Sri Lanka banks asked to suspend oil derivatives by central bank

Jan 28, 2009 (LBO) – Sri Lanka’s central bank says it has asked commercial banks which sold oil derivatives to state-run Ceylon Petroleum Corporation (CPC) to suspend the deals because they violated its prudential rules and were ‘tainted’. The banks had already offered to ‘re-structure’ the deals by extending payments over a longer period. The deals were based on a target accumulated redemption note (TARN) model and are due to expire by the middle of 2009.

The Central Bank said it began to probe the deals, with Citibank, Standard Chartered, Deutsche Bank, People’s Bank and Commercial Bank of Ceylon on November 13 following media reports, and had also received a court order later.

The regulator said it found “substantial non-compliance” with its prudential directions on derivatives and “non-compliance with best market practices and prudential norms generally applicable to such transactions.”

“In view of the findings, the Monetary Board of the Central Bank of Sri Lanka concluded that the hedging transactions entered into by the CPC with a number of banks were materially affected and substantially tainted,” the Central Bank said in a statement.

“In the circumstances, on 16th December 2008 the CBSL instructed the respective banks not to proceed with, or give effect to, these transactions.”

On January 27, Sri Lanka’s Supreme Court terminated proceedings in several public interest petitions against oil derivatives which had gone against the CPC along with a temporary freeze on payments by the utility to banks.

“Nevertheless, the instructions/directions issued by the CBSL (Central Bank of Sri Lanka) to the respective banks in accordance with the law, will continue to be in force,” the regulator said.

Court had earlier ordered the removal of CPC chairman Ashantha de Mel over the deals.

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