Securities Companies’ Major Surgery Enters Most Important Phase

The new Circular No. 165 stipulating the financial adequacy norms, which will take place from December 1, 2012, is believed to help the process of restructuring securities companies go more effectively. A lot of securities companies would have to shut down by the first quarter of 2013 because they cannot satisfy the new requirements.



The watchdog agency now can update the information about the “health” of securities companies by considering not only quarterly, biannual and yearly finance reports, but also the finance adequacy ratio report as well.



Under the current regulations, securities companies calculate the finance adequacy ratios themselves by analyzing the capital usable ratio (which is the ratio of usable capital on the total risk value) and submit reports to the State Securities Commission (SSC).



The watchdog agency would release the decision to put the securities companies which cannot satisfy the finance adequacy norms under the special control.



To date, seven securities companies have been put under the special control. However, analysts believe that the modest figure does not truly reflect the actual situation. The list of the seven companies does not include the unprofitable companies which are on the verge of bankruptcy, and the ones which always face the liquidity problem.



The problem lies in the fact that the finance adequacy ratios have been calculated by securities companies themselves, which means that securities companies can “play tricks” to hide their troubles.



Especially, some securities companies successfully avoided the special control by delaying the finance report submission. The currently valid Circular No. 226 only stipulates the punishment on the companies unable to satisfy the requirements, while it does not show how to treat the companies which do not submit reports on schedule.



However, securities companies will not be able to avoid the special control by delaying the report submission, once the new circular takes effects.



Analysts have predicted that the list of the securities companies to be put under the special control would see new members. At least 40 securities companies, whose reported finance adequacy ratios have raised doubts from the management agency would see their names in the list.



Securities companies would die more quickly



The new regulation is also believed to shorten the securities companies’ duration on the deathbed. Under the current regulation, a securities company would have to declare death if it cannot improve the situation after six months under the special control. Meanwhile, with the new regulation, securities companies would have four months only to improve the situation.



The circular No. 165 stipulates that the watchdog agency would force securities companies to suspend operation when the aggressive loss is equal to 50 percent of the chartered capital.



Under the current regulations, it is not easy to delete a securities company from the list. The Securities Law stipulates that the license for the establishment and operation of securities companies is also the business registration certificate.



Therefore, if the watchdog agency revokes the establishment and operation license, the legal status of securities companies would not exist any more. This would cause difficulties to the debt payment by securities companies.