CB to introduce new system for bond auctions soon

4 November 2016 12:04 am - 0     - {{hitsCtrl.values.hits}}

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Electronic trading and counterparty system also in the pipeline

In a bid to close room for manipulation in the government securities market, the Central Bank is now gearing up to introduce a brand-new system for primary government securities auctions market, which is expected to go online in three months, according to the Central Bank Governor. 

“We are working on a new auction system which will be more robust and less easy to manipulate,” said Dr. Indrajith Coomaraswamy. 


To this end, the Central Bank is now seeking technical assistance to implement this system from the International Monetary Fund and the World Bank, as they have expertise in government securities markets with exposures to different countries. 
A new system for the primary auctions market is being evaluated in the wake of Perpetual Treasuries Limited, a primary dealer connected to the former Central Bank Governor, Arjuna Mahendran, making super-normal profits through alleged auction rigging.
After Mahendran was appointed Governor last year, the method of offering bonds was changed from direct placements to a fully auctioned system, citing the need for 
higher transparency. 

 

But Sri Lanka witnessed the biggest scandal in the history of the government securities market during Mahendran’s tenure when the Central Bank sold ten times the bonds it offered at higher rates where Perpetual Treasuries Limited bought most of the bonds.
The transaction is believed to have paid off very well, giving a windfall to Perpetual Treasuries as they were said to have dumped the bonds later. 


However this year, the Central Bank took multiple measures to increase the level of transparency in the primary auctions market.   


While the Central Bank doesn’t accept bids above the offered amount at auctions any more as had been the practice in the past, the Central Bank has also started to hold pre-bid meetings with all the primary dealers. Further, an auction calendar has also been introduced. 
Meanwhile, the Central Bank is also planning to introduce an electronic trading platform and a counterparty system which will further increase the level of transparency and reduce room for manipulation in the government securities market. 


This system, according to the Governor, will take at least one year to be fully implemented. 
“There are no perfect systems anywhere. We are trying to reduce the risk of manipulation,” the Governor stressed.  
Apart from the measures that have already been taken to increase the transparency in the primary auctions market, the Central Bank also took multiple measures in recent times to increase transparency in the secondary bond market. 


While the Employees’ Provident Fund is no longer trading in the secondary market, all the banks and primary dealers were asked to join the Bloomberg electronic bond trading platform for government securities secondary market transactions. 


With this development, all primary dealers and banks undertake trades among them on the said platform and report all over-the-counter outright deals with investors of Rs. 50 million and above within 30 minutes.

Special unit to crackdown on pyramid schemes  

The Central Bank is to revive its now defunct special investigation unit to crackdown on the rising ponzi schemes in the country, according to the country’s Central Bank Governor. 


The Central Bank will soon make a formal request in this regard to the Prime Minister, Ranil Wickremesinghe, who is also the Minister in charge of the National Policies and Economic Affairs Ministry, under which the Central Bank is listed. 
“We are going to re-establish the special investigation unit,” Dr. Indrajith Coomaraswamy told a news conference early this week. 
According to reports, a special investigative unit under the Central Bank was originally set up in 2005 to probe into the GoldQuest pyramid scheme. But it was shut down during the administration of President Mahinda Rajapaksa and the tenure of former Central Bank Governor Ajith Nivard Cabraal. 
The new unit will need the assistance of the Sri Lanka Police. 


In a disturbing turn of events the Central Bank has observed a rising trend in pyramid schemes in the country – a fraudulent act of non-existent enterprise fostered by the payment of quick returns to the first investors from money invested by later investors.    
“It appears that ponzi schemes are rising”, Dr. Coomaraswamy added.
The term ‘ponzi’ derives from the Italian born con artist named Charles Ponzi who defrauded tens of thousands dollars from American people through clever money making schemes. 
The Central Bank in recent times has been seen bringing in new systems and establishing new processes to tighten the firewalls and closing the loopholes to avert manipulation.  
Earlier this week the Central Bank said it was going to set up an enforcement division under the Central Bank to prosecute wrongdoers.

 

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