SEC suspends trading firm
MANILA, Philippines–The local unit of an international bond trading firm has been suspended by corporate regulators after it was found to have been operating with capital that was grossly insufficient to the size of its financial market activities.
Late last week, the Securities and Exchange Commission (SEC) ordered Tradition Financial Services Philippines Inc. to suspend its activities for five trading days “and until such time that the company is able to comply” with a higher capitalization level as required by the regulator’s Risk Based Capital Adequacy (RBCA) Rules that have been the industry standard since 2004.
Under these rules, financial institutions such as securities brokers and dealers are required to set aside a portion of their capital to serve as a buffer in case of financial market volatility or failed transactions that result in losses to either the firm or its clients’ portfolios.
The RBCA is the standard mandated under SEC regulations to ensure that financial services firms such as banks and money brokers are sound enough to service their customers. A broker/dealer must maintain an RBCA ratio of at least +1.10 to be compliant. A ratio lower and the broker “shall immediately cease doing business” under SEC regulations.
The prudential measures were imposed by regulators to strengthen the capital structure of brokers and dealers and consequently prevent any difficulties of one firm from spreading across the entire financial industry.
In its “show cause” letter to Tradition as early as March 20, 2009, the SEC asked the firm to explain why it had failed to maintain adequate RBCA levels, failed to comply with the minimum net liquid capital requirement, failed to inform regulators that its aggregate indebtedness had exceeded 1,700 percent of its liquid capital floor and why it failed to voluntarily cease business operations once its capital had fallen below minimum industry levels.
The letter was addressed to the company’s board of directors and its president, Jaime Villalon.
The SEC said that, in its reply, Tradition had apologized to the agency for its failure to inform them of the precarious capital situation, saying that it had started operations only a year earlier and, as such, was unable to comply immediately.
Tradition also reasoned that, as a broker, it did not take market positions, which could potentially impact its capital levels in case the prices of the securities moved against it, but only acted on behalf of its clients that were mostly banks and other financial institutions.
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