SEC mulls mandatory rating for brokerages

Published : 8:30 am  June 25, 2015 | No comments so far |  | 


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Says will enhance regulatory standards for broking firms and rating agencies


By Indika Sakalasooriya
Capital market regulator, the Securities and Exchange Commission (SEC), is exploring ways to introduce mandatory rating for stockbroking firms operating at the Colombo Stock Exchange (CSE), a top official said.

“In order to enable especially the retail investors to select a stockbroker by ascertaining the credibility of the firm, the SEC is exploring the possibility of introducing a mandatory rating for stockbroking firms,” SEC Chairman Thilak Karunaratne said.

He said the mandatory rating requirement would aim to preserve the integrity of the market and protect investor interest. Stockbroking firms will have the option either to obtain ratings from credit rating agencies or based on the risk and probability of impact, the SEC will initiate ratings for them.

However, Karunaratne said the SEC would have an industry consultation before implementing it.

In the recent past, Sri Lanka’s stockbroking industry has progressed considerably in the provision of services as well as in terms of the number of players in the market.

According to the latest SEC annual report, there are 28 registered stockbroking firms and seven debt traders. The rating requirement is likely to apply to all.  

Meanwhile, Karunaratne pointed out the need for enhancing entry standards and other prudential requirements for stockbroking firms and rating agencies to ensure sound business practices, appropriate safeguards for investors and market confidence.

Mirror Business learns that it is likely that the SEC would increase the minimum net capital requirement of Rs.35 million that currently applies for a stockbroking firm.

 A stockbroking firm is expected to maintain the minimum net capital requirement at all times. There were several instances in the past where the regulator wanted to increase the minimum capital requirement. However, the attempts were met with much opposition from the stockbroking community.

And also, the SEC, as the body that regulates credit rating agencies, is expected to beef up the regulations and minimum requirements pertaining to setting up and carrying out rating agency operations in the country.

The SEC recently banned Lanka Rating Agency, one of the three rating agencies operating in the country, from issuing new ratings until it fulfils the mandatory regulatory requirements. The rating agency is scheduled to renew its licence end of this month.

Meanwhile, Karunaratne expressed hope in completing a few key tasks which are imperative for Sri Lanka’s capital market development. “I am of the belief that before the end of the year 2016 we will be able to establish the Central Clearing Corporation, amend the SEC Act and facilitate the Demutualisation of the CSE,” he said.

A consultancy firm specialising in capital market-related assignments globally has been entrusted with the task of implementing a fully-fledged Central Counterparty system.

This is expected to significantly minimise the risk of settlement failure and counterparty risk. Karunaratne said during 2014 the Legal Draftsman finalised the draft of the CSE Demutualisation Bill and the SEC had forwarded it to the Finance Ministry for necessary action.
The proposed amendments to the SEC Act are expected to introduce a range of administrative and civil sanctions, including the seeking of restitution to any person aggrieved.

“In addition, the amendments to the Act will align the SEC governance structure with International Organisation of Securities Commissions (IOSCO) standards, facilitate the introduction of new categories of market intermediaries and regulation of their business conduct and provide for the regulation of derivative products,” Karunaratne noted.