Sri Lanka gilt dealer begins trading listed debt

Feb 11, 2014 (LBO) – Sri Lanka’s first gilt dealer has begun trading listed corporate debt in the Colombo Stock Exchange kicking off a process that could improve liquidity and secondary trading, officials said. Capital Alliance Ltd (CAL), a primary dealer in government securities became the first firm to trade as a dealer-broker Tuesday, under new rules allowing primary dealers in Treasury bills to trade in debt listed on the CSE.

On Tuesday the firm bought listed debt from a client to its own account giving liquidity to market.

“With the surge in corporate debt issuances in the year 2013, the next step in the cycle will be the development of a vibrant secondary market,” Gihan Hemachandra, chief executive of Capital Alliance said.

“In this regard, CAL is confident that it can use its financial strength as a Primary Dealer in order to make-a-market in corporate debt.

“The success of the Government Securities market is the dealer driven system it follows. We are confident that the same model can be successfully extended to the Corporate Debt space as well.”

Trading in listed corporate debt has been intermittent with few bids coming on the system for debenture holders seeking to exit.

Listed corporate debt owners sometimes have to sell at steep discounts to exit, though there have been more transactions over the past year.

Unlike a broker who will quote price when there is an actual buyer or a seller, a dealer will quote a two way price on its own account creating a market for others to buy or sell a security.

Hemachandra says CAL is already providing two way quotes for its clients for six securities and will also offer them on the trading system soon.

Niroshan Wijesundere, head of market development at Colombo Stock Exchange said in 2013, 68.2 billion rupees of debt was issued.

The Securities and Exchange Commission and CSE encouraged primary dealers in Treasury bills were encouraged to get permission to trade corporate debt on the exchange.

“Though this process we intend secondary trading to increase,” Wijesundere, said.

CAL was the first primary dealer to get approval and start trading.

“While this market is in its very early stages and we are bound to face lot of hurdles in terms of technical and other aspects we think this market will have a much larger secondary market in 2014,” Hemachandra said.

An earlier attempt to promote secondary trading through CSE’s DEX system failed partly due to high brokerage and fees as well as some operational procedures that were not compatible with debt trading.

Dealers however do not depend on brokerage commission for survival but can instead make profits from interest rate fluctuations.

Under the current system brokerage is negotiable but there were some problems that needed to be ironed out to boost trading, industry specialists have said.

At the moment trading fees are charge on yield which means a trading a 4-year security incurs fees four times that of a one year security, discouraging trading on longer tenor instruments.

There was also no process yet to facilitate repurchase (repo) transactions on corporate debt on the system, involving a notional sale and buy back. Under the current trading system an actual sale has to take place.

Such transactions are needed to fund a portfolio cost-effectively. A part of the dealing process involves trading on the yield curve and short-term funding is used to buy and hold securities of a longer tenor.