Sri Lanka’s Central Bank is to shortly allow primary dealers to short sell government securities

Sri Lanka’s Central Bank is to shortly allow primary dealers to short sell government securities, in an attempt to add some liquidity to the market. Sri Lanka’s Central Bank is to shortly allow primary dealers to short sell government securities, in an attempt to add some liquidity to the market. Primary dealers – an elite group appointed by the Central Bank to exclusively access primary treasury bill and bond auctions – were told that they can short sell up to Rs. 100 million or 25 percent of their capital.

The decision was conveyed to dealers at their weekly meeting late Tuesday but Central Bank’s Public Debt Dept says the implementation date would be announced once Monetary Board approval comes through.

Short selling (or “selling short”) is a sale of a security the seller does not actually own.

But the negative position has to be later covered, by buying back the security.

An investor can borrow a security from a dealer and sell it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the dealer.

This allows traders to make profits even in a falling market (when interest rates rise).

Starting July 1, 2005 primary dealers’ minimum capital requirement will go up to Rs. 250 mn from Rs. 200 mn. The figure goes up to Rs. 300 mn from July 1, 2006.

The Central Bank will push ahead with a risk weighted capital system – modeled on similar lines like commercial banks – for primary dealers from July 1, 2006,

Meanwhile, treasury bill interest rates remained virtually flat at Wednesday’s auction, with three-month treasuries nudging up 0.01 points to 8.06 percent.

Six and one-year paper remained flat at 8.15 percent and 8.25 percent respectively.

The Monetary Board will meet on Thursday 12 to decide on whether to change short-term interest rates. Rates have remained steady since November 2004, when the bank raised rates by 50 basis points.

The repurchase rate, at which it drains money from the banking system, stands at 7.5 percent, and its reverse-repurchase rate has remained at 9.0 percent.

However, market players are not expecting the bank to shift its stand despite inflation creeping up to 11.9 percent in April.

-Mel Gunasekera: mel@vanguardlk.com