Smooth Operator

Primary Dealers in government debt will be asked to raise their capital next year, as the Central Bank tries to strengthen the dealer network.
The new regulations for dealers who operate in the primary government securities market comes, as the Central Bank steps up its drive to deepen the debt market.rn

rnAt the moment primary dealers have to maintain a minimum of Rs. 150 mn in Tier I capital and a further Rs. 50 mn in Tier II or debt capital. rn

rnldblquote We hope to raise the minimum capital requirement to Rs. 400 mn next year,
dblquote Central Banks Superintendent Public Debt Dept. Dharma Dheerasinghe told members of the dealer fraternity late Friday.rn

rnThe bank expects dealers to take the capital raising exercise in the lquote right spirit after the industry notched a very profitable financial year last year. rn

rnldblquote Most of the primary dealers have capital in excess of this limit,
dblquote says Dheerasinghe. rn

rnPrimary dealers also leverage or borrow to fund their portfolios. rn

rnThe new capital requirement will put a squeeze on expanding portfolios and leverage levels. rn

rnldblquote Wiht Rs. 200 mn capital we can leverage 20 times, that is Rs. 20 bn. Higher capital requirement means the ability to maintain a larger portfolio gets restricted,
dblquote notes G Ramanan, CEO HNB Securities Ltd. rn

rnThe Primary Dealers Association is talking to the Central Bank to get a risk based regulatory system in place later next year. rn

rnldblquote We are very keen on this [risk based regulation] and we have asked the World Bank to help us with some technical assistance,
dblquote Dheerasinghe said.rn

rnThe Central Bank regulations are aimed at controlling the market risk, Dheerasinghe explained. rn

rnSimilar capital adequacy requirements in the banking sector are aimed at controlling the credit risk, which primary dealers dont carry. rn

rnldblquote When it comes to Primary Dealers, the requirement is only to cover the market risk. Since we deal in risk free assets, there is no credit risk,
dblquote Ramanan said.rn

rnDealers say even the market risk can be minimised by properly matching the portfolio. rn

rnldblquote Even market risk we can minimise by matching the assets and liabilities by proper duration matching. If that is done, there is not need for capital. In this requirement we dont account for that as well,
dblquote Ramanan said.rn

rnTodate, four non-bank and eight bank dealers have exclusive access to bid at primary auctions.rn

rnMeanwhile, the Association of Primary Dealers took another important step on Friday by signing up with financial markets specialist Bloomberg LP, to set up a bond-trading platform.rn

rnKnown as ldblquote Lanka Primary Dealer endash Bloomberg BondTrader
dblquote or LPBT, the electronic platform enables multi-dealer pricing display, order routing and deal confirmation. rn

rnThe platform will display bids and offers for government securities as quoted by the participants of the platform. rn

rnThe LPBT will fill a major requirement of providing on line bond market information. rn

rnThe participants are obliged to provide price quotations in the trading platform where the other participants could respond by accepting the bids and offers. rn

rnThe trades will be concluded and confirmed by the system electronically and settlement will be done using the Real Time Gross Settlement System (RTGS) and the proposed Scripless Securities Settlement System (SSSS) of the Central Bank.rn

rnCentral Banks Governor, A S Jayawardene said the SSSS system is expected to go live by end November, early December, once parliament approved the necessary legislative amendments.rn


-By Mel Gunasekera;


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