SEC to impose risk-based standards on stock brokers

The Securities and Exchange Commission will impose risk-based capital standards on stockbrokerage houses and investment houses to ensure that they have adequate capital to cover risks and meet contractual obligations.

The SEC’s Market Regulation Department, which oversees securities brokers, government securities dealers, and investment houses, is now working on the proposed risk-based capital standards to ensure the solvency of these entities.

The MRD said the capital adequacy scheme is particularly valid when the systemic cost of default may be unacceptably high.

The Asian Development Bank, which has agreed to extend a $150-million loan intended for the development of the non-bank financial sector, has required the SEC to develop risk-based capital standards for brokers and investment houses with minimum entry requirements. This was among the conditions tied to the grant of the loan.

According to the ADB, the capital requirements of investment houses, government securities dealers and securities brokers should be risk-based and in harmony with international best practices.

The MRD said a stockbroker firm’s access to sufficient capital enables it to protect its clients and counter parties from consequential losses. "On this premise, the importance of capital adequacy standards and requirements has become paramount, providing an increasing level of protection to investors as players in the capital market take on greater risks," the MRD said.

The SEC’s proposed risk-based capital model will result in higher capital requirements for small brokerage houses.

Last year, the Bangko Sentral ng Pilipinas required banks to allot additional capital to cover risks associated with their contingent accounts or the so-called "off-balance sheet" items. These transactions were previously not backed up by capital since they are excluded from the bank’s balance sheet.

MRD said the latest revision of the Basle Accord (2001) incorporates market discipline, giving more emphasis on public disclosure that would enable market participants to assess the banks’ inability to remain solvent. For market risk, the accord strongly urges banks to reveal their value at risk.

It believes that the adoption of the risk-based capital adequacy standards will encourage market intermediaries to adopt a more relevant approach to risk management. With the system in place, stockbroker firms would have to assess their trading books more regularly in order to understand and monitor the risk profile of their respective businesses, MRD said.

In line with current international practices, the new rules work on the premise that stockbroker firms that are exposed to greater risk need more capital. Those that are exposed to less risk, on the other hand, require less capital.

At present, the SEC merely imposes a net capital requirement, the liquid portion of a broker’s capital which addresses liquidity and not minimum paid-up capital. All brokerage houses are required to maintain a P5-million net capital.

Due to the prolonged slump in the capital market, the SEC had agreed to defer the implementation of its proposed P50-million paid-up capital requirement for stockbrokerage houses.