Circular No: 02/2007
TO: ALL STOCK BROKERS AND STOCK DEALERS LICENSED BY THE SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA
RE: REGULATION – DIRECTIVE TO STOCK BROKERS AND STOCK DEALERS
We write to inform you that the Commission at its 219 th meeting held on 28 th December 2006 issued a directive to all licensed stock brokers and stock dealers in connection with ensuring that such entities refrain from extending credit to its clients in a manner which may undermine its financial stability.
In this light, the Commission has directed as follows:
1that all licensed stock brokers and stock dealers be required to become compliant with the following by 01st July 2007 :
- In the event the licensed stock broker or stock dealer is not liable to obtain registration as a Margin Provider but proposes to extend credit to its clients in facilitating its business as a broker/dealer and not on the basis of a separate business objective the stockbroker or stock dealer shall ensure:
(i)that such credit is extended to its clients on the basis of a written agreement which clearly sets out the entire agreement between the parties. Every amendment to such agreement shall also be in writing;
(ii)that the value of credit extended to its clients at any given point in time does not exceed 10 times the value of the company's net capital. Net Capital shall be computed in compliance with the applicable rules prescribed by the Colombo Stock Exchange (Currently prescribed by its Member Regulations);
(iii)that the company ensures that credit is only extended on the basis of collateral comprised of listed securities and that the credit extended does not exceed 50% of the market value of the individual client's securities portfolio, which is pledged to secure the credit. The market value of the pledged securities shall be the value of such securities marked to market at the end of each market day.
(iv)In the event the market value of the securities pledged falls by 10% the company shall call on its client to meet the shortfall by the next market day, in ensuring compliance with sub paragraph (iii) above.
(v)In the event the client fails to meet the shortfall on the market day, the company shall ensure that the securities pledged are sold to ensure compliance with sub paragraph (iii) above.
(vi)The company may not grant a ‘Single Client' credit, the value of which is in excess of 15% of the total value of credit extended by such company to its clients.
“Single Client” in the context of a corporate body means the borrowing company, its parent and subsidiary companies and in the context of a natural person means the borrower, his/her spouse and dependent children.
Channa de Silva
Director General