Call for Sri Lanka g-sec market to be regulated by the SEC

ECONOMYNEXT – A governance activist has called for Sri Lanka’s government securities market to be regulated by the Securities and Exchange Commission amid inherent existing conflicts of interests at the central bank and recent irregularities and concerns over fraud.

The central bank is the issuer of government bonds on behalf of the Treasury, the buyer of bonds on behalf of a the Employees Provident Fund, a forced saving scheme of only private sector workers.

In addition it is also the regulator for primary dealers in bonds.

Chandra Jayaratne, a governance activist and former chief of Sri Lanka’s Ceylon Chamber of Commerce, wrote to newly appointed Central Bank Governor Indrajit Coomaraswamy that only minor changes have to be made to the SEC law to expand its oversight to gilts.

"I trust that you and the Monetary Board, will immediately begin negotiation with the Securities & Exchange Commission and the Government, for the formal transfer of the oversight responsibility over Government Bond Issues and associated Secondary Market dealings, to the Securities & Exchange Commission," he said.

The Central Bank had come under fire for buying pumped up stocks that no one wanted into the Employees Provident Fund earning it the name of ‘buyer of last resort’ during a 2011 stock market bubble.

Under the current regime, virtually the same dealers, and sellers were alleged to have dumped pumped government bonds after the EPF apparently ‘missed’ direct bids at auctions. The auctions themselves are alleged to be rigged.

Jayaratne’s full letter is reproduced below. The emphasis is retained from the from the original text:

Dr. Indrajit Coomaraswamy,
Governor, Central Bank, ,
Central Bank of Sri Lanka, ,
Janadhipathi Mawatha, ,
Colombo 1. ,

Dear Sir, ,

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Regulatory Oversight Accountability over Government Bond Issues and Related Secondary Market Transactions

You would no doubt agree, that effective and professional best practices embedded regulatory oversight over Government bond issues and related secondary market transactions, ensuring that engaged intermediaries duly discharge their professional commitments in line with best market practices, are an essential imperative of a well governed securities market in Sri Lanka.

Such a governance framework is also an essential investor right, as endorsed by the Securities & Exchange Commission of Sri Lanka and the Chartered Financial Analysts Society of Sri Lanka ( refer attachment). These rights need to be duly discharged through ensuring that; “all associated financial professionals and intermediary organizations are

Honest, competent, and ethical in conduct and complies with applicable law;
• Independent and objective in advice and assistance, based on informed analysis, prudent judgment, and diligent effort;
• Financial interests of the investor takes precedence over those of the professional and organization;
Fair in treatment in relation to other clients;
• Disclosure of any existing or potential conflicts of interest in providing products or services;
Understanding the clients circumstances and ensuring advice is based on clients financial objectives and constraints;
• Clear, accurate, complete and timely communications;
Fees and costs involved be transparent;
Confidentiality of information assured;
Complete supporting records are maintained

Whilst acknowledging that the Central Bank of Sri Lanka has competent professionals and infrastructure support to provide the oversight framework as set out above, recent controversial bond issues related experiences have clearly demonstrated that the Central Bank suffers from definite conflicts of interests, due its role in

• Being the primary issuer and manager of the Government Bond issues;
• Being the effective Manger and Portfolio Investor of the largest Securities market player in Sri Lanka – the Employees Provident Fund

In addition, it is commonly believed that the secondary market information data set maintained by the Central Bank is inadequate and incomplete for effective regulation of market and associated intermediaries. It is reported that the records maintained in the Central Bank, covering the secondary market transactions, fail to record the basic market data relevant to the prices at which the secondary market transactions have taken place.

In the light of above it is urged that the Monetary Board resolves to assign the role and responsibility to for regulatory oversight over Government bond issues and the related secondary market transactions to the Securities & Exchange Commission, at the earliest opportunity.

You will note from the attached copies of correspondence with the Securities & Exchange Commission, that the Securities & Exchange Commission, needs to make a minor amendment to its empowering enactment, to undertake this expanded role of supervision of the Government Bond issues and associated secondary market..

I trust that you and the Monetary Board, will immediately begin negotiation with the Securities & Exchange Commission and the Government, for the formal transfer of the oversight responsibility over Government Bond Issues and associated Secondary Market dealings, to the Securities & Exchange Commission.

Yours Sincerely,

Chandra Jayaratne

CC. The President, The Prime Minister, The Speaker, Leader of Opposition, Minister of Finance, Minister of Justice, Monetary Board, Chairman SEC, The Auditor General, Attorney General, Chairman COPE , Ceylon Chamber of Commerce

(Colombo/July20/2016 – corrected para 4 – Chandra Jayaratne, a governance activist and former chief of Sri Lanka’s Ceylon Chamber of Commerce, wrote to newly appointed Central Bank Governor Indrajit Coomaraswamy that only minor changes have to be made to the SEC law to expand its oversight to gilts.)

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