Sri Lanka gilt dealers cut off from cash auctions

ECONOMYNEXT – Sri Lanka’s non-bank primary dealers have been cut – off from open market auctions of cash of central bank that injects or takes away money from the credit system, market participants said.

Open market auctions are conducted earlier in the day and dealers able to get funds to buy more bonds even in case they cannot find client money to participate in the auctions.

However the central banks informed dealers last month that they would lose access to the facility from September 25.

Sri Lanka’s money markets are facing unprecedented cash shortages this week.

Gilt dealers will still be able to access the intra-day liquidity facilities and the overnight window that opens late in the day.

Sri Lanka’s non-bank primary dealers in government securities have been facing difficulties in the repo market after a so-called bondscam and a fraud at Entrust Securities shocked the market generating risk-averse behavior.

In the repo market, there is now a reluctance to advance cash against longer term bonds, even with a greater haircut, making it less easy than in the past for non-bank dealers to get access to funds.

Non-bank dealers are among the most active in bonds markets and provide liquidity and greater price transparency by providing a more activity in the secondary market.

While using open market auction money for bonds is not a good for a strong currency, the effect is the same whether a bank or non-bank dealer engages in the practice, analysts say.

Sri Lanka recently also has a coercive bond sale system. There are fears that lack of access to the auction, may increase the likelihood of a primary dealer failure if they are unable to finance coercive bonds dumped on them. (Colombo/Sept25/2016)





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