Small brokers buck minimum capital rule

Small brokers want the Securities and Exchange Commission (SEC) to amend the implementing rules and regulation of the Securities Regulation Code (SRC) and downgrade the P100-million capital requirement to only P10 million as the "absolute minimum," to be increased depending on the volume of transactions handled by the broker.

In the proposed amendments, small brokers said the original P5-million capitalization had been enough to guarantee capital adequacy, but this could be adjusted to P10 million with built-in mechanics for increasing the capitalization to reflect market conditions.

According to Joey Roxas, president of Eagle Securities Inc., previous studies and analyses of the formula for net capital have shown that for a higher transaction volume, a higher minimum capital was required just to meet the net capital requirement.

This meant, Roxas said, that the minimum capital was already calibrated to increase automatically as volumes increase. "So there is no need to arbitrarily set a minimum unimpaired capital requirement," he said.

The P100-million capital requirement, however, was intended to force small brokerage houses to merge and consolidate, the assumption being that this would radically improve their risk management capabilities and raise market confidence in general.

Roxas, however, said policy-makers should look at the market from a different perspective. "This is the wrong way to view the situation. We should try to expand the market, not decrease the number of brokers," he said.

According to him, the P100-million capital requirement poses as a serious disincentive and would force small brokerage houses to close shop. At present, he said only around 20 brokers/dealers have a paid-up capital of P100 million and above.

The remaining 130 brokers/dealers, he said, would be forced out of the market. "And for what? For the purpose of solving an imaginary problem?"

Roxas expressed apprehension that the market would shrink even further once the requirement is imposed. Bigger brokers, he said, do not bother to service small retail investors. When small houses close down, he said these investors would not be absorbed by the major houses.

"Capital adequacy and clearing risk have never been a major concern of investors," Roxas pointed out. "The major concern is market liquidity which will shrink even further."

As an alternative, Roxas said the capitalization should be based on a ratio of 100:1, with an absolute minimum paid-up capital of P10 million. This means that for every P1 million of capital, the house should be able to trade P100 million worth of stocks annually.

"This should be a fair formula considering that many in the top 20 houses are already close or above this ratio," Roxas said.