SecZim tightens capital screws on market players

The Securities and Exchange Commission of Zimbabwe (SecZim) has introduced comprehensive capital adequacy rules requiring stockbrokers, asset managers, exchanges, and other securities market intermediaries (SMIs) to demonstrate stronger liquidity, robust risk management, and credible insurance coverage. The reforms, described as the most far-reaching in nearly a decade, aim to ensure firms can absorb losses, settle trades on time, and withstand operational shocks.

SecZim issued the directive under Section 21 of the First Schedule to the Securities and Exchange Act, as read with the Sixth Schedule of the Securities (Registration, Licensing and Corporate Governance) Rules. Titled the Capital Adequacy Directive for Securities Market Intermediaries (SMIs), the notice supersedes the 2017 Capital Adequacy Directive and mandates that compliance be verified through quarterly financial returns or other periods as determined by the commission.

The directive applies to a wide range of entities, including securities dealing (stockbroking) firms, asset management firms, investment advisory firms, trustees, custodial firms, transfer secretaries, securities exchanges, central securities depositories, and alternative trading platforms.

Under the new rules, firms must hold liquid resources sufficient to cover at least 13 weeks of operational expenditure or the minimum thresholds specified by the commission, whichever is higher. Entities that fall below this threshold will be classified as inadequately capitalised. Capital adequacy will be assessed using the ratio of Adjusted Liquid Capital (ALC) to Total Capital Requirement (TCR), with firms considered adequately capitalised if ALC meets or exceeds TCR.

SecZim further requires SMIs to maintain professional indemnity and fidelity insurance covering negligence, fraud, technology failures, and operational disruptions, with coverage limits set at the firm's initial capital or 0.01% of assets or turnover, whichever is higher. To protect investors from settlement failures, the regulator has introduced a Counterparty Risk Requirement (CRR), mandating that firms allocate capital for any unsettled trades across equities, government and corporate bonds, and other financial assets.

The total capital requirement (TCR) for each SMI will comprise Operational Expenditure Requirements (OER) and Counterparty Risk Requirements (CRR), with firms required to maintain ALC above TCR to be deemed adequately capitalised. Entities achieving ALC more than 1.2 times TCR will receive a higher capital rating.

SecZim also imposes a 100% capital charge on unsettled transactions unlikely to settle and applies risk-based haircuts on asset classes to prevent firms from inflating balance sheets with illiquid or risky holdings. Suspended counters carry a 100% deduction, private equity and unlisted investments 60%, property 20%, and some listed equities up to 40%, with overdue receivables discounted by up to 100% if outstanding for more than 90 days.

The new directive marks a decisive move by SecZim to strengthen the resilience and credibility of Zimbabwe's securities sector, ensuring investor protection and enhancing overall market stability.