Sri Lanka securities watchdog halts broker credit

Sept 15, 2010 (LBO) – Sri Lanka’s Securities and Exchange Commission has ordered brokering firms to “absolutely refrain” from giving credit for clients to trade in stocks as rising prices reduced the immediate risk of delaying payment. In Sri Lanka purchases have to be settled in three days (T+3).

However clients could continue to get credit from margin accounts given by another provider such as a bank.

The SEC said brokers have to shift any client credit accounts to a margin provider by the end of the year.

Margin trading facilities are popular when stocks go up and can also fuel bubbles.

Margins given by brokers can hurt their financial stability if stock prices reverse sharply and clients are unable to meet margin calls.

In the late 1920s when the US Federal Reserve printed money in excess of real investment opportunities available in the economy large volumes of money went into stocks via newly created margin facilities.

When the bubble was broken, margin calls worsened the stock market correction, eventually leading to the great depression.

Sri Lanka’s benchmark index fell into negative territory in intra day trading after the announcement.