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Saturday May 15th, 2021
Bonds & Forex

Insider dealing in Sri Lanka gilt markets to be probed by lawyer: report

COLOMBO (EconomyNext) – A lawyer from outside the Central Bank will probe allegations of insider dealing in bond markets by a company connected the bank’s Governor Arjuna Mahendran, a media report said.
Sri Lanka’s The Sunday Times newspaper quoted Deputy Policy Planning Minister Harsha de Silva as saying that a full investigation will be launched on past and current allegations.

"Insider trading that took place in the past – issues that I have raised (as an opposition lawmaker) – are continuing to happen," The Sunday Times quoted de Silva as saying.

"I complained about this many times on how certain persons in the CB’s EPF (Employees Provident Fund) department and the public debt department got together with some market players and manipulated the market. These crooks are still playing the same game."

De Silva was a key critic of the Central Bank during the last regime where stocks were pumped and dumped on the Employees Provident Fund managed by the Central Bank.

There have also been allegations on insider dealing on bond markets, but the deals did not stand out like a sore thumb, because they were done around the market levels.

A bond dealer who has inside knowledge that the Central Bank is raising interest rates can sell his bonds and profit from the information (or buy if he knows rates are going to be cut)  by selling unobtrusively at market prices.

This time a series of aggressive deals were made driving bond prices down and rates higher, making them easy to identify.

Though de Silva did not name the firm, allegations centres around Perpetual Treasuries, a primary dealer in government securities connected the son-in-law of Governor Mahendran.

Perpetual Capital group has also come under fire for stock deals with the EPF in the past.

Governor Mahendran was quoted as saying by Sri Lanka’s The Sunday Times that he would not resign and a lawyer not connected to the Central Bank would probe the matter. The person was not named.

The scandal was further complicated by a 30-year bond auction, conducted by the Central Bank where one billion rupees of bonds were originally offered but it was then expanded 10 times sending yields soaring.
According to leaked data now in the public domain, about the half the total volume or about 5.0 billion rupees appeared to have been allocated to Perpetual Treasuries.

The auction killed bond market activity for one and a half days, as shocked dealers were too scared to trade.

An explanation by the Policy Planning Ministry about the 30-year bond auction and the decision to take 10 billion also showed that a capacity building is urgently needed at the Central Bank.

Decision-makers should be urgently taught on what tenors use to raise money to minimize the cost to the people, instead of going for the longest possible tenor and committing the state to paying elevated rates for three decades, analysts say.

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