Rough Times

The Central Bank has issued a draft guideline to allow primary dealers to transact in derivative instruments.
The guidelines include limits for credit risks and capital adequacy exposures.rn

rnThe move comes as market players met on Tuesday to try and activate the local derivative market.rn

rnParticipants at a seminar organised by the Primary Dealers Association lamented on the risk averse attitude of market players.rn

rnThey also said certain regulatory, legal and taxation issues, were preventing the derivative markets from taking off.rn

rnIf done actively, the market is worth around Rs. 500 bn, but only a mere Rs. 200 mn worth of interest rate swaps and forward rate agreements have taken place between primary dealers since last year. rn

rnldblquote The question is whether the market is not serious about managing their risk or that they are not willing to use transactions of this sort,” says Ajantha Madurapperuma, President of the Primary Dealers Association, addressing a brainstorming session late Tuesday.rn

rnPremila Perera, Senior Partner attached to KMPG Ford Rhodes says there is some uncertainty on how to classify derivative instruments.rn

rnldblquote Some clarifications are needed, whether it comes under the general VAT laws or whether they come under the special VAT applied to banks. For the development of the market I suggest the industry ask for a total exemption,
dblquote she said.rn

rnLocal accounting standards too do not provide for derivative rnstandards.

ldblquote The option is to use IAS 32 and IAS 39, until a local standard comes out within the next few years,
dblquote notes Manil Jayasinghe, Partner at Ernst & Young. rn

rnWhile decision have to be taken as to who would regulate derivative instruments, the Central Bank has come forward to help out the primary dealers with benchmarks and capital requirements.rn

rnMadurapperuma says greater awareness has to be built up among provident funds and insurance companies. Participants pointed out that the current insurance laws do not allow insurance companies from taking advantage of derivate transactions.rn

rn”There are a variety of opportunities to cover exposures and to resolve funding mismatches. But we cannot clap with one hand everybody must help,” says Madurapperuma.rn