The Colombo Stock Exchange (CSE) last week said it is in the process of implementing a Risk-based Capital Adequacy Requirement to all Stockbroker Firms who are Members/Trading Members of the CSE and licensed by the Securities and Exchange Commission of Sri Lanka (SEC). The Risk-based Capital Adequacy Requirement would replace the minimum Net Capital requirement of Rs. 35 million, which is currently applicable to Stockbroker Firms.
The CSE, taking into consideration the best practices adopted by other markets and upon an analysis of the trading patterns and the operational capabilities of the Stockbroker Firms operating in the Sri Lankan market, has recommended a minimum Capital Adequacy Ratio (CAR) of 1:2 to be applicable to Stockbroker Firms.
The Risk based Requirement compares the risks of Stockbroker Firms, arising from the transactions and operations carried out, with the amount of Liquid Capital that the Stockbroker Firm must maintain on an on-going basis. The methodology would identify the amount of Liquid Capital that a Stockbroker Firm should maintain as opposed to various types of risks the Stockbroker Firm is exposed to. There are four types of such risk factors that have been identified by the CSE when developing the Risk based Capital Adequacy Requirement; namely Operational Risk, Counterparty Risk, Large Exposure Risk and the Position Risk.