Sri Lanka G-Sec short selling to be allowed, counter party risks cut

Jan 02, 2013 (LBO) – Sri Lanka will allow covered short selling of Treasuries, issues will be underwritten, and central clearing will be set up to cut counterparty risk as part of efforts to boost market efficiency, Central Bank Governor Nivard Cabraal said. Sri Lanka’s central bank issues government securities on behalf of the Treasury and regulates the market and primary dealers.

A guaranteed central clearing arrangement on a net-settlement will be established to eliminate counterparty risk, Cabraal said in a road map for monetary policy for 2013.

“With a central counterparty arrangement market participants can trade with each without worrying about credit limits with the other party,” Ajith Fernando, head of Capital Alliance group, an active bond house in Colombo said.

“So it frees up trading limits. At the moment some institutions for example cannot trade with smaller parties because they do not have adequate counterparty limits.

“It also allows for anonymous trading. It looks like Central Bank is going to strengthen this market and take it o the next level.”

Primary dealers will also be given liquidity support.

The Central Bank said derivative products will also be encouraged once the cash market is developed.