By Alexandria Grace C. Magno, Reporter
THE PHILIPPINE Stock Exchange, Inc. (PSE) expects the number of stock brokerage firms to decline further if the Securities and Exchange Commission (SEC) tightens capital requirements, with some brokers likely to cease operations, its chief said.
PSE President and Chief Executive Officer Ramon S. Monzon said in an interview with Bloomberg TV’s Haslinda Amin on Thursday that higher capital requirements could accelerate consolidation in the industry.
“Yes, I think it would be a good thing, especially for risk management purposes,” he said.
Mr. Monzon said the number of brokers has declined to 121 from about 180 previously and could fall further as capital requirements increase.
“With this capital increase, I think there will be some more brokers [that] will be stopping their operations,” he said.
The SEC is reviewing broker-dealer capitalization requirements and is considering raising the P100-million level cited in existing rules, SEC Chairperson Francisco Ed. Lim told reporters on Monday.
He said the decades-old level may no longer be adequate and that the review was partly prompted by previous incidents involving brokers with relatively small capital bases. He stressed, however, that lower capitalization did not necessarily indicate misconduct.
Under the SEC’s 2015 Implementing Rules and Regulations of the Securities Regulation Code, first-time broker-dealer registrants that participate in a registered clearing agency, as well as firms acquiring an existing broker-dealer business and participating in a clearing agency, are required to maintain P100 million in unimpaired paid-up capital.
The same rules allow certain existing broker-dealers that do not meet the P100-million level and are not seeking authority to engage in market-making transactions to maintain at least P30 million in unimpaired paid-up capital and post the required surety bond.
The PSE is separately proposing a phased increase in the minimum unimpaired paid-up capital of its trading participants.
“Actually, the PSE Board has already come out with a directive to the brokers to raise their capital requirements to 100 million, and we’ve given them a runway of three years,” Mr. Monzon said.
In July, the PSE sought public feedback on a proposal to increase the minimum unimpaired paid-up capital of trading participants to P50 million by end-2027 and P100 million by end-2029.
Under the proposal, brokers that fail to meet the P100-million requirement by end-2028 would have to increase their surety bond to P20 million from P12 million.
“So the SEC is talking about shortening the runway or increasing it further from P100 million. But, you know, they’ve talked about it, but I’m saying we’ve submitted to them the board’s decision to increase it, and I haven’t heard a thing from them on that,” Mr. Monzon said.
Broker-dealers are also subject to the SEC’s risk-based capital adequacy framework, which requires them to maintain financial resources relative to their risk exposures.
ANALYSTS SEE PRESSURE ON SMALLER BROKERS
Higher capital requirements could put greater pressure on smaller brokerage firms as they weigh the cost of raising additional capital against remaining in the industry, analysts said.
“A higher minimum capital requirement would likely accelerate consolidation in the Philippine stockbroking industry,” Globalinks Securities and Stocks, Inc. Head of Sales Trading Toby Allan C. Arce said in a Viber message.
He said brokers unable to raise additional capital could merge, sell their businesses, or leave the industry, while larger firms could spread technology and compliance costs across a wider client base.
He also said stronger capital positions could provide greater financial buffers against operational and trading risks, although higher capitalization alone would not ensure better governance.
“Raising the threshold may remove financially weaker participants, but it cannot substitute for effective supervision, internal controls and enforcement,” Mr. Arce said.
“A phased implementation period would therefore be important, particularly if the eventual requirement is substantially above current capitalization levels,” he added.
Mr. Arce said the effect on market liquidity could be mixed. Better-capitalized brokers could have greater capacity to handle institutional transactions and participate in market-making, while consolidation could temporarily disrupt trading as clients move between firms, he said.
“The Philippine market already faces relatively thin liquidity, so regulators should be careful that strengthening intermediaries does not unintentionally reduce the number of active distribution channels available to investors,” he said.
Philstocks Financial, Inc. Research Manager Japhet Louis O. Tantiangco said higher capital requirements could strengthen brokers’ capacity to absorb transaction-related risks and bolster investor confidence.
“However, raising the minimum capital requirement would also be an additional burden to the brokers who are already challenged by the present market conditions wherein trading is tepid,” he said in a Viber message.
BDO Securities Corp. President John Tristan D. Reyes said the requirement could leave the industry with fewer but larger brokerage firms, which he said could strengthen investor confidence by improving firms’ ability to manage risks and protect clients.
“This can help boost investor confidence as investors would be dealing with more stable companies that are able to manage risks and protect clients,” he said in a Viber message.
For retail investors, Mr. Arce said the effect would depend on how brokers deploy the additional capital.
He said greater investment in digital platforms, cybersecurity, research, and investor education could improve services, while higher account requirements or fees could discourage some smaller investors.