- Foreign investors to receive marked-to-market gain from swaps if they unwind contract
The foreigners, who will invest in Sri Lankan government securities, assisted by swap arrangements to safeguard them from foreign exchange risk, will receive the marked-to-market gain, if they choose to unwind or terminate the contract prior to its maturity.
In a departure from the original rule, where banks cannot pay the marked-to-market gain or the financial gain arising from unwinding a swap arrangement or a foreign exchange derivative contract by a customer, the revised rule stipulates that a bank could pay such a gain, if “the underlying transaction is an investment in government securities, by foreign investors”.
“… a marked-to-market gain (financial gain) should not be paid to the customer. However, Eligible Bank (EB) may pay the marked-to-market gain arising from unwinding/selling back of derivatives for which the underlying transaction is an investment in government securities, by foreign investors,” the Monetary Board said in a revision to the clause on such gains arising from unwinding contracts in the Banking Act Directions on Financial Derivative Transactions for Licensed Commercial Banks and Licensed Specialised Banks.
This revision is aimed at encouraging foreign inflows to the country, said Central Bank Governor Professor W.D. Lakshman, who is also Chairman of the Monetary Board.
The government in September decided to offer up to two-year swap to woo foreigners into government securities, for investments between US $ 25 million and US $ 1.0 billion, in a bid to strengthen the country’s foreign reserves.
Under the proposed swap arrangement, the buying and selling of the foreign exchange will be carried out at the same exchange rate.
Any market risk to an eligible bank can be covered with the Central Bank, which wasn’t possible before, as non-market maker deals could only be covered with another eligible bank or with a foreign counterparty.
“Non-Market Maker (NMM) deals: transactions executed by EBs with their customers, i.e. any party other than an EB or with another EB with the intention of making a spread. In these transactions, an EB shall not take any market risk into its own books and shall cover the transaction on the same day on a back-to-back basis with another EB in Sri Lanka or with a foreign counter party or the Central Bank of Sri Lanka,” the revised rule said.
Any foreign exchange losses thus be incurred by the Central Bank in the process will be netted off against future profit transfers from the Central Bank to the National Treasury.
The Treasury earlier said that any premature transaction by a foreign investor on the government securities, such as withdrawing of the investment in full or part, will be allowed to carry out at the prevailing foreign exchange rate at the time of the transaction, subject to a penalty.