arket regulator, Securities and Exchange Commission (SEC) has asked stockbrokers to reduce interest rates charged on broker credit and margin trading in line with policy interest rates of the Central Bank.
In two separate letters dated July 25, 2014, SEC’s Officer in Charge/Deputy Director General Dhammika Perera has requested all stockbrokers and margin providers to respond positively to this call.
According to Perera, the stock market has demonstrated greater stability depicting a positive momentum with the benchmark All Share Price Index (ASPI), recently surpassing 6700 mark together with a larger participation of investors in the market and increased level of turnover.
Central Bank’s AWPR currently stands around 7.6 percent, against 9.7 percent at the beginning of the year
He further said that although the Average Weighted Prime Lending Rate (AWPR) of the Central Bank of Sri Lanka (CBSL) has declined considerably in the recent past, the lending rates charged by certain brokers and margin providers have not been adjusted accordingly to transfer the benefits of the lower interest rates to their clients.
Central Bank’s AWPR currently stands around 7.6 percent, against 9.7 percent at the beginning of the year.“Hence, the Securities and Exchange Commission of Sri Lanka (SEC) is of the view that it is essential for lending rates on credit extension/margin trading be aligned with policy rates prescribed by the CBSL,” the letters noted. However, the letter sent to stockbrokers appears to contradict with SEC’s policy of discouraging broker-credit. The SEC was seen actively promoting margin trading and other means of funding for investors instead of credit provided by the brokers.
Meanwhile, some of the brokers Mirror Business talked to were of the opinion that most brokerages wouldn’t be able to cut their lending rates to investors as they borrow from banks at higher rates.
“Knowing stockbroking is a risky business, the banks lend us at 16 to 17 percent despite the low interest-regime prevailing in the country. Since we also need to keep a margin, they lend the money to investors at 20 to 21 percent. Therefore I don’t think brokers can heed to this SEC request,” a stockbroker said on the grounds of anonymity.
Some however are of the opinion that stockbrokers shouldn’t cut lending rates as it could again fuel an unsustainable rally fuelled by broker-credit, like in 2011/2012.
“Brokers have been so far very selective of the investors who have been given credit. But we don’t know how long sanity would prevail if the indices keep going up,” a senior stockbroker noted.
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