Sri Lanka seeks IMF, WB advice on bond auction overhaul

ECONOMYNEXT – Sri Lanka has sought feedback from the International Monetary Fund and World Bank on a proposed new auction system which will be less easy to manipulate, Central Bank Governor Indrajit Coomaraswamy said.

"We are working on an auction system which will be more robust and less easy to manipulate," Coomaraswamy said, in the wake of so-called ‘bondscams’ where Perpetual Treasuries, a firm connected to ex-Governor Arjuna Mahendran allegedly made large profits from rigged auctions.

Experts from the IMF and World Bank who have knowledge of auction processes in other markets have been asked to look at the proposed new system, Governor Coomaraswamy said.

"No system is perfect, but we want to improve it," he said.

Analysts say in developing countries it may be easier to manipulate markets as there are restrictions on the operation of market forces.

Bureaucrats in most countries and developing countries in particular distrust markets some observers say but market participants are the same the world over and are therefore able to profit from restrictions on competition, hiding of information, or attempts to stop market clearing prices.

Analysts say a key method of how bond auction were ‘rigged’ in the past was to accept much higher volumes than originally advertised.

In the past bonds were offered by ‘direct placement’ without transparent auctions but the pricing mechanism also could have led to administration discretion giving significant profits to bond buyers.

In one method bond were sold a 05 basis points above ‘secondary market price’ but market prices could change as much as 20 to 40 basis points in a day, and closing prices could also easily change due to low liquidity especially on the larger maturities.

In what is probably the most liquid bond market in the US, Treasuries are issued on a ‘single price’ where the bonds are issued at the highest yield (Dutch auction), a technique that is difficult for some people to grasp.

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In most markets, like in Sri Lanka multiple price auctions are conducted where buyers are allocated bonds from the lowest yield, upwards.

In some better functioning markets, buyers are allowed to submit ‘non-competitive’ bids, who will be allocated bonds at the price established at the auction.  (Colombo/Nov02/2016)
 

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