No surprise SEC wants more time!

If time already taken wasn’t long enough then the Securities and Exchange Commission don’t agree, and hence opted to meet again on Monday to take a final decision on relaxation of rules on broker credit.

Issuing a one paragraph statement the SEC said “At the 294th Commission Meeting of the Securities and Exchange Com-mission of Sri Lanka (SEC) held today (11), the Commission Members discussed the subject with regard to extension of credit by Stock Broker Firms and decided to take a final decision on  Monday 16 January.”

The broker recommendation was communicated to the SEC in late November when the regulatory body was headed by Indrani Sugathadasa in addition to conveying same to President and Minister of Finance Mahinda Rajapaksa.Since then the SEC Commissioners except new Chairman TilakKarunaratne had deliberated broker requests at least a minimum of three times though failing to reach a decision as yet. At present, broker credit is allowed only one time, their net liquid capital whilst broker’s original request was to relax it to either two or three times.  This and the removal of price bands to be replaced with circuit breakers are the two immediate requests from the Colombo Stock Brokers Association to the SEC to revitalise the Bourse.

However, SEC’s assertion appears to be that brokers haven’t yet fully utilised even the current limit hence there was still room for higher credit instead of asking for relaxation.

One estimate is that there is a pool about Rs. 35 billion amount brokers/margin providers for lending whilst the base of 28 brokers have a reserve of Rs. 2.5 billion. Whilst this could partly explain SEC reservations the regulator misses the point that margin provisioning is at a premium by banks hence shunned by retailers who prefer the route of broker credit.

Be that as it may and contrary to the snail pace speed at SEC, the CSBA recommendation also conveyed to President Rajapaksa about increasing the bank lending to trading of securities limit from 5% to 7.5% saw the Central Bank entirely removing the ceiling last month as the monetary authority found there were no more risks of share-asset price bubble and left it to individual banks to pursue their own prudent practices when lending.

The Daily FT learns that the likely new broker credit rule will be two or three times of the sum arrived at after deducting half of fixed asset from net asset i.e. Net Asset – Half of fixed Asset = Sum, of which figure two or three times  will be considered. The latter however would be decided on Monday after doing an analysis of each broker’s positions/credit strength to assess whether SEC needs to be lenient or not.

SEC is keen to accommodate broker recommendations including removal of price band but with its own assessment of desirability.  The new formula is expected to enlarge the fund base for credit  than the current  basis.

The present credit limit of one time is strictly based on liquid capital of brokers which drew some reservations. SEC is keen to accommodate broker recommendations but with its own assessment of desirability.

The Colombo bourse meanwhile in anticipation of decisions either way by the SEC, gained marginally but ended the six –consecutive day losing streak. Year to date dip remains at 3.45% whilst in 2011 it declined by 8.5% ending the two year bull run of 125% and 96% returns in 2009 and 2010 respectively.