Sri Lanka stockbrokers meet regulators after market fall; discuss credit data call

ECONOMYNEXT – Chief executives of Sri Lanka’s stock broking firms had met the Securities and Exchange Commission Thursday to discuss a request for credit information, which some had blamed for a recent correction in the market.

SEC in a statement said ‘candid views’ were expressed between the parties.

“The stockbrokers expressed the view that there had been some misconception that this information were to be gathered in order to curtail the credit that has been extended by the stockbroker firms,” the SEC said.

Credit Rules

Sri Lanka already has rules governing broker credit. Stock purchases are expected to be settled three days after the trade (T+3) and brokers also have to maintain net capital, which limits overdue accounts.

Brokers had to report client positions to regulators every two weeks earlier. Customers who had not settled (broker credit) is usually settled ahead of the reporting date.

The regulators had called for reports every week as the stocks shot up in January, amid unprecedented loose monetary policy which was discouraging bank deposits and was inserting rupee reserves in excess of the balance of payments to banks.

SEC said Viraj Dayaratne had told that such information was anyhow collected on a fortnightly and monthly basis.

Considering the “dynamic nature of the market some such information was required to be submitted on a weekly basis and that it was in no way meant to curtail credit granted by the stockbrokers,” he had said.

The CSE had also called for positions on some stocks, where a number were linked to businessman Ishara Nanayakkara were included but there were none on firms connected to Dhammika Perera, where frenzied activity was also seen, which according to some market participants was ad hominem.

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Authorities later revised the request dropping the named firms.

There were several views expressed among market participants about the recent fall.

One seasoned analyst said it the fall was a long overdue correction and it was a sign of a well functioning market.

There were others who speculated that a group of market players and sold down in-play stocks to ‘teach a lesson’ to regulators who had dared to question credit, and the move had backfired panicking retailers and killing overall sentiment leading to a selling spree.

As a result the credit information requests were ‘made a scapegoat’.

Sri Lanka’s market rally in 2021, like in 2011 comes amid large liquidity injections made by the central bank, which ended in a currency crisis a few months later.

Mal-investments

When large fiat money injections are made, there is mal-investment which may lead to asset price inflation.

Securities watchdogs in general are helpless to contain such booms and penny stock frauds and other manipulation that takes place.

The world’s first Securities and Exchange Commission in the US was also set up through the Securities Act of 1933 and the Securities and Exchange Act of 1934 following a stock market bubble and collapse triggered by the Federal Reserve.

The Federal Reserve fired the bubble partly with the help of open market operations which it accidentally stumbled into in the 1920s under New York Fed Chief Benjamin Strong, who had a long association with Bank of England Governor Montagu Norman.

Former Fed chief Alan Greenspan had said the bubble and the depression was also contributed by the Fed running loose policy to help stop a gold flow from Britain, which was in turn caused by a too loose UK policy to maintain its gold peg.

“The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates,” Greenspan explained writing in the Objectivist newsletter, decades before he was hired into a state agency.

“The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process.

“The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom.

“But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.

“Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.”

In Sri Lanka when stock markets crash and small investors suffer, the SEC is blamed.

Modern Monetary Theory

Sri Lanka is now printing money under so-called Modern Monetary Theory.

Federal Reserve’s current chief Jerome Powell has also denied responsibility for unusual stock movements and the speculative frenzy and penny stock bubbles in the US.

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Stocks Have Worst Daily Drop in Months

Powell has blamed fiscal policy and the Coronavirus vaccine rather than his policy.

Classical economists say this is the usual form in most countries.

Related

Central bankers trigger crises, don’t admit or learn from mistakes: economist at Sri Lanka forum

Blaming fiscal policy for monetary instability is the usual form also in Sri Lanka.

Budgets are easier for the public to understand than money printing, which is cloaked in econometrics and fancy language under the banner of ‘monetary policy’.

As a result central bankers generally get away scott-free and politicians are blamed.

But the then US President Herbert in his memoirs however refused to take the hit for central bank policy errors.

“This orgy [of speculation] was not a consequence of my administrative policies,” he wrote.

“In the main it was the result of the Federal Reserve Board’s pre-1928 enormous inflation of credit at the request of European bankers which, as this narrative shows, I persistently tried to stop, but I was overruled.” (Colombo/Feb11/2021)

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