Stock broking firms yesterday clarified issues with the Securities and Exchange Commission (SEC) over the latters’ action with regard to suspending 12 broking houses extending credit to clients due to lack of liquid capital.
Leading stock broking houses complained they had niggling issues with the SEC which had been resolved on Thursday but said these had contributed to forced selling as the liquid asset position of some broking firms was a concern to the SEC.
He said the SEC had sent letters saying 12 broking firms had extended credit and did not have a sufficient amount of liquid assets and this triggered certain broking firms to force sell their debtors to have positive liquid assets. Firms are required by the regulator to net off assets against borrowings to have no gearing at the end of the month. This included four stock broking firms who had positive liquid assets but had been told they did not meet the liquid asset requirement which also created confusion among stock broking firms, he said. In some cases a few brokers had been short by around a few million rupees.
However yesterday morning the stock broking firms explained to the SEC the misinterpretation of the directive (because although four firms had positive liquid assets they had been told otherwise) and this was principally not disagreed by the SEC, the CEO who wished to remain anonymous, said.
The SEC recently issued a directive permitting stock brokers to extend credit to investors over T +3 days based on a computation of Liquid Assets less Obligations to arrive at zero leverage at the end of the month. The directive mandates stock brokers to reconcile daily positions taken against the liquid assets and to submit a declaration to the SEC and Colombo Stock Exchange at the end of the month.
Perhaps negative broker sentiments spilled over to the Bourse dipped by over 0.5% yesterday. Turnover was a lacklustre Rs. 1.39 billion. Net foreign sales were Rs. 47 million.
“The fundamental value of shares got disregarded in the market from Monday to Thursday as a result. Brokers started force selling most shares where the clients were making lesser losses. These were sold by the broking firms instead of evaluating the fundamentals and selling,” he said.
Banking Finance and Insurance, Beverages, Food & Tobacco and Chemicals & Pharmaceuticals sectors were the highest contributors to turnover yesterday.
Blue Diamonds voting and non voting shares traded heavily with 9,241,100 voting shares contributing Rs. 108 million to turnover and closing at Rs. 11.40 while 20,346,800 non-voting shares contributed Rs. 105 million to turnover. Blue Diamonds non voting shares closed at Rs. 5.
Colombo Land Development Company saw 1.2 million shares trade to make it the third highest contributor to turnover for the day, contributing Rs. 74.9 million to turnover. The share closed at Rs. 60.50.