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CMA to enforce compliance tests

NAIROBI, Kenya Nov 18 – The Capital Markets Authority will from August 2011 implement Risk Based Supervision of stockbrokers, investment banks and other CMA licences.

The move aims to intensify inspection and change statutory requirements for players in the capital markets in an effort to protect investor funds.

CMA Chief Executive Officer Stella Kilonzo says brokerage firms will be required to submit monthly risk reports to the regulator which will gauge their level of capitalisation and other basic financial ratios.

"Risk based capital deals with making sure that the capital that is in the company is being used actively in the capital industry the institution is geared towards," Mrs Kilonzo said.

Risk based supervision also aims at restoring investor confidence in the capital markets where a number of stockbrokers have collapsed and are unable to reimburse investors.

Under the new regime, stockbrokers and investment banks will be required to convert a percentage of their assets into liquidity to be used to secure investor funds in the event they collapse.

"This will be a level of capital out of paid in capital that has to be represented by liquid assets.  That is, the money in the firm should be directed towards assets that can be converted into cash if there is a problem," International Securities Consultants Director David White said.

Under statutory requirements, stockbrokers are expected to have a minimum capital base of Sh50 million while Investment Banks are required to keep Sh250 million. A percentage of this will have to be converted into liquid assets.

The CMA did not however specify what percentage would be required to be converted.

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To ease transition into the new system, firms will be expected to issue pro-forma statements.

Institutions will be scrutinised depending on their level of capitalisation and other basic financial ratios, quality of key management staff, strength of their corporate governance structures, their record of response to investor complaints and history of past regulatory breaches.

Some players who have little history of past violations and those who do not directly handle investors\’ funds such as investment advisors will undergo less compliance tests but will be required to file specified periodical reports with the CMA.

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