Macroeconomic objectives:

Stock Market to fall in line

The Sri Lanka stock brokers association issued a statement regarding proposals made after the meeting with President Mahinda Rajapaksa. We carry below the statement.

”In the wake of recent media reports, which have led to adverse publicity about the Colombo Stock Market, the Colombo Stock Brokers’ Association (CSBA) would like to clear some of the misconceptions, which have arisen.

The CSBA has been in existence since 1995 and our members have played an active role in the Colombo Stock Exchange (CSE) and have always acted in the overall interest of developing the Sri Lanka’s Stock Market.

In the recent past, the CSBA has earnestly sought some policy changes in order to formulate strategies in developing the equity market and to keep in line with the broad macroeconomic objectives set by the government. Towards achieving this goal, we went through a series of meetings beginning with the Board and Management of the CSE, then the Securities and Exchange Commission (SEC) and finally with President Mahinda Rajapaksa, who gave the CSBA an opportunity to place its proposals for consideration. All the 28 registered Stock Broking firms of the CSE were invited to attend the meeting.

The President, and 22 stock Broking firms attended.

The requests of the CSBA are:

To allow Stock Broking firms to extend credit up to a maximum of three times leverage of Net Capital. This is to bring in more liquidity into the market. Prior to September 14, 2010 ,Broking companies were allowed to extend credit up to 10 times their net capital.

The credit given at present is based on the computation of liquid assets less obligations of the broking company, which is effectively less than leveraging of zero times.

At present there are risk management measures in place which are monitored by the regulators.

In the future giving credit would not create any systemic risk as all the stockbrokers will be required to establish Risk Management Systems shortly under the initiatives taken by the CSE.

To remove the price band which has a secret formula.

This request is mainly due to the disruption it causes to the price discovery mechanism in the market.

Having said that, the CSBA understands the importance of

regulations to ensure a level playing field, CSBA believes this function can be achieved more efficiently with circuit breakers as practised in most other markets presently and previously in Sri Lanka.

Commercial Bank’s lending on listed equity to be increased from the current 5 percent to the 7.5 percent of the bank’s loan portfolio.

Last year the banks did not have a ceiling on lending against listed equity collateral from a regulatory standpoint.

The CSBA feels that the banking sector should be given flexibility to lend to booming sectors in a growing economy.

This of course is entirely at the Bank’s discretion.

To provide blanket permission for foreign-owned margin providers, licensed by the SEC to provide margin-trading facilities. The reason for requesting such permission is that the Money Lending Ordinance of 1918 prohibits carrying on of the money lending business by foreign companies.

However, margin trading is a specialised transaction relating to the securities market and such permission of the Central Bank will allow flexibility to meet favourable environment to support the expanding capital market activities. It will facilitate foreign funds from entering the local economy.