The DSE Brokers Association of Bangladesh urged the Bangladesh Securities and Exchange Commission to extend the timeline for provisioning against negative equity and unrealised losses until 2030.
The DBA sent a letter with the proposal to the commission on December 3 as the extension of time would allow brokers to manage their obligations with sustainability and financial stability.
In the letter, the DBA emphasised that the current provisioning deadline of January 31, 2025, would impose significant financial strain on brokers, potentially destabilising the capital market.
The association outlined the challenges stemming from prolonged market downturns, saying the prolonged bearish vibe led to a 40 per cent or Tk 2,30,000 crore decline in market capitalisation since the last quarter of 2021.
鈥楾he reintroduction of the floor price mechanism, while intended to stabilise the market, has inadvertently affected investor confidence among both local and foreign participants. This has contributed to reduced market liquidity and disrupted price discovery,鈥� the letter said.
The DBA said that this decline resulted in unrealised losses in dealer portfolios and rising levels of negative equity in client accounts.
If required to meet provisioning requirements immediately, brokerage firms could face massive financial losses, reduced operational capacity, and negative retained earnings, raising doubts about their viability, according to the letter.
Negative equity happens when the value of a client鈥檚 investments (in their margin accounts) falls below the amount they owe. Brokerage firms are then responsible for covering this shortfall.
Unrealised losses are investments that brokers hold but have not sold yet. If a stock鈥檚 price falls but hasn鈥檛 been sold, the loss is not yet finalised but poses a financial risk.
Provisioning means that brokerage firms are required to keep money aside to account for potential losses including negative equity and unrealised losses. This ensures they are financially prepared to absorb these risks without jeopardizing their operations.
To address these challenges, the DBA proposed a phased approach to provisioning, beginning with a 5 per cent requirement in 2025 and increasing incrementally to 100 per cent by 2030.
This timeline, the association said, would allow brokers to adjust gradually, preserving financial stability and avoiding widespread insolvency.
The DBA in the letter also recommended barring additional margin loans to accounts with negative equity and proposed separate regulations for director shares purchased with margin loans, to mitigate further risks.
The proposal also highlighted the broader implications of immediate provisioning, including reduced earnings for publicly listed parent companies, a decline in investor confidence, and a potential slowdown in the recovery of the capital market.
