The stricter rules, which used to apply only to big brokerages, will now cover all firms. They will also value assets such as stocks and funds at less than their full market value, since these can be difficult to sell quickly during a financial crisis.
Under the proposed amendments, the measures are intended to address vulnerabilities exposed during the 2022 crisis involving amusement park Legoland, when brokerages faced severe liquidity shortages and required emergency government support despite reporting liquidity ratios above 100 percent.
The most significant shift is the expansion of the regulatory scope.
Only comprehensive financial investment business entities - large investment banks - and brokerages issuing derivative products were required to maintain liquidity ratios above a certain level. But this requirement will become mandatory for all 49 securities firms. The aim is to bring small and medium-sized brokerages, which possess relatively weaker capital-raising capabilities into the risk management perimeter.
About a dozen branches of foreign firms will be excluded from the new measures as they primarily engage in brokerage and advisory services that have a minimal impact on liquidity risk, according to the FSS.
Previously, brokerages could count their stock and bond holdings at full value when calculating liquidity. But those assets will be discounted to account for the losses that can occur when firms are forced to sell quickly in a stressed market.
For example, government and municipal bonds will continue to be counted at full value (100 percent). However, assets that are more vulnerable to panic selling during a crisis - such as listed equities, foreign securities, and open-ended funds — will be discounted by 15 percent, meaning only 85 percent of their value will be recognized as usable liquidity.
Conversely, when calculating liabilities, "potential debt" (contingent liabilities) such as loan commitments and debt guarantees must be strictly included in current liabilities. Money that a brokerage must pay or repay on behalf of clients during a crisis will be preemptively categorized as debt to evaluate practical risk exposures.
Non-liquid assets such as closed-ended real estate funds will have their liquidity timelines tied strictly to their remaining maturity rather than arbitrary liquidation estimates. Regulators will also differentiate regulatory burdens for repurchase agreement (RP) sales and securities lending transactions, which are frequently used for short-term cash generation, based on the creditworthiness of the underlying collateral.
Financial authorities are simultaneously moving to strengthen the risk weights for real estate Net Capital Ratios (NCR) and establish aggregate investment caps to manage exposures in real estate financing. For major comprehensive financial investment entities, a separate, differentiated capital regulation framework will be prepared within this year.
The proposed amendments will be subject to a regulatory change notice later this week to gather industry feedback before taking effect on Jan. 1 next year.
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