CMA issues new rules for capital adequacy requirements

Muscat: An important administrative decision was issued on the new rules for capital adequacy for companies operating in securities, to enhance their risk management in the capital market, such as market volatility risks, settlement risk, credit risk, operation risks and liquidity risk through robust requirements and control systems.
Sheikh Abullah Salim Al Salmi, executive president of the Capital Market Authority (CMA) said: “Compliance with capital adequacy requirements (CAR) is the safety valve for licensed companies and is a key instrument for risk management, as well as being a message from the company to its clients of its ability to discharge the obligations toward them, which would enhance the level of confidence between them.”
He added that due to the importance of such requirements to control capital adequacy for financial institutions, such as banks, insurance companies and the companies operating in securities, the regulators of such institutions worldwide regulate the same through monitoring capital adequacy of companies and their ability to encounter the risks for the stability of the financial system.
He pointed out that the new CAR were issued after a thorough review of the requirement, which were applied for more than a decade in view of the new concepts of risk management and complex processes of stock markets, as well as the advances in technology and operating systems of the licensed companies.
The new requirements observe the element of capital adequacy, which are related to the level of risks the companies are exposed to, as well as the consolidated financial statements of the companies to ensure better valuation of the levels of risks relating to the assets of subsidiaries and their financial obligations.
They also take into account the liquidity risks of the portfolios of licensed companies and the securities held as collateral for margin financing.
Exposure ratios were reduced for their relative importance in curbing the risks the companies are exposed to by increasing the hedging ratio in the capital buffer from 25 per cent to 50 per cent of the annual expenses, also for subordinated loans at the same ratio, while reducing the percentage for real-estate assets, profits and commissions, as well as ownership in profitable companies not listed on the market due to their reduced level of risks.
He concluded that the companies must apply the CAR soundly and monitor capital adequacy to ensure early intervention in the event of any default, which would expose the company.
The new requirements require the companies to maintain 100 per cent adequacy and continuous monitoring systems to ensure maintaining the required ratio. The routine capital adequacy report is obligatory on a monthly basis in 10 working days from the end of each month. CMA may require additional reports on capital adequacy signed by a member of the top management and the compliance officer.
Where the capital adequacy falls below 100 per cent, the company shall top it up within 30 days and shall adopt a recovery plan determined by the Executive President of CMA.
CMA has also urged the licensed companies to take the required actions to transform capital adequacy calculation through the electronic system linked to the internal systems of the company in not more than six months from the date of the decision.