• The requirement to come into effect from January , 2018
• SEC says new condition would equip brokers to play a greater role in market development 
• The requirement does not apply to brokers who also operate as primary dealers

Giving effect to a long awaited reform to consolidate the overcrowded stock broking industry, Sri Lanka’s capital market regulator, the Securities and Exchange Commission (SEC), last week issued a directive asking brokers to maintain minimum a shareholders’ fund requirement from next year. 
To this end, the SEC directed each broker to maintain a minimum shareholders’ fund of Rs.100 million or 50 percent of the firm’s stated capital, whichever is higher. 
Up to now brokers have not been asked to maintain a minimum shareholders’ fund requirement, which includes stated capital and reserves. 
The SEC said the move is to strengthen the financial position of the brokers and dealers irrespective of the losses sustained in the past as part of risk assessment framework.
The regulator also said mandating a minimum shareholders’ fund requirement will uplift the standards of stockbrokers and stock dealers and equip them better to play a greater role in the development of the market. 
The new requirement comes in addition to the risk-based capital adequacy requirement that would replace the existing minimum net capital requirement of Rs.35 million in March.
The brokers who do not meet minimum requirement in their shareholder funds however will have time till January 1, 2018, to either bring their capital up to the threshold or merge with another broker or close the shop.
The SEC has directed the Colombo Stock Exchange (CSE) to develop a suitable enforcement mechanism in the event of non-compliance.

Nonetheless the regulatory forbearance is commonplace in Sri Lanka and the strict enforcement of rules by the SEC is something yet to be seen.
The rule does not apply to brokers who also operate as primary dealers and are being regulated by the Central Bank According to many, the directive is a long-felt need to ensure the stability of the broking industry as some of the brokers are currently struggling to stay afloat with prolonged lackluster market performance due to policy inconsistency and rising interest rates. 
While the long overdue directive was widely expected by many, some may find it shocking as the brokers were expecting a milder form of regulatory interference for them to stay afloat with an imposition of ‘sleeping periods’ or periods of temporary deactivation until tough times are over.  

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SEC revises transaction fee structure

Meanwhile, the SEC also replaced the exiting flat share transaction fee structure of the CSE and Central Depository Systems (Pvt) Ltd (CDS) to a step up fee structure (see table) when consolidating transactions for the purpose of computing fees. 
“The basis for the request was that levying fees on a ‘flat’ basis is not equitable since transaction fees payable on a marginally lower turnover is higher than fees payable for  a marginally higher-value transaction,” the SEC directive noted.
That is, for a Rs.102 million worth share transaction, charges will be calculated in such a manner where fee structure (higher) applicable up to Rs.100 million would be charged for the first Rs.100 million while the balance Rs.2.0 million would be charged based on fee structure (lower) applicable for transactions above Rs.100 million to ensure equitable nature. 
Further the threshold for the two-band fee structure is also raised to Rs.100 million from the current Rs.50 million. 
Unlike the minimum capital rule, the directive issued revising the fee structure would come into effect from as early as March 15, 2016.
The two directives are amongst a host of other capital market reforms that are in the pipeline including the new SEC Act, the demutualization of the CSE etc.