Derivatives to develop efficient financial system

by Lalin FERNANDOPULLE

Introducing derivatives to the Sri Lankan market will help develop a flexible and efficient financial system, said Director General, Securities and Exchange Commission (SEC), Channa de Silva.

He said India’s average daily turnover exceeds US$ 15 billion and its market capitalisation is around US$ 700 billion. Derivatives are the main catalysts of financial market growth in India. Derivatives comprise around 80 per cent of the Indian market.

A derivative is an instrument where the value is derived from or based on, an underlying security or commodity.

Derivatives can be traded on exchanges or in the over-the counter market. They can be used to mitigate risk or to take on market risk. “A central clearance corporation is needed to facilitate stock borrowing, lending and short selling of the market.

Large corporates in India have shown interest in setting up clearing corporates and provide technical support”, he said.

Sri Lanka’s low investment on the stock market is due to lack of knowledge of the financial system . Sri Lanka’s average daily turnover in the recent months has been around US$ 150 million.

SEC will set up investor centres in Colombo, Kandy and Jaffna with stock market live board, library and Internet facilities. Steps will be taken to strengthen the capital market information centres in universities this year.

A proposal has been made to the Central Bank to enable people to purchase Treasury bills through unit trusts and stock brokers.

He said the primary dealers are only interested in promoting their products and not Treasury bills. Primary dealers mobilise money by paying low interest rates on savings accounts while an interest of 18 per cent is paid for Treasury Bills.

The regulations should be made practical, innovative and effective to meet the challenges of the global economic crisis.

The capacity of regulators has to be increased to be effective in the monitoring and supervision roles. SEC’s role is to implement stringent regulations to ensure no market manipulations take place.

A surveillance system will be launched shortly to track malpractice in market dealings.

It is the first time an electronic computer aided surveillance system will be used to help build market confidence.

De Silva said the SEC Act will be strengthened through the revised listing rules of the stock exchange which will be in effect from the second quarter of 2009.

“Taxes need to be simplified and reduced. Corporate taxes should drop to around 15 per cent,” he said.

De Silva said emerging markets contribute around 45 per cent of the world economic growth.

Experts predict that through shift from developed to developing countries emerging markets will contribute 100 per cent to the global growth.

“With an early end to the war and the peace dividends Sri Lanka will be an ideal destination for investors.

Reducing interest rates, developing SMEs, promoting innovation and venture capital, developing the entrepreneurial spirit are some of the major challenges this year for the economy”, he said.