Brokers to grant margins

SEC to take decision soon:

Sanjeevi JAYASURIYA

The Securities and Exchange Commission Sri Lanka (SEC) will consider permitting stock brokers to grant margins for small retail investors. The stock brokers have made a proposal to the SEC to grant margins for retail investors and SEC will take a decision shortly, SEC Director-General Malik Cader told Daily News Business.

“The proposal submitted by the stock brokers is realistic and reasonable. The SEC will consider to permit brokers to grant margins for retail investors,” he said. Margin lending is likely to be allowed for brokerage firms as this could allow the market to pick up, Heraymila Securities Chief Executive Officer Ravi Abeysuriya said.

Retail investors comprise of over 44 percent of stock market investors and could be considered as the backbone of the Colombo Stock Market in the absence of a well-developed institutional investor base in Sri Lanka. Retail investors typically borrow funds to invest in the stock market, which is called leveraging.

The Securities Exchange Commission of Sri Lanka (SEC), to avoid a potential systemic risk completely prohibited brokerage firms in Sri Lanka from extending credit beyond T + 3 with effect from January 1, 2011 and directed if credit is to be extended beyond T + 3 to do so through a separately owned Margin Provider duly registered with SEC. On hindsight, the decision to completely prohibit brokerage firms in Sri Lanka from margin lending had a huge cost. Primarily, curtailing retail trading had a negative impact on the market where the market has been on the decline ever since.

Moreover the cost of moving margin facilities to independent margin trading providers are burdensome to clients and costly as they attract stamp duty and a higher risk premium as independent margin providers are less knowledgeable about the quality of brokerage firm’s clients as well as the quality of the stocks in their clients portfolios compared to brokerage firms. The SEC is now reconsidering to allow brokerage firms to engage in Margin lending based on value at risk (VaR) principles where the level of Margin lending is limited to meeting certain capital adequacy standards, which are monitored by SEC on a daily basis electronically.

“Brokerage firms, on their part will have to adopt superior risk management and back office systems to monitor and provide pertinent information to SEC,” Abeysuriya said.

If the SEC allows brokerage firms in Sri Lanka to extend credit once again, it will grant some relief to retail investors and the Colombo Stock market could see a revival, although global stock markets are tumbling, he said.

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