5 January 2017 08:53 am
The Securities and Exchange Commission (SEC), Colombo Stock Exchange (CSE) and stockbrokers are actively engaged in a discussion over the sustainability of the broking industry as many broking firms are losing money heavily due to the depressed state the Colombo bourse is currently in, Mirror Business learns.
Though the negative sentiment in the market is largely to do with the stability factor, stockbrokers have suggested ‘inactivation periods’ for their struggling peers, allowing them to temporarily close shop for a period till the market conditions get better for them to return.
However, this is not the first time ‘sleeping periods’ for brokers have been discussed as the suggestion was actively pursued in 2013 and early 2014 when Dr. Nalaka Godahewa was functioning as SEC Chairman. Sri Lanka’s US $ 18 billion stock market, of which the daily turnover last year remained around Rs.730 million, has 28 stockbrokers, a number according to many, is too high for a market of that size. They say consolidation is the sustainable way forward for the stockbroking industry.
“The industry is aware of the need for consolidation. But they (stockbrokers) are looking for a way out to keep their licences intact,” a stock market source told Mirror Business. Adding to their worries, Sri Lanka, in November last year, announced moves to hike the capital adequacy requirements (CAR) for stockbrokers from March 1, 2017. Accordingly, each stockbroker will be directed to maintain a capital requirement—measured as liquid capital—of 1.2 times the total risk it undertakes, subject to a minimum liquid capital requirement of Rs.35 million.
The SEC said CAR rules are applicable to all stockbroker firms excluding those licensed to deal only in debt securities. Also, the proposed CAR rules mandate stockbrokers to report their CAR to the SEC and CSE on a daily basis. Currently, the net capital positions are reported by the stockbrokers to the SEC and CSE at month-end. Meanwhile, it is unlikely that the SEC would entertain a hike in brokerages as a solution to overcome the situation as Sri Lanka is already considered having relatively high brokerage charges. Lower brokerage works as a key pull factor in attracting foreign investors.