What ails Colombo Bourse? Brokers give a fresh dose

The Colombo Stock Brokers Association (CSBA) has made fresh representation to the Colombo Stock Exchange (CSE) as well as the Securities and Exchange Commission (SEC) with regard to the major challenges facing the Bourse, in addition to suggesting remedial measures.

The critical assessment of the stock market is after acknowledging that an immediate and collective strategy by all stakeholders was critical to revive the confidence and activity in the Colombo Bourse.    

Here are some excerpts from the CSBA’s representations:

During the past two years, increasing interference in the free operation of the market has frustrated the enthusiastic market players and driven them away from the market.

The CSE and SEC should work closely with the stock broking companies to make the market popular among the remaining 99.5% or so of the eligible population who are almost totally unaware of the potential of the market, since all will benefit from the expansion of the market. Stockbrokers have the knowledge and the marketing skills to undertake promotional activities and hence the CSE and SEC should provide assistance for this task.

Correcting the computation of Net Capital

1. The burning issue in the market for the last few months is the correct interpretation of Net Capital for the purpose of determining the capacity of brokers to extend margin credit to their clients (three times Net Capital less 50% of Fixed Assets as per the CSE directive dated 17 January 2012) has to be resolved without further delay. The third letter dated 17 May 2012 was sent to SEC and CSE on this issue as well as there had been several meetings regarding this issue.     Financial institutions providing margin trading do not provide credit to small investors (with portfolios less than approx. Rs. 3 million). Therefore, small investors should also have a method of obtaining credit over T+30 as according to Government policy, small investors cannot be discriminated.  

Lack of consultation with stockbrokers

2. CSE officials often comment that stockbrokers’ views have been incorporated in Stockbroker Rules but it should be pointed out that the CSBA has been given the opportunity to appoint only twp CEOs out of the five CEOs in the Rules Committee. In our opinion, the Rules Committee should be fairly represented by the CSBA i.e. – comprise four members from the CSBA representing 25 member firms and one member from the three Non-CSBA member firms.

3.The consultants from McKenzie have to discuss their recommendations with the Colombo Stock Brokers Association (CSBA) before reporting their final recommendations to the Board of the CSE for approval. Further, the CSBA should be involved in every step of the implementation process to make sure the stock market does not react negatively to the changes.

4. The CSBA welcomes the Risk Management System (RMS) as it takes the current turnover/risk in to account rather than the present method of taking the previous month’s turnover/risk in to account. The CSBA has to be consulted on the RMS before implementation to make sure that the formulae is created so that there is no increase in the required average security deposit at the CSE when comparing first half 2011 security deposit amounts with the amounts which should have been kept at the CSE if the proposed RMS was in place. If the required average security deposit increases in the future, this would have a serious negative effect in the already fragile stock market.

Further, interest should be paid (at the rate of REPO rates) on the security deposit as at present. The CSE Risk Division informs that CSE will not be paying interest when the RMS is implemented.  

5. Once RMS, DVP and CCP is implemented CSE and SEC should allow short selling as soon as possible. Therefore, DVP should be implemented, decoupling the CDS with the ATS.

Proper utilisation of CSE funds

It should be reminded that the CSE is owned by 15 member firms. Therefore,

6. To inform the chairmen/owners of the member firms who are the owners of the CSE, the cost incurred to engage McKenzie, National Stock Exchange of India, Millennium Information Technologies and any other consultants.

7. Sri Lanka needs to enhance the credibility and efficiency of our stock market by improving the standards of infrastructure used by market intermediaries in Sri Lanka to a higher level in line with the other frontier markets.  The implementation of RMS, DVP and CCP could be expedited and suitably implemented only if homogeneous infrastructure is in place at all stock-broking companies. Therefore, provide a grant for an advanced system where the broker back office is integrated with the front end trading system and the Risk Management System.

8. Provide a grant for a broker telephone recording system.

9. To extend the Rs. 25,000 concession given to member firms to open new branches, also to member firms which have already borne the risk and opened branches outside the Stock Exchange premises to avoid discrimination and to prevent such branches being closed down.

10. The CDS Fees to be used for posting of all CDS monthly statements. Presently stock-broking firms incur 70% of the cost of posting CDS monthly statements by the CDS. Further, this matter should be taken in conjunction with the fact that the CSE conveniently gave the task of printing contract notes to the stock-broking firms without reimbursement due to security concerns a few years ago.

11. Request the FSA/SEC not to charge CCM Exams (Rs. 30,000 per employee) and for the Viva (Rs. 9,000 per employee) from member firms or alternatively the CSE should bear this cost. This is very important as the CSE and SEC should drastically increase certified investment advisors, which is vital for market development.

Eliminate settlement risk

12. Request the part of the SEC Cess which was to be put into the Settlement & Guarantee Fund, should be put into the said fund and settle member firms who may default (broker firms and custodian banks) immediately and then go after the defaulter and recover the sums due.

13. The CSE/CDS/SEC to change the rule that member firms (Broker firms and custodian banks) should not settle until they receive all funds from the other members, as the system will not work if all member firms wait till others pay first.

Bad debtors

14. To arrange for the stock-broking firms and margin trading providers to provide names of bad debtors to the CRIB and also to be able to obtain information about prospective clients from the CRIB before extending credit.

15. When a broking firm is recruiting an employee from another broking firm, it should be made mandatory to obtain a clearance letter from the other broking firm. In the event a service letter is not provided, the CSE would determine whether there is a valid reason or not, to do so.

Road shows and market development

16. To conduct an international fund managers’ conference in Sri Lanka.

17. To conduct road shows in selected local districts.

18. To conduct road shows in selected overseas destinations.

19. Have a beginners’ course of two hours per day for three days every week in head office and all CSE customer service centres. Topics covered could be internet trading, fundamental analysis, technical analysis and basic economics.  

Risk statement

20. Amend the mandatory risk disclosure statement in internal account opening form to read as ‘Risk of securities trading – the prices of securities fluctuate, sometimes considerably.  The price of a security may move up or down,’ i.e. delete the following ‘and may even become valueless. It is likely that losses may be incurred rather than profits made as a result of buying and selling securities.’

Code of conduct

21. Code of ethics – The sub-committee comprising five member firms will be sending a letter to the SEC shortly with their recommendations.