SEC to impose risk-based capital standards on brokers

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

The SEC said the shift to the risk-based approach of supervision will allow it to develop monitoring and audit processes that will identify, assess, monitor and if necessary, appropriately direct specific market players to control specific risk areas.

"We hope that, with our reasonable assessment of the risk exposure of the various regulated entities, we can channel our limited financial resources and deploy our manpower complement on those entities that exhibit higher potential credit, market and operational risks," the SEC’s Markets and Regulation Department director Jose P. Aquino said.

He said the SEC shall develop a risk-based capital adequacy framework, a quantifiable measure of the risk exposure of each market participant and a corresponding capital charge for each risk the market participant assumes in his business.

In line with this, the SEC has required the Philippine Stock Exchange’s Compliance and Surveillance Group to review past audit and investigation reports and identify potential and concentrated risk areas peculiar to each broker firm which will cover the three general risk categories of credit, market and operational risk.

The CSG is also required to assess the brokers’ level of compliance with the following:

• licensing, qualification, ownership transfer and corporate control;

• corporate governance principles of appointment of independent directors, creation of board committees and rotation of accredited external auditors;

• prudential standards on in-house application of the risk-management principles; and

• financial responsibility on matters relating to capital and net capital requirements, reserve requirement rule and books and records rule.

The CSG was directed to submit to the SEC a written report covering a revised audit and monitoring procedure on or before June 30, 2004.

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

According to the SEC, a broker firm’s access to sufficient capital enables it to protect its clients and counter parties from consequential losses.

The SEC 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, the SEC said.