Confirming the exclusive Daily FT report of last Thursday, the Securities and Exchange Commission (SEC) yesterday formally announced the granting of enhanced limit for broker credit, giving an estimated Rs. 5 billion extra boost for the market.
Revealing its new stand much to the delight of brokers the SEC in a statement said: “At the commission meeting held on 16 January 2012, the Securities and Exchange Commission of Sri Lanka (SEC) decided to permit stock broking firms to leverage three times adjusted net capital with immediate effect.
It defined the ‘adjusted net capital’ as the net capital computed as per the Colombo Stock Exchange (CSE) Member Regulations less 50% of fixed assets. SEC said in line with other regional markets, 50% was deducted to take into account the concerns of realising illiquid assets into cash.
Previously the stock broking companies were permitted to extend credit based on the liquid assets less obligations. “By permitting the stock broking firms to leverage three times adjusted net capital, the additional credit available in the market will increase by Rs. 5 billion, resulting in the total credit available among stock broking firms amounting to Rs. 8.7 billion,” the SEC said.
The capital markets regulator justified the revision and the new move having considered the dimensions of credit extension and to establish a balance between the two principals of lending norms and risk management.
“As a capital market regulator, it is a core function of the SEC to ensure that capital and other prudential requirements are sufficient to address the level of risk taking by the stock broking firms in extending credit with adequacy in the financial strength, disclosures, systems and governance processes which should be monitored on a regular basis in order to prevent any systemic risk to the capital market,” the SEC said in its statement.
The final decision comes after near two months since the Colombo Stock Brokers Association (CSBA) conveyed to the SEC in writing the need for a revision as one of the measures to stem the freefall at the Colombo bourse.
Colombo Stock Brokers Association President Sriyan Gurusinghe said the association was extremely happy about the SEC move and expressed confidence that “things would work out better in the future”.
In early November the All Share Index was down by only 3.46%, but it worsened to 8.27% by 30 November and ended 2011 with an 8.5% negative return. This was after the Colombo bourse had a bullish run growing 96% in 2010 and 125% in 2009. In comparison to ASI’s 2011 peak in mid-February, the year-end closing reflected a decline of 22%.
Brokers yesterday welcomed the SEC’s revised rule, the likelihood of which was reflected in last Thursday’s gain in turnover to Rs. 1 billion after three weeks, the ASI’s improvement to a one-week high and volume touching a six-week high.
Friday morning momentum was evident with the ASI up 50 points before profit taking set in, leading to a marginal dip. Year-to-date, the ASI is down 2.4%.
Encouraged by the SEC move, the market is expected to gather momentum today after it was closed yesterday on account of the Thai Pongal holiday on Sunday.
The Colombo Stock Brokers Association is expected to welcome the move today formally with the release of an official statement.