Brokers’ plea on new capital rule denied

BY RUBY ANNE M. RUBIO, BusinessWorld Reporter The Securities and Exchange Commission (SEC) has denied the request of the Philippine Association of Securities Brokers & Dealers, Inc. for a six-month deferment of a policy that would require brokers to maintain minimum levels of capital vis-a-vis their size, complexity, and business risk. It also deferred action on the Philippine Stock Exchange’s request to relax the P100-million capitalization requirement. In a three-page letter to the brokers’ group, SEC director Jose P. Aquino said SEC Memorandum Circular No. 16 Series of 2006 will be implemented as scheduled and broker dealers are required to submit risk-based capital adequacy ratio (RBCA) reports as prescribed. Broker dealers opting to use a formula to compute the requirement are given six months or until end of July to develop the software that will compute the actual counterparty risk requirement. The brokers’ group, the national representative of the securities industry, had sought the deferment of the implementation of the new capital rules on Jan. 15. The group’s president, Nestor Aguila, had said the implementation of the RBCA sends a negative signal to brokerage houses. "Trading participants had been concerned and worried the proposed implementation of the RBCA model would adversely affect our capital market by setting arbitrarily high criteria in the procedure for computing our net liquid capital. We believe that the net capital rule determines with sufficiency similar liquidity levels as the RBCA, but with appreciably less work," he wrote. But the SEC’s Mr. Aquino refuted "misimpressions" on the new capital rule, which some had said to be anti-Filipino. He said the model does not only encourage the entry of smaller broker firms, but also allows them to sustain a certain level of business activity commensurate to their risk exposure and individual capacities to raise liquid capital. "The RBCA rule is designed to be a broker-specific risk measure whereby individual capital requirement is dependent on the firm’s level of activity and its corresponding risk exposure," he said. RBCA, as defined under the Securities Regulation Code, refers to the minimum level of capital that has to be maintained by a firm which is licensed, or securing a broker dealer license, taking into consideration the firm’s size, complexity, and business risks. Currently, broker dealers use the net capital model, which focuses on liquidity risks. The net capital requirement is an amount set by the SEC to give brokerage firms enough capital that would allow them to cover the volume of transactions they handle within a day and cover their client’s exposure to high settlement risk. Brokerage firms which fall below the required net capital level are required to make a daily report to the SEC and at the same time report the steps being undertaken to meet the capitalization level. Failure to meet the requirement could lead to suspension of operations. Mr. Aquino said the risk factors used in the computation of the RBCA ratio are not arbitrarily set. He reminded the brokers’ group that no technical study substantiating its claims has been submitted for consideration as advised in a meeting with SEC Chairman Fe B. Barin. "Contrary to your allegation, position risk factors for both equity and debt securities are based on volatility measures using actual Philippine data. For those where Philippine data are not available, we used internationally accepted standards. We have not received from the association an alternative computation that would make us reconsider our present position. Clearly, more than a critic of the model, what the commission needs are recommendations from the industry," he said. While the net capital rule was one of the regulatory tools that helped cushion the blow of the Asian financial crisis among Philippine brokers, he said the new capital rule is "a more robust model which is designed to quantify risk exposure specific to each broker firm and attempts to address the limitations of the net capital rule."