5.1.2 Procedure for Maintaining the Minimum Capital Adequacy Requirements

Transcription

1 SECTION 5 CAPITAL REQUIREMENTS 5.1 CAPITAL ADEQUACY REQUIREMENTS FOR STOCKBROKER FIRMS TRADING IN EQUITY AND DEBT SECURITIES Minimum Capital Adequacy Requirements Each Stockbroker Firm trading in equity and debt securities shall, at all times, maintain a minimum Capital Adequacy Ratio of 1.2 computed in accordance with Annexure 6 of these Rules, subject to maintaining a minimum Liquid Capital of Rs. 35 million Procedure for Maintaining the Minimum Capital Adequacy Requirements The Value at Risk (VaR) Margin value of each Security listed on the CSE shall be provided to all Stockbroker Firms referred to in Rule above by the CSE on a monthly basis. The VaR Margin shall be calculated by the CSE based on the methodology determined by the Board of Directors of the CSE from time to time. (c) (d) A Stockbroker Firm shall compute its Capital Adequacy Requirements for each Market Day based on the VaR Margin values provided by the CSE in terms of Rule above and notify same to the CSE and SEC on a daily basis, not later than 9.00 hours on the following Market Day, in accordance with the procedure specified by the CSE and SEC for such purpose from time to time. The Stockbroker Firm shall ensure that the Capital Adequacy Requirements are notified to the CSE and SEC in terms of Rule above by the Chief Executive Officer or any other person authorized by the Stockbroker Firm for such purpose. In the event the Capital Adequacy Requirement/s of the Stockbroker Firm fall below the minimum requirement/s as prescribed in Rule above on a particular Market Day, such Stockbroker Firm shall; (i) notify the CSE and the SEC in writing, the manner in which such Stockbroker Firm intends to increase its Capital Adequacy Requirement/s to the minimum requirement/s, not later than 9.00 hours on the date referred to in Rule above; and, (ii) take necessary steps to meet the minimum Capital Adequacy Requirement/s by the end of the Market Day immediately following the date of notifying the CSE and SEC in terms of Rule (d) (i) above. 1

2 5.2 SHAREHOLDERS FUND REQUIREMENT FOR STOCKBROKER FIRMS TRADING IN EQUITY AND/OR DEBT SECURITIES This Rule 5.2 will be effective from 1 st January Minimum Shareholders Fund Requirement Subject to Rule below, each Stockbroker Firm trading in equity and/or debt securities shall, at all times, maintain a minimum Shareholders Fund Requirement of Rs. 100 Million or 50% of the Firm s Stated Capital, whichever is higher. A Stockbroker Firm which is a Primary Dealer regulated by the Central Bank of Sri Lanka is exempted from the minimum Shareholders Fund Requirement prescribed in Rule above Continuous Monitoring of Minimum Shareholders Fund Requirement A Stockbroker Firm shall continuously monitor the Shareholders Fund Position of the Firm and ensure that the Stockbroker Firm meets the minimum Shareholders Fund Requirement prescribed in Rule above. In the event the Shareholders Funds Position of the Stockbroker Firm is likely to fall below the minimum requirement prescribed in Rule above, such Stockbroker Firm shall initiate immediate action to ensure that the Shareholders Fund Position is maintained at least at the minimum level prescribed in Rule above Procedure for maintaining the Minimum Shareholders Fund Requirement A Stockbroker Firm shall notify its Shareholders Funds Position to the CSE and the SEC on a monthly basis within fifteen (15) days from the end of the particular month, in the format prescribed by the CSE for such purpose from time to time. In the event the Shareholders Fund Position of a Stockbroker Firm falls below the minimum requirement prescribed in Rule above, the Firm shall immediately notify the CSE and the SEC in writing and take necessary steps to meet such requirement within a period of thirty (30) Calendar Days from the date of notifying the CSE and SEC of the noncompliance. 5.3 NET CAPITAL FOR STOCKBROKER FIRMS TRADING ONLY IN DEBT SECURITIES Each Stockbroker Firm trading only in Debt Securities, other than a Primary Dealer licensed by the Central Bank of Sri Lanka, shall, at all times, maintain a minimum Net Capital, the amount of which shall be determined by the Board of Directors of the CSE from time to time. 2

3 5.3.2 Net Capital means: The shareholders funds of a Stockbroker Firm adjusted by deducting the following and computed in accordance with the Statement of Net Capital in Annexure 7 hereto; (1) all unsecured loans given by the Stockbroker Firm that is included as current or long term assets. (2) the receivables, other than trade receivables arising from purchase/sale of Securities, due from the following: Parent, subsidiary or associate companies. Subsidiaries or associates of the parent company. (c) A company in which a director has a controlling interest directly or indirectly. (d) Employees of the Stockbroker Firm as defined in Rule of these Rules. Receivables due as a result of deposits placed in institutions included in to (c) above (provided that such institutions are approved to accept public deposits by the Monetary Board of Sri Lanka) and in unit trusts investing in gilt edged funds, need not be deducted when computing Net Capital. (3) amounts due from clients after the settlement date, as set out in the Statement of Net Capital in Annexure 7 hereto. (4) all other assets doubtful of collection less any provision made. (5) all deferred expenses and intangible assets. (6) all contingent liabilities In the event the Net Capital of a Stockbroker Firm referred to in Rule above, falls below the minimum requirement, the Stockbroker Firm shall, within two (2) Market Days of the Net Capital falling below the required minimum, inform the CSE and the SEC in writing, as to how the Stockbroker Firm will increase the Net Capital to the minimum requirement. The Stockbroker Firm shall increase the Net Capital within thirty (30) calendar days of the Net Capital falling below the minimum requirement. 5.4 LIQUIDITY REQUIREMENTS FOR TRADING IN SECURITIES OTHER THAN DEBT SECURITIES Each Stockbroker Firm shall maintain a minimum liquidity deposit of Rs. 3.5 million with the CSE and any increases as determined by the Board of Directors from time to time. The liquidity deposit shall be in the form and ratio as specified in Rule of these Rules The minimum liquidity requirement will be progressively increased in blocks of Rs. 500,000/=. The increase in the minimum liquidity requirement will be computed as follows: 3

4 TRADES INVOLVING CUSTODIAN SETTLEMENT 5% of the average daily purchases (only applicable for Custodian purchases rejected by the Custodian Bank where the settlement liability has passed on to the Stockbroker Firm) and, TRADES INVOLVING STOCKBROKER FIRM SETTLEMENTS 5% of the average daily purchases multiplied by 3 Any purchase/s of Securities which is/are subject to a margin requirement by the CDS and purchases of Debt Securities shall be excluded from the above computation The purchases used for the purpose of computing the minimum liquidity requirement of a Stockbroker Firm will be the purchases carried out by the Stockbroker Firm during a period of four (4) weeks immediately preceding the date of computation, excluding such date The liquidity requirement of Stockbroker Firms will be reviewed by the CSE on a weekly basis on the first Market Day of each week In the event of an increase in the liquidity requirement as computed by the CSE, the Stockbroker Firm shall take necessary steps to increase the liquidity deposit maintained with the CSE in accordance with Rule of these Rules within two (2) Market Days from the date the CSE advises the Stockbroker Firm of this increase, excluding the date of notification Reduction in the level of the liquidity requirement and the consequent reduction to the liquidity deposit of a Stockbroker Firm, where applicable, will be considered by the CSE on a weekly basis, on the first Market Day of each week. Refunds of the cash deposit will be made within two (2) Market Days, where applicable Liquidity Deposit (1) Subject to the ratio prescribed in Rule 5.4.7(2) of these Rules, the Stockbroker Firm shall maintain the liquidity deposit with the CSE in the following forms: Cash and Cash Equivalents Cash deposit Irrevocable Bank Guarantee acceptable to the CSE Non-cash Equivalents Government Securities (2) The Stockbroker Firm shall ensure that at least 50% of the liquidity deposit furnished to the CSE shall be composed of Cash and Cash Equivalents. The balance 50% or such other part thereof may be furnished to the CSE in 4

5 the form of Non-cash Equivalents. The value of the Non-cash Equivalents shall be adjusted by the hair-cuts determined by the CSE from time to time. (3) The liquidity deposit maintained by a Stockbroker Firm with the CSE will be used by the CSE to defray; (c) the subscription fees, entrance fees and other charges and dues payable by the Stockbroker Firm to the CSE any sums due and payable by the Stockbroker Firm to any client of such Stockbroker Firm and; any sum or sums of money due by such Stockbroker Firm to any fellow Stockbroker Firm during the course of the Stockbroker Firms dealing with the CSE as a Licensed Stockbroker Firm. (4) In the event that the CSE uses all or part of the liquidity deposit for the purposes described in Rule (3) of these Rules, the Stockbroker Firm shall replace the amount utilized by the CSE immediately. (5) Any coupon payments and maturity proceeds relating to Government Securities furnished by a Stockbroker Firm to the CSE shall be paid to the relevant Stockbroker Firm by the CSE, subject to the Stockbroker Firm maintaining the minimum liquidity requirement. 5.5 NON-COMPLIANCE WITH CAPITAL REQUIREMENTS Non-Compliance with the Minimum Capital Adequacy Requirements If a Stockbroker Firm referred to in Rule above, fails to meet the minimum Capital Adequacy Requirement/s; (i) (ii) five (05) times within a period of thirty (30) calendar days commencing from the first non-compliance; or, seven (07) times within a period of three (03) months commencing from the first non-compliance; whichever is earlier, the Chief Executive Officer of the CSE or any person acting on his behalf shall prohibit the Stockbroker Firm concerned from carrying out any purchase of Securities and shall inform the SEC of such prohibition. (c) The ability to carry out purchase of Securities will be permitted upon compliance by the Stockbroker Firm with the minimum Capital Adequacy Requirement/s. In the event the Stockbroker Firm concerned fails to comply with the minimum Capital Adequacy Requirement/s for a period of one (01) month 5

6 from the date of prohibition from carrying out any purchase of Securities, the matter will be referred to the Board of Directors of the CSE for necessary action and the Board of Directors of the CSE shall inform the SEC of the decision of the Board together with reasons for same Non-Compliance with the Minimum Shareholders Fund Requirement A Stockbroker Firm trading in equity and/or debt securities, which fails to comply with the minimum Shareholders Fund Requirement specified in Rule 5.2 of these Rules, shall be subjected to the enforcement action set out in this Rule with effect from 1 st January In the event a Stockbroker Firm fails to increase its Shareholders Fund Position within the time period specified in Rule above, the Stockbroker Firm shall be subject to the following: (i) (ii) (iii) The CSE shall prohibit the Firm from canvassing for and/or accepting new clients. The Firm shall; settle and/or return funds belonging to the clients (clients money) held by the Stockbroker Firm within a period of ten (10) Market Days from the date of prohibition as prescribed in Rule (i) above and not retain any clients money with the Firm beyond such date; and, settle Cleared Funds to the selling clients on the settlement date commencing from the date of prohibition as prescribed in Rule (i) above. Commencing from the date of prohibition from canvassing for and/or accepting new clients in terms of Rule (i) above, the Stockbroker Firm shall, until it is permitted to resume all trading activities as provided for in Rule (f) below, report the following to the CSE: On a daily basis I. A confirmation of the schedule of creditors detailing creditors who have been settled and creditors pending settlement, signed by the Chief Executive Officer or Compliance Officer of the Stockbroker Firm. II. Position of client funds against the creditors outstanding as detailed in item (I) above. On a weekly basis I. The client account bank reconciliation as at the end of each week The Stockbroker Firm concerned will be granted a further period of two (02) months from the date such Firm is prohibited from canvassing for and/or accepting new clients as per Rule above, in order to comply with the minimum Shareholders Fund Requirement prescribed in Rule above 6

7 (c) In the event the Stockbroker Firm concerned fails to comply with the minimum Shareholders Fund Requirement within the period of two (02) months granted in terms of Rule above, the following measures shall take effect on such Stockbroker Firm: (i) (ii) (iii) A notice will be published by the CSE, within three (3) Market Days from the end of the two (02) months period granted in terms of Rule above in all three (03) languages in national newspapers, stating the non-compliance with the applicable Rules and the enforcement action taken and to be taken by the CSE against the Stockbroker Firm concerned. The Stockbroker Firm concerned shall be required to facilitate the smooth transfer of portfolios of the clients of the Stockbroker Firm to other Stockbroker Firm(s)/Custodian Bank(s) of the clients choice. Upon the expiry of seven (7) Market Days from the date of publication of the notice referred to in Rule (c) (i) above, the CSE shall prohibit the Stockbroker Firm concerned from carrying out all trading activities. (d) (e) (f) The Stockbroker Firm concerned shall be granted a further period of two (02) months from the expiry of the period granted in terms of Rule above to increase its Shareholders Fund Position to the minimum requirement. If the Stockbroker Firm concerned fails to comply with the minimum Shareholders Fund Requirement at the expiry of the period granted in terms of Rule (d) above, the membership of the Stockbroker Firm shall be suspended by the Board of Directors of the CSE in terms of Article 20 of the Articles of Association of the CSE, unless the Board of Directors of the CSE decides to waive such suspension with the approval of the SEC, subject to such conditions as the SEC may deem appropriate. The Stockbroker Firm concerned will be permitted to resume all trading activities no sooner it complies with the minimum Shareholders Fund Requirement prescribed in Rule above Non-Compliance with the Minimum Net Capital Requirement If a Stockbroker Firm referred to in Rule above fails to increase the Net Capital within the time period specified in Rule above, the Chief Executive Officer of the CSE or any person acting on his/her behalf shall forthwith prohibit the Stockbroker Firm concerned from carrying out any purchase of Securities on behalf of clients/on own account of the Stockbroker Firm concerned and shall inform the SEC of such prohibition. The Stockbroker Firm concerned will be permitted to carry out sale of Securities on behalf of clients/on own account (if licensed to trade on own account). 7

8 (c) (d) The ability to carry out purchase of Securities will be permitted no sooner the Stockbroker Firm complies with the minimum Net Capital requirement. In the event the Stockbroker Firm concerned does not comply with the Net Capital requirement at the end of a period of three (3) months from the date of prohibition from carrying out any purchase of Securities on behalf of its clients/on own account of the Stockbroker Firm, the matter will be referred to the Board of Directors of the CSE for necessary action and the Board of Directors of the CSE shall inform the SEC of the decision of the Board together with reasons for same Non-Compliance with Liquidity Requirements (c) (d) If any Stockbroker Firm fails/neglects to maintain the liquidity deposit as specified in Rule 5.4.1, the Chief Executive Officer of the CSE or any person acting on his/her behalf shall forthwith prohibit the Stockbroker Firm concerned from carrying out any purchase of Securities on behalf of clients/on own account of the Stockbroker Firm concerned and shall inform the SEC of such prohibition. The Stockbroker Firm concerned will be permitted to carry out sale of Securities on behalf of clients/on own account (if licensed to trade on own account). The ability to carry out purchase of Securities will be permitted no sooner the Stockbroker Firm complies with the minimum liquidity requirement. In the event the Stockbroker Firm concerned does not comply with the liquidity requirement at the end of a period of one (1) month from the date of prohibition from carrying out any purchase of Securities on behalf of clients/on own account of the Stockbroker Firm, the matter will be referred to the Board of Directors of the CSE for necessary action and the Board of the CSE shall inform the SEC of the decision of the Board together with reasons for same. 8