(NAR) VOL. 15 NOS. 3-4 / JULY - SEPTEMBER 2004
- The shift should be in conformity with IOSCO's "Objectives and Principles of Securities Regulation" and consistent with similar shifts by security regulators in the region as well as globally.
- In addition to liquidity risk, the model should be capable of covering other significant risks Broker Dealers are exposed to.
- In quantifying the significant risks and the capital required to cover them, the model should adopt approaches which are consistent with international best practices.
- Factors to be incorporated in the model for the measurement of the various risks should be based on the local market conditions where appropriate but in no case shall they be below the Basel Standards.
- The model should be relatively easy to implement.
- The introduction of the RBCA model should facilitate the proposed move to risk based supervision by the Commission and the Exchange as well as the adoption by Broker Dealers of the minimum risk management standards which the Commission should also introduce.
- The RBCA computation and the submission to the Commission and/or the Exchange of the result should be performed at the frequency that the Commission should prescribe.
- The reporting system relative to the RBCA should incorporate appropriate early warning signals.
- RBCA computation schedules and reports should be capable of easy adoption/transfer to an integrated electronic reporting and monitoring system when introduced.
- The risks proposed to be covered for the RBCA will include, among others, (1) Position or Market Risk, (2) Credit Risks such as Counterparty Risk, Settlement Risk, Large Exposure Risk, and Margin Financing Risk, and (3) Operational Risk.
- The new capital requirements will be incorporated to supplement the existing net capital computation as prescribed under SRC Rule 49.1 (Net Capital Rule), which at present focuses primarily on Liquidity Risk.
- For ease of implementation, the current net capital computation will be enhanced/modified to align it with the capital requirements for the additional risks identified above. For this purpose, the Commission will be revisiting the current net capital model to fine tune the provisions relating to the treatment of the various items of assets, liabilities and equity in the computation of net capital to fully capture the economic substance of the underlying risks and the available equity to cover them.
- In calculating capital requirements, appropriate risk conversion factors (currently being developed by the Commission) will be applied to risk positions/exposures.
- These factors, where appropriate, will be based on the volatilities derived from actual data in the Philippine equities and fixed income securities markets.