet later this week to firm up the way forward on credit rules leading to formal approval by SEC Commissioners by mid next week, a development which most analysts confirm will be a lifeline for the struggling Colombo stock market.

The meeting between the SEC and the brokers, likely to be on either Thursday or Friday, is following the Colombo Stock Brokers Association (CSBA) making written representations to the capital market regulator with regard to what are perceived to be “very rigid” rules on forced selling and granting of credit.

The discussion is also likely to find consensus on the thorny issue and the recommendation will be studied for a final decision by the Commissioners of the SEC, who are scheduled to meet mid next week.

The Daily FT only Tuesday, 26 July, exclusively reported about an emergency meeting by CSBA members the previous day. Thereafter the CSBA followed up with a letter dated 26 July to SEC Chairperson Indrani Sugathadasa, who however was on an official visit to India.

Following her return the SEC has studied the proposals in detail positively and Daily FT learns that a meeting between the regulator and CSBA is on the cards this week where specific recommendations from the broking community will be further discussed.

At the emergency meeting, three proposals won support from the brokers and the CSBA had provided the SEC with options – a move which analysts viewed as “reasonable”.

One is that all brokers be allowed to lend their net capital, which is in excess of Rs. 35 million (minimum net capital requirement) leveraging zero times.

The other option is that all brokers be allowed to lend two times the net capital, which is in excess of Rs. 35 million (leveraging one time).

Under both options, the compulsory force selling on Trade + 5 (market days) or T+5 rule has to be removed. The basis for this includes (under first option) broking firms being able to gradually force sell when they are fully utilising their excess funds and can do same when reaching one time leverage.

CSBA has argued that for the first option, brokers in any case can take their excess funds out of the company in the form of dividends or do anything they wish to do with it. With regard to the second option, CSBA has said it would be safe considering the fact that broking firms are able to leverage 10 times up to 2010 whilst presently finance companies are allowed to leverage 10 times and leasing companies allowed seven times leveraging.

Another proposal is that brokers be allowed to transfer excess net capital in the broking company to the wholly-owned margin trading company licensed and regulated by the SEC without deducting from the net capital.

CSBA had emphasised that most broking firms presently have proper systems and procedures in place to monitor debtors.

Analysts who are well versed with the situation opined that brokers have made valid recommendations whilst the SEC is likely to extend conditional support. After consultation with brokers this week, a more win-win regulatory regime with regard to credit extension and compulsory forced selling is expected to go before the SEC Commissioners.

Analysts said that when all macro indicators and developments point to favourable environment for equities investments, the Colombo stock market has been struggling. A key reason for this is said to be some of the regulations being considered “too rigid”.

They also opined that the mid-2010 credit bubble has been brought under control by now, with some estimating the outstanding credit to be below Rs. 2 billion as opposed to Rs. 8 billion. Deadlines for debt clearing as well as price band, according to most analysts, has brought improved discipline in the market, hence it was high time for regulators to reward the market by way of relaxing its rigid stance.

CSBA in its case for a review of existing rules had told the SEC that the ASI had declined by 16.8% since mid-February 2011 peak and MPI had plunged by 24.3% from October 2010.

“Each market day has become a T+5 force selling day for all stock broking firms, which has amounted to a large number of clients’ shares being forced sold daily to the buying quotations, which in turn is moving lower and lower and thereby precipitating a continuous drop in the market prices,” CSBA had pointed out.

“The main reasons for the market drop in our opinion are these on voluntary sales, which result in prices going down, cascading margin calls and more forced selling,” it added.

According to CSBA, local individual investor contribution to market turnover rose from 22% in 2008 to 44% in 2010 and large number of local individual investors with share portfolios of less than Rs. 1 million who were unable to obtain margin trading facilities have been force sold or have left the equity market.

To add to this problem, from 1 January 2010 to date, there has been a net foreign outflow of Rs. 34.6 million and from 1 January 2011, IPOs, Rights Issues and private placements have absorbed over Rs. 50 billion.

“These are the natural mechanisms by which an expensive market becomes an inexpensive market, thereby eliminating the need for any regulatory restrictions,” CSBA argued.

udul


Senior Equity Analytic
Senior Equity Analytic
hmmmmmmmmmmm, Suba anagathayak cheers

Rajaraam


Vice President - Equity Analytics
Vice President - Equity Analytics
This time we can hope something.

pushpakumara


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
Brokers and regulators are to meet to firm up the way forward. Wish they can live up to this little sentence and come to a conclusion on credit issue.

We do not like to see another pile of huge amounts to be settled situation again. That means brokers too have some responsibility towards meeting the requirements of CSE. There can not be any slack in settlements. Brokers need to submit their proposals to avoid similar situation we faced on this credit issue since rules on T+5 is strictly enforced. If brokers have had done their job properly we should not have faced this situation or situation would not have been this bad.

Any way this meeting will be in limelight and we look forward for some good news in the coming week.

Aamiable


Vice President - Equity Analytics
Vice President - Equity Analytics
Are the broker firms going to protect investors? ....Are they on the other hand going to earn a lot by allowing retailers and investors to form credit bubbles ....where there is lot of buying and selling going on... fee and profits from transactions .....and an interest on credit can also be earned? ....Are they representing clients?....

If there is an end to force selling , that is fine to attract investors.
Very Happy

windi5

windi5
Moderator
Moderator
Brokers are suckers. they sucks our money. they dont mind any bubble or hobble.

invest-abc


Manager - Equity Analytics
Manager - Equity Analytics
@Aamiable wrote:Are the broker firms going to protect investors? ....Are they on the other hand going to earn a lot by allowing retailers and investors to form credit bubbles ....where there is lot of buying and selling going on... fee and profits from transactions .....and an interest on credit can also be earned? ....Are they representing clients?....

If there is an end to force selling , that is fine to attract investors.
Very Happy

I don't think broker firms are looking at investors interest here...the most benefited party out of relaxing credit rules would be the broker firms. Providing credit was a major profit earner for broker firms...

anyway, this will end the force selling and we'll see a positive outlook towards the Market. But, what will be interesting is the proposals that will be give by Broker firms to avoid market getting overheated due to credit in the future...

mark

mark
Expert
Expert
i remember what "Dr bubble" told in early days. Rolling Eyes

windi5

windi5
Moderator
Moderator
Hmm,he seems to be correct!

Aamiable


Vice President - Equity Analytics
Vice President - Equity Analytics
@invest-abc wrote:
@Aamiable wrote:Are the broker firms going to protect investors? ....Are they on the other hand going to earn a lot by allowing retailers and investors to form credit bubbles ....where there is lot of buying and selling going on... fee and profits from transactions .....and an interest on credit can also be earned? ....Are they representing clients?....

If there is an end to force selling , that is fine to attract investors.
Very Happy

I don't think broker firms are looking at investors interest here...the most benefited party out of relaxing credit rules would be the broker firms. Providing credit was a major profit earner for broker firms...

anyway, this will end the force selling and we'll see a positive outlook towards the Market. But, what will be interesting is the proposals that will be give by Broker firms to avoid market getting overheated due to credit in the future...



to prevent force selling broker induced credit bubbles formation.... need to be prevented... Very Happy Smile

dinusha.kiwulegedara


Senior Equity Analytic
Senior Equity Analytic

Thanks god...

Good Time for all ... mmm cant we suggest trading without brokers ha ha ha ...
What will happen...!!!?

Good luck

sajeethk


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
if the not much turn over in the market brokers realized the issue. If the turnover is there they don't care abt the regulation and the clients.

It happen 2008 when the market having less than 100m/day turnover

Soundchips


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@sajeethk wrote:if the not much turn over in the market brokers realized the issue. If the turnover is there they don't care abt the regulation and the clients.

It happen 2008 when the market having less than 100m/day turnover


turnover should improve on real terms.. , ..fake increase in turnover can become red ... actual increase turnover may stay longer..

duke


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@sajeethk wrote:if the not much turn over in the market brokers realized the issue. If the turnover is there they don't care abt the regulation and the clients.

It happen 2008 when the market having less than 100m/day turnover

Exactly. Brokers are only worried about their profits not coming in like the good old bubble times. They have built up propaganda with the help of foolish investors that this is all the fault of the rules and regulations so they can make more bucks.

rijayasooriya

rijayasooriya
Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
@sajeethk wrote:if the not much turn over in the market brokers realized the issue. If the turnover is there they don't care abt the regulation and the clients.

It happen 2008 when the market having less than 100m/day turnover

Brokers are not charity workers. They are here to earn money like us.When turnover goes down not only brokers SEC and government also suffer.Investers have to be very careful when they use brokers credit.

laksharemk


Senior Equity Analytic
Senior Equity Analytic
Guys, providing credit is not the main issue i suppose since credit within terms and conditions is a valid business. First question is whether brokers have legitimate right to provide credit facility and second is how brokers manage it (within the allowed limits, in line with investment portfolio: by ignoring the value of crap shares, etc).
Charging interest and recovery of non payment is i think fairly simple since brokers have full authority to sell and recover.
Using credit wisely is the responsibility of investors and portfolios of the people who don't manage credit carefully and within limits should be forcefully sold to recover the respective amounts.
Within this framework credit can be a good thing as per my personal view only.

manula


Vice President - Equity Analytics
Vice President - Equity Analytics
All the world run on credit.. no one has hard cash... if some credit facility given as per investor portfolio with some interest ... then investors will manage credit carefully. So i think re introduce credit given will be a good for the market.

ShareShares


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
They should not have force sell and force the market down in the first place. After a period of force selling reintroducing credit and same thing again to lift the market and force selling again cannot be rational.

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