SEC Amends SRC Rules and Circular on Risk Based Capital Adequacy Ratio for Brokers Dealers

On 11 August 2023, the Securities and Exchange Commission (“SEC”) issued Memorandum Circular No. 11 (“Circular”) containing amendments to the 2015 Implementing Rules and Regulations of the Securities Regulation Code (the “SRC Rules”) and SEC Memorandum Circular No. 16, Series of 2004 Relative to the Settlement Cycle from T+3 to T+2. 

The Circular amended SRC Rule 50 by providing for a shorter settlement cycle of two (2) business days after the trade date compared to the previous (3) business days after the trade date, for purchases by a customer in a cash account.

The Circular also amended SRC Rule 49 on the Computation of Net Liquid Capital (“NLC”). Per the Circular, SRC Rule 49 now provides that, “in computing NLC, the Equity Eligible for Net Liquid Capital of a Broker Dealer is adjusted by the following, provided, however, that in determining net worth, all long and all short securities positions shall be marked to their market value:

• 49.1.1.5.3.1
  Adding unrealized profits (or deducting unrealized losses) in the accounts of the Broker Dealer.
• 49.1.1.5.3.2
  Deducting fixed assets and assets which cannot be readily converted into cash [less any indebtedness excluded in accordance with SRC Rule 49.1.1.5.2.4 of the Definition of the term Aggregate Indebtedness] including, among other things:
  • 49.1.1.5.3.2.1
    Real estate; furniture and fixtures; Exchange memberships/trading rights; prepaid rent, insurance and other expenses; goodwill, organization expenses;
  • 49.1.1.5.3.2.1
    All unsecured advances and loans; deficits in customers’ and non-customers’ unsecured and partly secured notes; deficits in special omnibus accounts or similar accounts carried on behalf of another Broker Dealer, after application of calls for margin, marks to the market or other required deposits that are outstanding two (2) business days or less; deficits in customers’ and non-customers unsecured and partly secured accounts after application of calls for margin, marks to the market or other required deposits that are outstanding two (2) business days or less, except deficits in cash accounts for which not more than one extension respecting a specified securities transaction has been requested and granted; the market value of stock loaned in excess of the value of any collateral received therefore; and any collateral deficiencies in secured demand notes in conformity with SRC Rule 49.1.2 above.”

Meanwhile, Section 52 on the monthly aging of Customers Receivables and the schedule of the Allowance for Doubtful Accounts was amended to adjust to the new settlement cycle. Finally, Sections 4, 5, 6, 7 and 8 of the SEC MC No. 16, Series of 2004 were also amended on the adoption of the risk-based capital adequacy requirement/ration for brokers dealers.

The subject amendments shall apply to transactions to be executed starting 24 August 2023.