The SC Approves New Capital Adequacy Requirements for the Stockbroking Industry

Kuala Lumpur, 2 January 1999

The Securities Commission (SC) approved on 31 December 1998 the Capital Adequacy Requirements for stockbroking companies, which will refine the prudential benchmark for maintaining better market integrity at the level of the exchange and clearing house. The new requirements will replace the existing Minimum Liquid Fund rules once they are implemented through the Kuala Lumpur Stock Exchange (KLSE)'s business rules in 1999. These will enable both KLSE and its stockbroking companies to identify more clearly the capital available to cover the risks of running a securities business from the actual level of risk faced by the business at any given point in time.

The approval of the Capital Adequacy Requirements clearly marks an important milestone in the SC's continuing work in developing the prudential regulation of the Malaysian capital market. The new risk-based capital adequacy framework, in line with current international approaches, works on the premise that stockbroking companies that are exposed to greater risk need more capital. An important aspect of the framework is that it is flexible to changes in the risk profiles of stockbroking companies. The SC believes that the adoption of such a framework will encourage market intermediaries to adopt a more relevant approach to risk management. In particular, stockbroking companies will have to assess the risk of their trading books more regularly. As Dato' Dr Mohd Munir Majid, the SC Chairman, pointed out in July 1998, "benefits also accrue to those who are equally adept at recognising, quantifying and managing the risks inherent in the environment."

However, the SC recognises that in order to ensure that regulation remains relevant as the activities in the market change over time, the SC itself has to continue to review and enhance the prudential regulation of the capital market. The SC will therefore monitor the business activities and trading books of stockbroking companies more closely; monitor the evolution of international capital adequacy standards; and develop skills to evaluate quantitative risk management processes.

For a number of years, the SC has recognised the need for a new risk-based capital adequacy framework as part of a co-ordinated effort to establish more relevant and better prudential standards in the Malaysian capital market and has thus pressed for such a framework. And as the Chairman's Statement in 1997 annual report highlighted, the financial problems of stockbroking companies during the market turmoil have served to underline the usefulness of this approach and methodology of ensuring capital adequacy. To this end, the SC identified the enhancement of systemic risk management, and the review and redefinition of the roles and responsibilities of the exchanges, clearing houses and other market institutions as front line regulators as two of the key programmes in the SC's business plan.

For the development of KLSE towards its objective as a world class stock exchange, the SC sees KLSE putting in place more sophisticated and stringent enforcement and surveillance procedures over the stock market, as well as inculcating the discipline of internal compliance and controls in their intermediaries. As the SC Chairman has said in November 1997, the SC expects the front line regulators to place emphasis on inter alia enhancing systemic risk management which means that they will have to address issues such as inter market surveillance, institutional information-sharing, modes of handling emergency situations, capital adequacy as well as consumer protection.

It is under this broad umbrella of systemic risk management that the SC directed KLSE to initiate a project on capital adequacy for its stockbroking companies. The new Capital Adequacy Requirements now form one cornerstone of an enhanced systemic risk management regime which will also shortly see the introduction of new client money and customer assets rules as well as rules on best sales practice.

While the new rules or any other combination of regulatory tools are not themselves a guarantee against a systemic failure or market disruption, the SC and its front-line regulators will continue to make the necessary enhancements to minimise such risks faced by exchanges and other financial institutions. As critical as it is, prudential financial requirements like the new Capital Adequacy Requirements are but one aspect of prudential and financial regulations which together help to ensure systemic stability and financial integrity.


Issued on behalf of the Securities Commission. For assistance, please contact Corporate Affairs Department at tel. no. 603-2507510 or fax no. 603-2536184.
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