July 02, 2007 (LBO) – A new rule by Sri Lankan stock market regulators that limits brokering credit for investors should ensure more stability and provide long term security for the market. The rule, effective from July 1, will limit brokerage firms from lending more than 75 percent of the market value of an investor’s portfolio, according to the Colombo Stock Exchange (CSE).
“These are steps to ensure the stability of the market in the future,” Reshan Kurukulasuriya, assistant vice president of DFCC stockbrokers, told LBO.
It is a common practice for brokering firms to lend two or three times the portfolio value to investors who do margin trading on a daily basis looking for small profits, stockbrokers said.
But the practice also created more volatility in the market.
With the new rule, investors doing margin trading will only be able to borrow up to a certain limit through brokers who rely on that credit to buy shares daily.
According to the rules, an investor’s share portfolio is pledged to secure credit.
If the market value of the shares that are pledged falls by ten percent, the investor has to meet the shortfall by the next market day, CSE rules also sa