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Mixed reactions to SEC’S credit, broker trading rules relaxation

10 Oct 2012 - {{hitsCtrl.values.hits}}

The removal of credit restrictions by the Securities and Exchange Commission (SEC), effectively providing brokers with the facility to extend more credit, met with strong positive and negative feedback from market analysts on both sides of the issue.

Speaking to Mirror Business, former Director General of the SEC, Aritha Wickramanayake said, “Credibility and not credit is the main issue that the market is facing today. I’ve always maintained that credit has in fact never been an issue for brokers and the idea that there is a lack of credit is an artificial perception that some are trying to create and I think that with the way the market performed after the restriction was lifted, this point has proved itself.”

“Quite obviously, the extension of unlimited credit also creates systemic risks and this is made worse in a downturn. With restrictions on credit, it would have been possible to at least make sure that in a situation where the market did drop, the extension of credit would not be able to cause a systemic collapse because of the limits that were in place and this is no longer the case,” Wickramanayake asserted.

Whilst expressing hope that the decision to lift restrictions was an informed one, Wickramanayake went on to question what the long-term impact of rolling back regulations would be.

“If the SEC hasn’t made this decision after carefully weighing out the consequences that I fear that they are being misguided and this is not going to sustain the market over the long term. There are lots of people who burnt their fingers in the last downturn, when credit was freely available,” Wickramanayake cautioned.

“The SEC should not concern itself over daily market fluctuations in the first place but instead, should be looking at making sure that the proper systems are in place to facilitate growth over the long term and I hope that this is the case,” he added.

Nevertheless, reactions to the SEC’s latest regulatory changes have been extremely polarizing.

Speaking with Mirror Business, Director at Capital Trust Securities (Pvt.) Ltd., Sarath Rajapakse strongly welcomed the moves to roll back in regulations implemented during the tenure of former Chairperson of the SEC, Tilak Karunaratne.

This move will definitely help the smaller brokerages which were unable to extend credit because of these regulations. They were unable to find capital previously but now we feel that several billion rupees in trading money will finally be allowed to enter the market and we can almost certainly expect the market to start trending upwards as a result.

When asked about whether freely available credit in the market could create the kind of systemic risk that Wickramanayake cautioned against, Rajapakse said, “We had downturns in the past and even then, whilst the war was still going on, we never had a default up to date. The idea that these restrictions help anyone is something that has been imagined by parties who wanted to smother the market; such draconian measures would not be found in developed markets like those in New York, Tokyo or London.”

Rajapakse went on to blame the imposition of regulations itself, starting from July 2010, as being responsible for the downturn in the Colombo bourse.

“Things like price bands and other limits might be found in pick pocket markets like those in Indonesia and Thailand but we are not aiming to be a back water market. In 2009/2010, we were one of the best performing markets in the world but with more and more stringent regulations, the market finally yielded and that resulted in the upward movement of the market being artificially interrupted,” Rajapakse claimed.

In terms of what kind of impact deregulation will have on market performance, one analyst speaking on condition of anonymity with Mirror Business projected that no real change in performance would be seen during an upswing in the market.

“The change in rules was brought about mainly in favour of retailers who are running behind stocks. Strategic and institutional investors will not be affected directly as a result of these changes and it is they and not retailers and punters who drive the market. So, in the current conditions, I don’t see any major changes in performance taking place.”

“There is a greater issue of instability that is created as a result of the SEC going back and forth on regulations. This does not provide the security and stability that is required to attract investors. If the SEC is to implement new regulations, then it is crucial that once implemented, they are not changed for at least a period of one year, so that investors know what to expect.”

(CF)

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Mixed reactions to SEC’S credit, broker trading rules relaxation

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