Amendment to rule 25 (iii) of CSE Member Regulations

The Securities and Exchange Commission said the percentage of credit which may be extended by brokerage firms to their clients, in accordance with Rule 25 (iii) of the Member Regulations, be amended to reflect 50% instead of 75%, as is currently stated, and that the same be incorporated to the Member Regulations of the Colombo Stock Exchange from January 1, 2008, a media release said.

The rule will limit brokerage firms from lending more than 50% of the market value of an investor's portfolio.

This is in line with the internationally accepted credit margin exposure limit, which is followed by advanced jurisdictions and large markets such as USA and India.

It is expected that this initiative will further complement the risk mitigation and management stance the commission has adopted with the reduction of the settlement cycle risk by adopting a single tier settlement cycle (T+3) with from December 10. This move is consistent with worldwide best practice.

In most markets credit margin exposure allowed on initial purchases of Equity (Shares) has been limited to 50% of total value of such purchases of shares market to market on a daily basis.

In addition, in response to downturns in share prices, periodic margin calls are made (this threshold differs from country to country) on the buyer to maintain the 50% equation.

In many other markets (Ex. India), Stock Brokers who are much better capitalised than in Sri Lanka (currently only Rs. 25 million per stock broker) are not allowed to extend credit at all or allowed only very conservative exposure limits.