The Philippine Securities and Exchange Commission (SEC) has proposed raising the minimum unimpaired paid-up capital requirement for broker-dealers, moving to update capitalization rules that have remained in place for more than two decades.

Under the draft rules, the minimum unimpaired paid-up capital would be raised to P120 million from P100 million and would generally apply to all broker-dealers, covering both exchange trading participants and non-exchange broker-dealers, including first-time registrants and companies acquiring existing broker-dealer businesses. Firms dealing purely in proprietary shares and not holding securities for clients would be subject to a separate P2.5-million capital requirement.

The proposed amendments, issued for public comment on Sept.30, would revise the capital and surety-bond requirements under the 2015 implementing rules of the Securities Regulation Code. The SEC is accepting comments until Oct. 14.

Under rules that took effect in 2004, the SEC required P100 million in unimpaired paid-up capital from first-time broker-dealer registrants and firms acquiring existing broker-dealer businesses that participated in a registered clearing agency. Other existing broker-dealers not seeking authority to engage in market-making transactions were allowed to maintain P10 million in capital plus the required surety bond. The 2015 rules retained the P100-million requirement and raised the alternative capitalization requirement to P30 million, together with a surety bond.

The SEC said inflation had eroded the real value of the P100-million requirement. Based on the Philippine Consumer Price Index, the regulator estimated that P100 million in 2004 would be equivalent to about P230.54 million in 2026 prices. Even at the proposed level, the new floor would remain below that estimated inflation-adjusted equivalent.

The commission also cited principles of the International Organization of Securities Commissions stating that capital requirements for market intermediaries should reflect the risks they undertake, taking into account the nature and amount of their business.

"The Commission finds it reasonable and appropriate to increase the unimpaired paid-up capital requirement," the SEC said in the draft, citing the inflation-adjusted value of the existing requirement, international regulatory principles and the interest of investors.

Existing broker-dealers would be given a phased transition to comply with the higher capital requirement. Firms registered with the SEC when the circular takes effect — except those dealing purely in proprietary shares and not holding securities for clients — would have to attain and maintain at least P100 million in unimpaired paid-up capital by Dec. 31, 2029, and P120 million by Dec. 31, 2030. Failure to meet either deadline would subject a broker-dealer to applicable sanctions for noncompliance with the conditions for continuing registration, according to the draft.

Broker-dealers currently operating under the P30-million alternative capitalization requirement would continue to comply with applicable surety-bond requirements during the transition period. Exchange trading participants under the arrangement would be required to post a surety bond of at least P20 million starting Dec. 31, 2028, until they fully meet the required unimpaired paid-up capital. Broker-dealers would also continue to comply with applicable risk-based capital adequacy, minimum net liquid capital and other prudential requirements during the transition.

The proposal follows the SEC's earlier review of broker-dealer capitalization requirements. SEC Chairperson Francisco Ed. Lim said in August that the decades-old capital requirement might no longer be adequate and that the review had been partly prompted by previous incidents involving brokers with relatively small capital bases. Mr. Lim said, however, that lower capitalization did not necessarily indicate misconduct.

Philippine Stock Exchange, Inc. President and Chief Executive Officer Ramon S. Monzon said in August that tighter capitalization requirements could further reduce the number of stock brokerage firms, with some brokers potentially ceasing operations.

— Alexandria Grace C. Magno

Source: BusinessWorld