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Message: <blockquote data-quote="sherlock" data-source="post: 10892476" data-attributes="member: 106046">The new SEC Rule has not given much boost to the Market The stock market has again shown up its weakness despite the SEC relaxation of the prohibition on broker firms extending credit. It has not given much of a boost to the market. The new Rule limits the brokers to extending credit only up to the aggregate of their liquid assets and no more. The Brokers Association wanted to be allowed to leverage their assets. But the SEC said it should be zero leverage. This means that when the brokers credit aggregate measured perhaps by the overdue debtors balances exceeds the total amount of liquid assets they hold they have to stop giving credit and start collecting money on unpaid purchases on T+ 3 or sell out by force to recover the proceeds. Ten brokers are said to have reached such limit to credit extension unless they pump in more capital. They cannot borrow since borrowings would not be counted among the liquid assets as laid down by the SEC new Rule. In fact if these brokers have exceeded the limit they would have to force sell and this would bring the market down at least on those shares which figured in short term speculation.  Is the new Rule necessary? A broker firm needs to hold liquid assets to settle net purchases from other brokers at the settlement where its clients have made purchases from other brokers in excess of sales to them. They also need to hold sufficient funds to settle the clients who have sold their shares through the firm if such shares had been fully paid for. If the shares sold by their clients have been purchased on credit from the firm then the money accrues to the firm and not to the client.  The Colombo Stock Exchange Rules provide for the segregation of client funds into a separate bank account with the settlement bank. Another Rule of the Colombo Stock Exchange limits the extension of credit to 50% of the client’s portfolio of shares and credit balances in his account. If the broker firms comply with this rule then only 50% of the portfolio will be on credit. But it would seem that this Rule has been flagrantly violated by the brokers and the SEC had to step in by prohibiting all credit. Credit needs to be limited but should the limit apply per client or through a liquidity rule on the aggregate volume of credit? The Stock Exchange Rules also require that when opening a new account the client must deposit some cash which could constitute the initial margin for credit. Perhaps the CSE should insist on the maintenance of the initial margin intact.  If the value of the portfolio paid for declines then the client should be called upon to put in more money to preserve the maintenance margin of 50% of the value of the portfolio. These Rules may perhaps be sufficient to ensure that the brokers do not provide unlimited credit and also ensure that the firms will not get into difficulty owing to the lack of liquidity for settlement. The present Rule requires the broker firms to maintain a minimum net capital of Rs 35 million in addition to liquid reserve deposited with the Stock Exchange. This is a flat amount applicable to all broker firms. Perhaps it should vary with the volume of business undertaken by the firms.<a href="http://www.news360.lk/category/markets/stock-market/feed" target="_blank">http://www.news360.lk/category/markets/stock-market/feed</a></blockquote>

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