Question & AnswerQ&A (SEC MEMORANDUM CIRCULAR NO. 10, SERIES 2004)
The primary regulatory shift declared is the eventual adoption of the Risk Based Capital Adequacy Requirement/Ratio (RBCA) for all registered Broker Dealers.
The SEC declares the shift under its regulatory and supervisory powers pursuant to Section 5 of the Securities Regulation Code.
RBCA is defined as the minimum levels of capital that must be maintained by firms licensed or securing a Broker Dealer license, considering the firm’s size, complexity, and business risk.
Key principles include conformity with IOSCO's 'Objectives and Principles of Securities Regulation,' covering multiple significant risks including liquidity, adopting international best practices, using local market conditions without going below Basel standards, ease of implementation, facilitating risk-based supervision, timely submission of reports, incorporating early warning signals, and compatibility with electronic reporting systems.
The risks include (1) Position or Market Risk, (2) Credit Risks such as Counterparty Risk, Settlement Risk, Large Exposure Risk, and Margin Financing Risk, and (3) Operational Risk.
The RBCA requirements will supplement the existing net capital computation, which currently primarily focuses on Liquidity Risk. The current net capital model will be enhanced and modified to align with the capital requirements for additional identified risks.
Risk conversion factors will be based on volatilities derived from actual data in the Philippine equities and fixed income securities markets, and are being developed by the SEC.
Broker Dealers are expected to observe their own risk management programs following sound risk management principles even as the SEC develops the minimum standards and the transition to RBCA is implemented.
The Circular shall take effect fifteen (15) days from its publication on the Philippine SEC’s website.
The Exchange is directed to continue developing regulatory processes leading to the mandated Risk Based Approach to Supervision of its Trading Participants and coordinate with the SEC for the implementation and gradual transition to RBCA.