Bigger Cushion

Primary Dealers in government debt were asked to raise their capital this month as the Central bank tried to strengthen the dealer network.
The new regulations for dealers in the primary market for debt came in to effect at the beginning of the month. Primary dealers now have a minimum of Rs. 150 mn in Tier I capital and a further Rs. 50 mn in Tier II or debt capital.rn

rnGovernment bill and bond portfolio sizes have also been limited to 5 percent of the total capital of the dealer.rn

rnBut primary dealers say the new regulations had little effect on the industry after the very profitable financial year last year.rn

rnldblquote Most of the primary dealers have capital in excess of this limit,
dblquote says Ajantha Madurapperuma CEO Seylan Asset Management/President of Primary Dealers Association.rn

rnPrimary dealers also leverage or borrow to fund their portfolios.rn

rnThe new capital requirement has put a squeeze on expanding portfolios and leverage levels. rn

rnldblquote Now you one have Rs. 200 mn capital we can leverage 20 times, that is Rs. 20 bn. Higher capital requirement means the ability to larger portfolio to be maintained gets restricted,
dblquote Madurapperuma said.rn

rnPrimary dealers are already talking to the central bank about moving to a risk based system of regulation.rn

rnThe Central Bank regulations are aimed at controlling the market risk.rn

rnSimilar capital adequacy requirements in the banking sector are aimed at controlling the credit risk, which primary dealers dont carry.rn

rnldblquote When it comes to Primary Dealers the requirement is only to cover the market risk. Because we are dealing in risk free assets. So there is no credit risk,
dblquote Madurapperuma says.rn

rnThe Primary Dealers Association is talking to the Central Bank to get a risk based regulatory system in place with in the next year. rn

rnDealers say even the market risk can be minimised by properly matching the portfolio.rn

rnldblquote Based on the portfolio regardless of whether the portfolios match or not,
dblquote he says.rn

rnldblquote Even market risk we can minimise by matching the assets and liabilities by proper duration matching. If that is done there is not necessity for capital. In this requirement we dont account for that as well. We are watching the with the Central Bank towards achieve it a risk based capital adequacy requirement in future,
dblquote he said.rn