Legal Hunt

The top level Financial Reforms committee is looking at ways to support derivative laws in Sri Lanka.
The committee has appointed top debt market specialist Mangala Boyagoda, Chief Executive of Standard Chartered Bank, to look at the gaps that
quote s holding firms back from using derivative instruments.rn

rnA derivative is a contract between two parties to buy or sell an asset in the future at a fixed price. The price of the asset is linked to the price of the underlying financial instrument. rn

rnDifferent derivatives are traded in different ways. They can allow investors to put up a small sum of money to gain exposure to a much bigger slice of the action. In theory you can make large profits on a small outlay, but the reality is that it is similar to a betting game.rn

rnThe absence of a formal structure has not kept a few firm
quote s from taking the plunge, says Boyagoda.rn

rnHe says its time local firms pay more attention to derivative instruments, as the government is in the process of implementing various pension products to keep in line with its overall pension reform plan. rn

rnldblquote A few transactions have taken place within the normal contract law, but people are risk averse to hedge various instruments,
dblquote he said.rn

rnBoyagoda will look into the legal and accounting structures currently in place and recommend any changes if needed.rn

rnInternationally too, market players are re-visiting some of the practices, to keep up with changes. The International Accounting Standard
quote s IAS 39 now makes it mandatory for company
quote s to mark to market their derivative portfolio. The local accounting body too has taken note of these changes and the Institute of Chartered Accountants of Sri Lanka is working towards introducing a similar standard in Sri Lanka.rn

rnFor derivative transactions to go smoothly a simple arbitration process should also kick in. Presently, when contracts go sour, the injured party has to seek remedies through the judicial system. The process is lengthy and time consuming, but a quicker mediation process could easily resolve the dispute.rn

rnThere is also the problem of whether derivative instruments fall under the purview of the Betting and Gambling Act, notes Boyagoda.rn

rnldblquote There has been a court case where a Judge has said a derivative is a betting transaction. A similar instance happened in Hong Kong as well, and it is something we will have to look at,
dblquote adds Boyagoda.rn

rnMangala Boyagoda is expected to submit his findings to the committee in about ten days time.rnrn