The Tribune

• Broker/dealers under-capitalised may be ‘more exposed’

• Commission: Rules to address ‘long outstanding matter’

• Plans to expand concept to funds, corporate services

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamas-based securities dealers that meet existing requirements will all meet the Securities Commission’s enhanced capital adequacy rules, regulators revealed yesterday.

Christina Rolle, the Securities Commission’s executive director, told an industry briefing that developing regulatory capital rules for the financial services industry’s broker/dealer and investment advisory sector had been “a long outstanding matter” that had failed to keep pace with its increasing complexity.

With base or “fixed floor” capital requirements set to double for some elements of this segment, Ms Rolle said the regulator had sought to combine the existing “net capital rule” - which dates back to 1999 and the last century - with the Basel capital rules employed by the banking and trust company segment.

As a result, the Securities Commission is proposing that all its broker/dealer and investment advisory registrants ensure their adjusted net liquid assets be “no less” than 120 percent of their so-called financial resources requirements “at all times”.

This 120 percent ratio will act as the so-called “trigger”, with 110 percent acting as the “minimum” licensees cannot slip below. Breaching these benchmarks will trigger potential Securities Commission enforcement action, which will increase in severity according to the depth and length of the violation.

Ms Rolle added that the regulatory capital rules concept, once finalised and implemented, will also be extended to other sectors it regulates such as investment funds and financial and corporate services providers.

Acknowledging that upgrading the regulatory capital rules had been discussed prior to her appointment, and ever since the Securities Industries Act was reformed in 2011, the Securities Commission chief said regulators had first explored adapting the banking industry’s Basel rules to suit broker/dealers and investment advisers.

“We found those rules too complex for our registrants and licensees,” she explained. “In the 1999 Act, the solvency rules were based on the net capital rule. But since 1999 and 2011, our market has grown in size and complexity, and a firm’s capital requirements are not aligned with a firm’s risk.

“That does not necessarily mean there’s a capital inadequacy as a result. It means we cannot be confident that a firm’s measure of risk is appropriate, and all liabilities are included. The commission is empowered to monitor the solvency of licensees and take action to protect clients where solvency is in doubt.”

Besides consulting local industry practitioners, Ms Rolle said the Securities Commission also benchmarked the proposed Securities Industry (Financial Resources) Rules 2021 against capital requirements imposed by other international financial centres (IFCs) such as the Cayman Islands, Jersey, the Isle of Man, Hong Kong, Cyprus, Ireland, Dubai and Singapore.

Explaining that these were chosen because of their similarities to The Bahamas’ financial services industry, and the interaction between regulator and private sector, Ms Rolle said broker/dealers and investment advisors already compliant with existing regulatory capital requirements will have nothing to fear from the new proposals.

Referring to a survey analysis performed by the Securities Commission, she said: “We found all the licensees currently meeting their regulatory capital will continue to meet their regulatory capital under these rules. Those licensees that are deficient in regulatory capital, these rules will expose that and possibly to a greater extent than the net capital rule.”

Ms Rolle added that the Securities Industry (Financial Resources) Rules 2021 are “a hybrid” between the old “net capital rule”, dating from 1999, and the Basle requirements. “It sifts out a lot of the complexity, and ensures clients are sufficiently protected.

“In a nutshell, what’s happening with these rules is that a licensee/registrant is required to keep capital of 120 percent of adjusted net liquid assets.... If you fall below the 120 percent trigger ratio, the Commission will develop policies for enforcement measures to be taken to protect clients of licensees.”

To minimise bureaucracy and red tape, Ms Rolle said Securities Commission licensees who are regulated by the Central Bank in their capacity as banks and trust companies will not be required to make capital adequacy reports to the former regulator.

“The Central Bank, being a prudential regulator, keeps their hands on the solvency of their licensees,” Ms Rolle said. “We don’t find the need to duplicate or upload more requirements on what is already required.”

Still, the base or “fixed floor capital” required by broker/dealers involved in just arranging securities deals or managing securities is set to double from the existing $25,000 to $50,000 under the new rules. Broker/dealers dealing in securities as a principal, or as an agent, will see their respective base requirements rise from $300,000 and $120,000 to $325,000 and $175,000, respectively.

Describing the rules as “a first step” in addressing regulatory capital adequacy, Ms Rolle added: “It’s forcing the licensee to look at their business with a more critical eye and make decisions with a more critical eye.

“The next step is to also produce Financial Resources Rules for licensees under the Investments Fund Act. Essentially it’s the same thing required; to maintain a certain level of capital. That only impacts fund administrators.

“We’ll also produce those rules for licensees under the Financial and Corporate Services Providers Act who, going forward, will be required to maintain a certain level of capital adequacy. We haven’t determined who those licensees will be, but those whose activities fall under financial services will be required to maintain a certain level of capital.”