SC enhances Capital Adequacy Requirements framework for stockbroking companies

The Securities Commission (SC) today announced enhancements to the Capital Adequacy Requirements (CAR) framework for stockbroking companies. The enhancements are aimed at facilitating the re-engineering of business models in the stockbroking industry and enabling stockbroking companies to utilise their capital more efficiently.

The enhancements will provide the industry with greater flexibility in conducting their business to enhance their competitiveness and to facilitate the shift towards a risk-based approach to supervision. These enhancements are aligned with the vision and strategic initiatives contained in the Capital Market Masterplan (CMP) to create strong full-service domestic market intermediaries and to promote greater reliance on a market-based approach to regulation.

The CAR framework was first implemented in December 1999, in the aftermath of the Asian Financial Crisis. Its objectives were to ensure that stockbroking companies were well capitalised and managed their businesses prudently. These objectives have been achieved.

Earlier this year in January, the permitted gearing ratio requirement for Universal Broker (UB) with core capital of more than RM500 million was removed; thereby removing restrictions on UBs in terms of their bank borrowings.

Following extensive consultation with the stockbroking industry and other market participants during the engagement sessions leading up to the recently-concluded CMP dialogues, there was increasing recognition on the need to provide stockbroking companies greater flexibility in meeting prudential requirements, as the business of stockbroking expands from a single business line to a diverse and increasingly sophisticated range of products.

There was also a need to recognise that the impact of the increasing diversity of products and transactions on asset exposures in terms of their risk-mitigating effect.

The enhancements announced today, took into consideration that stockbroking companies have built up familiarity and capabilities in managing risks since the implementation of the CAR framework in 1999 and are considerably more disciplined and prudent in their conduct of business. In developing the enhancements, the SC has undertaken jurisdictional studies and took into account feedback from industry. The prudential standards adopted in the enhanced framework have been set at least on par with international standards.

Highlights of the new enhancements:

  • The reporting frequency of CAR has shifted to a risk-based approach which tiers the reporting frequency based on the ability of the stockbroking company to meet prudential requirements. Stockbroking companies are however, still required to monitor and compute their CAR ratios on a daily basis, on a mark-to-market basis as a measurement of risk and to ensure the Kuala Lumpur Stock Exchange has access to their CAR monitoring systems.
  • The Position Risk Factors and Risk Requirements for Large Exposures have been reviewed while the CAR ratio has been standardised to 1.2 times for all stockbroking companies. These changes are to take into account the increased diversity in the scope of the businesses of stockbroking companies and the risk-mitigating effect of diversification.

The new requirements will be stipulated in the Rules of Kuala Lumpur Stock Exchange. Details of the enhancements are listed in Table 1 below.

Table 1:

CAR area

Existing Requirements

Proposed Requirements

Minimum CAR ratio

  • 1.20 Non-UBs
  • 1.50 UBs

  • 1.20 for all stockbroking companies
CAR reporting frequency

  • Daily

  • CAR ratio more than 4.00 (monthly)
  • CAR ratio more than 2.00 but less than 4.00 (fortnightly)
  • CAR ratio less than 2.00 (daily)
Unrealised gain and unaudited profit

  • Not recognised in the computation of Liquid Capital

  • Recognised in the computation of Liquid Capital
Position Risk Factor for investment in unit trust

  • 28% (equity)
  • 17.1% (debt securities)

  • 15% (equity)
  • 5% (debt securities)
Position Risk Factor for single stock

  • CI stocks – 23%
  • Non-CI stocks – 28%
  • KLSE CI Futures – 10%

  • CI stocks – 15%
  • Non-CI stocks – 21%
  • KLSE CI Futures – 7%
Large exposure risk requirement to debt securities issued by Federal Government
and Government related agencies that are fully guaranteed by the Government

  • 250% of effective shareholders’ funds

  • 500% of effective shareholders’ funds
Large exposure risk requirement to debt securities with AA and AAA rating

  • 30% of effective shareholders’ funds

  • 250% of effective shareholders’ funds
Definition of single equity for large exposure risk requirement

  • Includes net purchase contract value that has not been paid for

  • Excludes net purchase contract value that has not been paid for
Large exposure risk requirement threshold for equity and debt securities

  • 10% of effective shareholders’ funds

  • 15% of effective shareholders’ funds

20 November 2003