Sri Lanka to make bond auctions transparent, block manipulation: CB Governor

ECONOMYNEXT – Sri Lanka is studying the bond auctioning processes to increase transparency and reduce room for manipulation benchmarking on international practices, Central Bank Governor Indrajit Coomaraswamy said.

"The idea is to make it as transparent as possible, to reduce the capacity for manipulation as much as possible," Coomaraswamy said.  "These are all thing that we would do."

"Clearly the reputation of the bank depends on us being able to do this well and transparently.

"So if we are saying that we want to really protect the reputation of the bank we have to do this as well as possible and as transparently as possible."

The reputation of the central bank, which conducts auctions on behalf of the government has taken a beating over the past year following a series of so-called bond scams where low volumes of long tenor bonds were advertised and large volumes sold.

There were also concerns that bids for short tenor bonds were rejected and long tenor bonds accepted to give greater profits to chosen primary dealers, instead of spreading bond sales along the yield curve.

Governor Coomaraswamy was appointed by President Maithripala Sirisena following appeals by governance activists not to bring back ex-Governor Arjuna Mahendran following allegations that he favoured a gilt dealership owned by his son-in-law

Concerns were raised that the Employees Provident Fund – which is also managed by the central bank – was providentially ‘missing’ bids at primary auctions and then were buying them at higher prices from dealers who had bought them cheaply at the auctions.

The EPF also came under fire during the Rajapaksa regime for being a dumping ground or ‘buyer of last resort’ for pumped up bonds. Critics say some of the same people involved in the stock scams were also behind bond purchases on both sides of the transaction.

The Monetary Board, the governing board of the central bank, which is ultimately responsible for all auctions of the bank and its governor said in a June 02 statement that a pre-bid conference will be held with dealers and there will be a clearly defined auction calendar.

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The Board also said managers have been instructed to "examine the international best practices with respect to volumes advertised and accepted at public auctions and propose" how to adopt them.

The EPF had also been asked to "actively participate at primary auctions. EPF is the largest holder of government bonds.

Until bids were missed this year, the earlier concern was that it was not bidding high enough due to a conflicts of interest at where central bank was simultaneously required to get the highest yield for EFP beneficiaries and the debt office was required to get the lowest rates for the Treasury.

There have been suggestions that the EPF be allocated bond on a non-competitive basis. In the US where there are single price auctions, competive bids are limited to 35 percent of the auction for a single bidder. India also has non-competitive bids, mostly for small investors.

There is a wide acceptance that auctioning is the better than placing bonds after auctions, as auctions communicate price signals quickly and bring more money to the gilt market, increasing the volume of bonds sold and also potentially lowering interest rates.

Placements done after auctions, may mis-communicate prices (as credit demand may change after the auction date) and eventually lead to lower volumes of cash coming to bond markets or delay a rate fall when budget deficits improve.

Some analysts say that that record volumes of bonds had to be accepted in long tenors and the that the EPF had to ‘miss’ bids to push rates up, also showed that allowing market forces to work made it more difficult to for auctions to be manipulated.

"We are studying it very carefully," Governor Coomarswamy said. "We are looking at various options. We are looking at other country experience – countries similar to us.

"Clearly the bond markets in highly advanced countries is very different to our bond markets. So we have to look at appropriate comparators."

In the US, gilts are sold through single price or Dutch auction (bids are accepted at the so-called cut off rate), which some analysts say may be too difficult for the ordinary public and especially politicians to understand as they do not trust markets.

However analysts say those who try to manipulate auctions do understand how market forces work and has faith in them as much as their advanced country counterparts will use tactics used in such countries in the past. (Colombo/July07/2016)
 

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