Corporate News

Brokers have enough buffer vs shocks -- SEC

Posted on September 21, 2015

MARKET regulators found all broker dealers at the Philippine Stock Exchange, Inc. (PSE) financially resilient despite sharp losses in late August, the Securities and Exchange Commission (SEC) said in a statement.

Citing a report of the Capital Markets Integrity Corp. (CMIC), the corporate regulator said all 132 brokers of the exchange met its risk-based capital adequacy (RBCA) requirements at the close of trades on Aug. 24 when the Philippine Stock Exchange index (PSEi) plunged by 6.7% -- its biggest one-day fall since June 13, 2013.

The findings were released nearly a month after the SEC ordered trading participants to submit reports on compliance with capital requirements in the wake of a series of trading glitches at the PSE.

Trading at the PSE has been halted three times in August, with an Aug. 25 outage being the biggest to hit the exchange in its entire history. The incidents fueled speculations that the bourse stepped in to cool the market after the 6.7% decline on Aug. 24.

CMIC is the independent regulatory unit of the PSE tasked to oversee trading practices in the bourse.

The RCBA requirements refer to the minimum liquid reserves to “protect the firms, their investors, customers and the economy as a whole.” They ensure that the broker dealers have enough capital despite operating losses “while maintaining a safe and efficient market.”

According to the report, 98 out of the 132 brokers booked lower net liquid capital (NLC) -- the equity eligible for net liquid capital of a broker dealer when adjusted for non-allowable current and non-current asset.

The report said 67 trading participants suffered a deterioration in their RBCA ratio -- the ratio of NLC to the total risk capital requirement (TRCR).

TRCR is the sum of the capital requirements for each of the various risk exposures of broker dealers, such as operational risk, credit risk and position risk.

Likewise, 22 brokers reduced their paid-up capital due to paper losses in their proprietary investments, while 88 trading participants saw an expansion in their aggregate indebtedness (AI) relative to net liquid capital.

“These findings notwithstanding, none of the TPs breached any of these various RBCA thresholds as of Aug. 24, 2015,” the SEC said.

The brokers are required to comply with the following RBCA requirements such as: minimum RBCA ratio of 110%; minimum NLC of P5 million or 5% of AI, whichever is higher; maximum AI to NLC ratio of 2000%; and minimum unimpaired paid-up capital of either P100 million for those who registered after the effectivity of the Securities Regulation Code, and P30 million for those already existing before the effectivity of said law.

Under the corporate regulator’s rules, broker dealers should compute their RBCA ratio and financial requirements every day, as well as submit a report on their compliance every month.

If the minimum RBCA ratio or the minimum NLC is breached, a broker dealer must immediately notify the SEC and CMIC, and shall immediately cease doing business.

The SEC had asked the PSE to submit not later than Aug. 28 a full and thorough report on the unprecedented trading halt that hit the exchange last month.

The bourse had clarified that the problem stemmed from a middleware -- the software that sends information from the base trading engine to the front-end terminals -- and not from the new platform developed by NASDAQ OMX Group, Inc.

SEC Chairperson Teresita J. Herbosa said the commission en banc is set to decide if it will penalize the PSE for last month’s unprecedented trading stoppage once the corporate regulator completes the review of the two preliminary reports submitted by the exchange. -- Krista Angela M. Montealegre