SEC seeks public views on broker-dealer rules

The Securities and Exchange Commission is seeking comments from the public for its proposed guidelines on the adoption of risk-based capital adequacy (RBCA) standards for broker-dealers.

The SEC has given broker dealers and other concerned parties until Sept. 24 to submit their comments.

RBCA, as defined under rule 28.1 of the Securities Regulation Code, refers to the minimum levels of capital that have to be maintained by broker-dealers, taking into consideration the firm’s size, complexity and business risk.

The RBCA framework is intended to ensure that stockbrokerage houses can meet contractual obligations and will have adequate capital to cover risks.

According to the SEC, 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, direct specific market players to control specific risk areas.

The factors to be incorporated in the model for the measurement of the various risks should be based on the local market conditions where appropriate but in no case shall they be below the Basel Standards, the SEC said.

The risks proposed to be covered for the RCBA will include position or market risk, credit risks such as counterparty risk, settlement risk, large exposure risk and margin financing risk and operational risk.

The SEC will revisit the current net capital model to fine tune the provisions relating to the treatment of the various items of assets, liabilities and equity in the computation of net capital. This is intended to fully capture economic substance of the underlying risks and the available equity to cover them.

In calculating capital requirement, appropriate risk conversion factors will be applied to risk positions/exposures.

According to the SEC, the capital adequacy scheme is particularly valid when the systemic cost of default may be unacceptably high.

The Commission believes that the adoption of the risk-based capital adequancy 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.

The SEC intends to expand the applicability of the RBCA rules to other non-bank financial institutions, including investment houses, mutual funds and pre-need companies.