Margin Providers

These Rules shall apply to all Market Intermediaries interpreted under Section 55 of the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended) , as Market Intermediaries and have obtained a certificate of Registration under Section 19A of the said Act.

These Rules are supplementary to the terms and conditions set out in Part V of the Schedule to the Securities and Exchange Commission of Sri Lanka Act. As such Market Intermediaries are required to comply both with the terms and conditions set out in Part V of the Schedule to the Securities and Exchange Commission of Sri Lanka Act and these Rules.

1. Every Market Intermediary as defined by Section 55 of the SEC Act shall be bound to comply:
   • with these Rules and any amendment thereto ;
   • with the terms and conditions contained in Part V of the Schedule to the SEC Act;
   • with any additional requirement which may be imposed by the SEC from time to time by way of a directive, or guidelines.
2. No person shall engage in any activity of a Market Intermediary or hold himself out as doing so unless he is a holder of a certificate of registration issued by the Securities and Exchange Commission of Sri Lanka as a Market Intermediary belonging to the category of that regulated activity.
3. Without prejudice to Part V of the Schedule to the Securities and Exchange Commission Act No. 36 of 1987 (as amended) and the Rules stated herein, the Commission may impose such other conditions or restrictions to be followed by the Market Intermediaries whilst the certificate of registration is in force.
4. The SEC may waive compliance with any Rule on being satisfied that the attendant circumstances justify such waiver.

05. A Registered Market Intermediary shall pay such registration fee in respect of each regulated activity in such manner as may be specified by the Commission.

06. No holder of a Certificate of Registration as a Market Intermediary shall carry on any regulated activity in respect of the registration without the written consent of the Commission if the minimum financial requirements as may be specified by the Commission are not met.

07. All Registered Market Intermediaries shall comply with all general or special directives and guidelines issued to them by the Commission.

08. All Registered Market Intermediaries shall not contravene any written law enacted for the protection of the members of the public against financial loss by dishonesty, incompetence or malpractice.

09. All Registered Market Intermediaries shall always furnish true information to the Commission.

10. All Registered Market Intermediaries shall not act fraudulently or dishonestly in the performance of the regulated activity and shall not engage in any business practices appearing to the Commission to be deceitful or oppressive or otherwise improper ( whether unlawful or not) or which reflect in the opinion of the Commission discredit on its or his method of conducting business .

11. All Registered Market Intermediaries shall not engage or be associated with any other business practices in such a manner as to cast doubt on its or his competence and soundness of judgment.

12. All Registered Market Intermediaries shall always strive to act in the best interests of clients.

13. All Registered Market Intermediaries shall always strive to act efficiently, honestly and fairly.

14. All Registered Market Intermediaries shall ensure that all directors and individuals employed to carry on the registered activity shall be fit and proper persons as may be determined by the Commission and shall possess the requisite qualifications as required by the Commission.

15. All Registered Market Intermediaries shall maintain a register containing the names of the individuals referred in Rule 15 in such form and manner as may be specified by the Commission.

16. All Registered Market Intermediaries shall comply with the Rules, Directives and Guidelines issued by the Commission in respect of the carrying on of the particular regulated activity of the Market Intermediary.

17. Where the Commission appoints a person for purposes of supervising the compliance by a Market Intermediary of the Rules, Directives and Guidelines issued by the Commission, the Registered Market Intermediary shall;

(1) Furnish the authorized person with any information that the authorized person may require to determine whether the Market Intermediary has complied with the provisions of the SEC Act (as amended) or with any Rules, Directives or Guidelines issued by the Commission which are applicable to Market Intermediaries; and

(2) Take such steps as are necessary to ensure compliance with the provisions of the SEC Act or any Rules Directives or Guidelines issued by the Commission

18. A Registered Market Intermediary shall furnish such returns and provide such information relating to its business as the Commission may require.

19. The Commission may specify that any information required under the above mentioned section shall be submitted within such period , at such intervals , in such manner or in such form as the Commission may specify and the Registered Market Intermediary shall comply with such requirement

20. A registered Market Intermediary shall –

(1) Maintain or cause to be maintained , such accounting records and other books as will sufficiently explain the transactions and financial position of its business and enable true and fair profit and loss accounts and balance sheets in keeping with the Sri Lanka Accounting Standards to be prepared from time to time ; and

(2) Maintain or cause to be maintained such accounting records and other books in such a manner as will enable them to be conveniently and properly audited.

(3) Retain such accounting records or other books as may be required to be maintained by the Commission for a period of not less than 6 years.

21. It shall be the duty of all Registered Market Intermediaries to furnish to an auditor or to an independent auditor appointed by the Commission

(1) All the information within its or his knowledge or which it or he is capable of obtaining or

(2) Any information which the auditor or independent auditor requires to enable him to carry out his duties and

The Market Intermediary shall ensure that all the information which is furnished to the auditor or independent auditor as the case may be is not false or misleading in any material particular.

22. Where the Commission having considered that it is in the interests of the Registered Market Intermediary or those of its or his clients, appoints an independent auditor or such other person or a body of persons to examine, audit and report either generally or in relation to any particular matter , upon the books, accounts and records of, and assets held by the Market Intermediary, it shall be the duty of such intermediary

(1) To produce any books, accounts and records of, and any assets held by the intermediary relating to his business ; and

(2) Shall answer all questions relevant to an examination and audit which are put to him by the independent auditor or such other person appointed by the Commission.

23. A Registered Market Intermediary with intent to defeat the purposes of Section 23 above or with intent to prevent delay or obstruct the carrying out of any examination shall not

(1) Destroy, conceal or alter any books or property relating to the business of the Market Intermediary ; or

(2) Send or attempt to send or conspire with any other person to send out of Sri Lanka any such books or any property of any description belonging to or in the disposition of or under the control of the Market Intermediary.

24. A Registered Market Intermediary shall on the occurrence of any one or more of the following events shall give to the Commission written notice , not later than fourteen days setting out the particulars of the event;

(1) If the Registered Market Intermediary is in the course of being wound up or otherwise dissolved whether within or outside Sri Lanka or ceases to carry on the business to which the registration relates;

(2) Where the Market Intermediary has failed to comply with any requirement under the SEC Act or of any Rules , Directives or Guidelines issued by the Commission;

(3) where any information or document furnished to the Commission is false or misleading; or there is any change in any information or document furnished to the Commission

(4) where any execution against the Market Intermediary in respect of a judgment debt has been returned unsatisfied in whole or in part;

(5) where a receiver or an equivalent person has been appointed in respect of any property of the Market Intermediary

(6) where the Market Intermediary whether within or outside Sri Lanka has entered into a compromise or scheme of arrangement with its creditors being a compromise or scheme of arrangement that is still in operation ; and

(7) where the directors , or the chief executive officer has been convicted of any offence involving fraud or dishonesty , or a violation of securities law or

(8) Becomes an undischarged bankrupt.

25. Where a Registered Market Intermediary ceases to carry on the business in all or any of the regulated activities to which the certificate of registration relates, shall return the certificate of registration to the Commission within fourteen days of the date of the cessation.

26.

(1) Subject to subsection (2), a Registered Market Intermediary may surrender the certificate of registration by sending it to the Commission together with a written notice of its surrender.

(2) The surrender of a certificate of registration shall not take effect until the Commission is satisfied that adequate arrangements have been made to meet all the liabilities and obligations of the Registered Market Intermediary that are outstanding at the time when the notice of surrender was given by the Market Intermediary.

27. A Certificate of Registration of a Market Intermediary shall be deemed to be Revoked

(1) If the holder of the certificate of registration is wound up or otherwise dissolved whether within or outside Sri Lanka

(2) In the case of an individual holder of a certificate of registration, if the individual dies.

28. The words and terms defined in the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 as amended by Act No. 26 of 1991 and Act No. 18 of 2003, shall unless the context so requires have the same meaning assigned to it in the said Act.

“Commission” means Securities and Exchange Commission of Sri Lanka;

“Connected Party” means the parent, subsidiary or an associate company of such party;

“Liquid Capital” means cash or investments which can be readily converted to cash such as bank/call deposits, re-purchase agreements with maturity of less than three months, commercial papers which are endorsed or guaranteed by a licensed commercial bank or licensed specialized bank with a term to maturity of less than three months and government issued securities with a term to maturity of one year or less;

“Net Capital” means,

1. The aggregate value of
1. Stated Capital
2. Reserves and
3. SEC approved subordinate debt or
2. Total assets minus total liabilities
   adjusted by deducting any other item as specified by the SEC from time to time.

“Rules” mean these Rules as may be amended from time to time;

“SEC” means the Securities and Exchange Commission of Sri Lanka;

“SEC Act” means the Securities and Exchange Commission of Sri Lanka Act No.36 of 1987 as amended from time to time;

“Single Client” in the context of a corporate body means the borrowing company its parent and subsidiary company and in the context of a natural person means the borrower, his/her spouse and dependent children.

01 (1) A Registered Margin Provider shall not appoint an individual as a director or a person dealing with clients for and on behalf of a Margin Provide, if such person has been:

(a) convicted by any Court of Law in Sri Lanka or abroad subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or

(b) found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by anybody with regulatory

or supervisory authority; or

1. established by law in Sri Lanka or abroad; or
2. constituted under law as a commission of inquiry, tribunal or other similar body; or
3. by any professional body which in the opinion of the SEC is of an established and credible stature.

(c) compounded in terms of the SEC Act (as amended) during the past 3 years preceding the date of the appointment; or

(d) found guilty of a capital market offence by a court of law in terms of the SEC Act;

unless the prior approval of the Commission is obtained for such appointment.The Commission on an application made under this provision by a Registered Margin Provider, may grant approval for such person to be appointed notwithstanding the above said prohibition under exceptional circumstances.

01 (2) (a) A Registered Margin Provider shall not allow an individual to continue as a director or a person dealing with clients, for a period as determined by the Commission, if such person, subsequent to his appointment as a director or a person dealing with clients has been;

1. convicted by any Court of Law in Sri Lanka or abroad subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or
2. found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by anybody with regulatory or supervisory authority; or

1. established by law in Sri Lanka or abroad; or
2. constituted under law as a commission of inquiry, tribunal or other similar body; or
3. by any professional body which in the opinion of the SEC is of an established and credible stature; or
4. compounded in terms of the SEC Act (as amended); or
5. found guilty of a capital market offence by a court of law in terms of the SEC Act.

01 (2) (b) For the avoidance of doubt, the period in which a person described in 01 (2) (a) above shall be barred from functioning as a director or a person dealing with clients for and on behalf of a Registered Margin Provider may be ;

1. for a period of months or for a period of years with a right to reapply at the end of the said period; or
2. a permanent bar from the industry; or
3. for a period from acting in a supervisory capacity or from performing a particular duty;

depending on the gravity of the offence, the impact of such offence on the market or other factor which the Commission shall deemed to be relevant considering the circumstances surrounding the commission of such offence.

02. Every person, whether as director, employee or agent dealing with clients on behalf of the Margin Provider shall possess the qualifications and/or experience set out in sub clause (a) or (b) below.

(a)(i)

• Associate of the Institute of Chartered Accountants of Sri Lanka;
• Associate of the Chartered Institute of Management Accountants;
• A degree from an accredited Sri Lankan or foreign university;
• Chartered Financial Analyst;
• Associate of the Chartered Certified Accountants;
• Associate of the Chartered Institute of Bankers;
• Associate of the Institute of Bankers of Sri Lanka; or
• An equivalent or higher professional and/or academic qualification acceptable to the SEC;

and

(ii) active experience in the financial/securities market for a minimum period of two years.

or

(b) Experience in the financial/securities market for a minimum period of seven years. Provided that experience for the prescribed duration per se will not fulfill the required qualification and the Commission shall consider the nature, scope and intensity of experience in determining its adequacy.

03. The Margin Provider shall ensure that at least two persons with the ‘Qualifications and Experience’ prescribed above in these Rules are employed by such Margin Provider and available to deal with clients.

The SEC may vary the number of such qualified personnel on account of the volume of business proposed to be undertaken or currently undertaken by such Margin Provider.

04. Business other than that of a Margin Provider may be carried out only with the prior written approval of the SEC.

05. (A) A Margin Provider shall at all times maintain:

(i) A minimum Net Capital as stipulated by the SEC from time to time
(ii) A minimum Liquid Capital as stipulated by the SEC from time to time.

(B) The Margin Provider’s exposure against the aggregate value of loans extended as margin should at no time exceed the value stipulated by the Commission from time to time.

The above requirement shall not be applicable to Registered Margin Providers licenced and regulated by the Central Bank of Sri Lanka. Such institution shall abide by the requirements stipulated by the Central Bank of Sri Lanka on credit exposure, which is determined according to the capital adequacy requirements imposed by the Central Bank of Sri Lanka.

(C) The Initial Margin (or own funds requirement)

The Margin Provider shall ensure that the initial margin credit permitted to its clients on share purchases does NOT exceed 50% of the market value of the total securities portfolio of a particular client.

(Example: If a client has Rs.100 in cash (or stocks) but wishes to purchase shares exceeding that amount, your firm may allow the client to purchase up to a maximum of Rs. 200 worth of shares extending Rs. 100 worth of credit or 50% of the total value of the purchase to the client.)
(D) Maintenance Margin

The Margin Provider shall ensure a minimum Maintenance Margin of 30% at all times. Maintenance Margin is the minimum amount of borrowers’ equity (own funds) that should be maintained at all times. A maintenance margin of 30% permits the market value of the share / portfolio of shares to drop until the credit component reaches 70% (0.70) of the Total Portfolio

(E) The margin call

A margin call is required to be made when the value of the share/portfolio of shares falls below the maintenance margin requirement. The investor would be required to provide cash or securities to satisfy the maintenance margin requirement. In the event the investor fails to meet the shortfall within 03 market days, the Margin Provider shall ensure that the securities pledged are sold with due notice to the relevant parties on the next market day to ensure compliance with paragraph (D) above, and notice shall be given to the client at the end of the market day, the sale is concluded.

(F) Pledged securities may only be re-pledged by the Margin Provider to entities licensed by the Central Bank of Sri Lanka and only up to a maximum of 100% of the value of the margin loans portfolio.

(G) The Margin Provider shall not extend margin facilities to its employees for the purchase of securities.

(H) All cash and securities of clients shall be maintained as segregated accounts and separate from securities and monies held by the Margin Provider on its own account.

(I) The maximum margin loan extendable by a Margin Provider to a single client shall at no time exceed 15% of the maximum margin loan exposure permissible in terms of Rule 5 (B).

(J) A Margin Provider shall always maintain adequate financial human and other resources sufficient to carry out the business as a Margin Provider

06.

(A) A Margin Provider shall provide the SEC with the information itemized below:

1. A Financial Report’ prepared monthly compliant with the format and time lines as prescribed by the SEC
2. The Interim Financial Report shall:

1. conform to the Sri Lanka Accounting Standards ; and
2. be signed pursuant to a Board resolution by a Director and the Chief Executive Officer.

(B) A copy of the statement of audited accounts of the Margin Provider, prepared annually in accordance with the Sri Lanka Accounting Standards shall be submitted to the SEC within a period of six months from the close of each financial year.

(C) The SEC shall be informed on a quarterly basis

1. of the location of scrip pledged and repledged with adequate detail to enable verification by the SEC;
2. details facilitating clear identification of the first ten largest clients in value in terms of margin facilities afforded by the Margin Provider.

(D) SEC shall be informed on a monthly basis any details clients who have been extended in violation of Rule 5 (I); and

(E) A Margin Provider shall provide the SEC with financial information in conformity with formats specified by the SEC from time to time.

07. A Margin Provider shall keep the SEC informed of the percentage holding in it by its parent/owning company(s), subsidiary companies, associate companies and partnerships and of shareholders holding more than 20% or more of its equity.

08.

1. A Margin Provider shall execute a written contract prior to carrying out any business for and on behalf of a client containing all the terms and conditions agreed to between the parties and shall ensure compliance with such contract.
2. Such contract shall not be modified in any way other than in writing, with due notice given to the Client.
3. Such contract shall specify the risks associated with margin trading for the Client.
4. A copy of such contract shall be handed over to the Client no sooner it has been signed by all parties.
5. The duties and obligations of each party shall be clearly and expressly stated in such contract and it shall be the duty of a Margin Provider to ensure that all parties to the contract discharge their duties and obligation as stated in the contract.

(A) A Margin Provider shall have an internal compliance manual applicable to its directors and employees/agents which sets out adequate compliance procedures and practices to ensure:

1. that the directors, employees and agents of the Margin Provider do not contravene the provisions of the SEC Act or any Rules or Regulations made there under; and
2. consistent and fair implementation of its operational procedures and administrative processes.

(B) A Margin Provider and its directors shall be responsible for due compliance with such internal compliance manual.

(C) A Margin Provider shall immediately inform the SEC in writing where any person acting on their behalf contravenes the provisions of the SEC Act or any rules or regulations made there under.

(D) A Margin Provider shall make an annual compliance report confirming compliance with the rules and regulations laid down by the SEC and forward same to the SEC signed by a director and the Chief Executive Officer.

10. A Margin Provider shall:

1. establish and implement good business practices and follow just and fair principles in the conduct of business;
2. comply with Codes and best practices applicable to the activities of a Margin Provider as may be issued by the SEC or determined by the SEC to be applicable;
3. have internal procedure manuals sufficient to ensure the continuity of its operational activities;
4. ensure that their account opening procedures are sufficiently diligent to identify clients;
5. maintain an effective complaints handling process; and
6. ensure that it does not carry out any activities which could cause a conflict of interest with its margin providing functions.

11. (A) A Margin Provider shall maintain the following records in its office:

1. all subsisting margin trading agreements entered into by the Margin Provider;
2. all margin trading agreements for a minimum period of six years from the date of cessation of such agreements;
3. details relating to all transactions including the identity of clients, spanning the immediately preceding period of six years; and
4. a comprehensive written record of all complaints received from clients and action taken thereon by the Margin Provider for a period of six years reckoned from the date on which the matter has been considered and concluded.

(B) A Margin Provider shall have suitable information recording and retrieval systems and maintain such information for inspection by the SEC.

(C) A Margin Provider shall ensure confidentiality at all times of all information relating to clients including such client’s identity and transactions carried out for such client, unless disclosure of such information is required by the SEC or any other provisions of any written law.

12.

1. Margin Providers shall ensure that the content in advertisements promoting its services as Margin Providers, are accurate and complete and does not have the capacity to mislead the public.
2. Margin Providers shall submit the contents of all advertisements for the perusal of the SEC at least 5 days prior to its publication in the media.
3. Margin Providers shall comply with any guidelines that may be issued by the Commission from time to time in respect of advertisements.