Multiplying

The Central Bank plans to expand the number of primary dealers dealing exclusively in government debt.rn

rnNewcomers will be on par with existing primary dealers, having exclusive access to bid at the primary auctions.

rnrnNew players have to set aside a minimum capital of Rs. 150 mn and have competent dealers, Central Bank Governor, A S Jayawardene told Lanka Business Online.

rnrnForeign banks are expected to snap up most of the new licences, with lquote one or two local banks
quote picking up the balance.

rnrnldblquote Though we reduced the number of dealers from 18 to eight, we felt there was more to be done to deepen the market and infuse greater competition,
dblquote Jayawardene said.

rnrnNew players are likely to include HSBC, Citibank, Standard Chartered Grindlays Bank, NDB Bank and Peoples Bank.

rnrnldblquote The Monetary Board has already approved the new licences, we are waiting for the Finance Minister
quote s approval to gazette the announcement,
dblquote he said.

rnrnHowever, Central Bank
quote s move has attracted a lot of criticism, as commercial banks usually compete with government securities to mobilise deposits.

rnrnTo avoid this conflict of interest, the Central Bank two years ago, issued fresh guidelines to primary dealers asking interested parties to form separate entities with dedicated capital.

rnrnThe new guidelines reduced the number of dealers from 18 to 8, with foreign banks being left out of the process.

rnrnHowever, the bank
quote s hopes of deepening the debt market by making gilt-edge securities freely accessible to the public have fallen far short of expectations.

rnrnOnly two out of the existing dealers are independent, while the others are subsidiaries of banks. Critics say banks are more interested in mobilising fixed deposits than marketing government treasuries.

rnrnMost dealers have also seen their capital eroded due to rising interest rates.

rnrnThe solution lies in appointing more non-bank dealers. Debt market players, numerous foreign consultants and donor agencies have also been lobbying for it for many years.

rnCentral Bank
quote s latest decision effectively shuts the door to the few non-bank secondary market players who are keen to put in new capital to get a primary licence.

rnJayawardene said the bank also plans to implement scripless trading for gilt-edge securities, in order to improve liquidity and efficiency by reducing intermediation costs.

rnBut the plan has got bogged down in bureaucracy on how to structure the central depository.

rnThe Colombo Stock Exchange also plans to appoint second-tier debt dealers that will interact with primary dealers. The bourse plans to offer secondary debt dealers endash which could include stockbrokers, banks and insurance firms endash on its system to trade, clear and settle government debt.

rnTransactions are presently certificate-based, with payments delivered to the Central Bank.

rnDealers have repeatedly said the absence of a scripless trading system is prevented retailers from investing in gilt-edge securities and limits the market to a few private captive funds and state-run financial institutions.rn