Sri Lanka central bank probing primary dealer

ECONOMYNEXT – Sri Lanka’s central bank is probing a primary dealer in Treasuries who is alleged to have sold securities belonging to clients and are unable to repay them, Central Bank Governor Arjuna Mahendran said.

"The Central Bank is on top of it and we are investigating," Governor told reporters Thursday.

Governor Mahendran said he had seen the reports in the press relating to the primary dealer.

Media reports said the primary dealer with whom the pension fund of a state agency had entered into a securities transaction several years ago, apparently no longer had asset and the money could not be recovered.

Following allegations made shortly after the setting up of primary dealers that some of them were using the same security to borrow money from clients twice and re-invest them in private securities, the central bank introduced a safeguard in the form of a central depository account.

A primary dealer who either sells a Treasury bill or bond outright to a client has to place the security in a CDS account in the client’s name whose balance can be checked including with period statements.

There was also market speculation that the dealer was not able to make payments on time.

Governor Mahendran said there was no systemic risk.

"If one company is finding it difficult to pay its depositors, there are windows through which the central bank will lend money to that company make good those deposits.

"Nobody needs be worried."

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Asked whether the company had met the capital requirement of the Central Bank, Mahendran said the capital had been raised to a billion rupees from 300 million and all of them have reached the level.

There have been fears in the market that a primary dealer may have been siphoned money out to a related finance company.

Many of Sri Lanka’s finance companies got into trouble around 2009 after the central bank kept interests rate low from 2004, printed money to finance the deficit and ‘promote growth’ firing a property bubble and other mal-investments, which ended with a balance of payments crisis.

A subsequent bubble was fired in stocks, which also led to many stock market frauds which led to a balance of payments crisis in 2012. (Colombo/Jan02/2016)

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