Stockbrokers to be called up on limiting corporate debt trading

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CSE Chairman Rajeeva Bandaranaike is to raise the lack of online trading of the corporate debt market with the stockbroker firms at the next scheduled meeting between the exchange and brokers. Currently, the Colombo Stock Exchange only facilitates the trading of corporate debt through the terminals available at the brokerage houses.

Investors looking to trade securities through online portals will receive error messages on the placement of bids. The brokerage houses and the software developers note that it is the regulator and exchange that is preventing them from providing trading access to their clients. The Securities and Exchange Commission has on its board a member of the Central Bank.

Bandaranaike was speaking on the sidelines of the bell ringing ceremony yesterday at the Colombo Stock Exchange trading floor.

The exchange is to transition to a Delivery vs Payment model for transacting by the end of May. Settlement risk on the trading of corporate debt can be managed with transaction limits that are already present on the online trading of equity securities. The exchange has communicated its interest in handling the trading and listing of the government securities market.

Bandaranaike said, “The Central Bank is not letting us list government securities.” The Central Bank is the only agency in Sri Lanka with an active debt market which is limited to agencies that it oversees like Primary Dealers.

Central Bank primary dealers have been plagued with issues. The Central Bank as the manager of the Employees Provident Fund, a major purchaser of government securities, the regulator of the primary dealers/banks, and the issuance agency of government securities faces many conflicts of interest.

Many primary dealers have failed and the government securities market is not efficient. Primary dealers have been found to be committing securities fraud with notable failures hurting the Ceylon Electricity Boards Employees Provident Fund. The CSE in partnership with its fully owned subsidiary the Central Depository System would be better positioned to create a vibrant government securities market.

Bandaranaike noted that the failure to list any REIT instruments was due to the failure of the government to gazette the promised tax structure for the products. He said, “There are many companies that are waiting to list.”

Given the current interest rate environment, the after-tax returns of a high net worth investor through the banking system would not beat inflation.

The corporate debt market offers investors positive after-tax returns but is inaccessible to the investor and even unit trusts.