Sri Lanka regulator tightens broker trading, settlement rules
May 22, 2012 (LBO) - Sri Lanka's securities watchdog has tightened short term trading by workers and directors of broking firms and also passed strictures on future trading by a state bank, following a controversial stock purchase on which payment was stopped.
SEC said market intermediaries will not be allowed to engage in trade below six months, crossing will be limited to 20 percent above market price and state-run National Savings Bank will have to present a board resolution before placing large purchase orders.
The rules come in the wake of sale of stock to NSB at 60 percent above market price on which payment was stopped after a controversy erupted.
SEC said enforcement will also be tightened.
The full statement is reproduced below
SEC Takes Interim Measures to Mitigate Settlement Risk
At the 301st Commission Meeting of the Securities and Exchange Commission of Sri Lanka (SEC) held today (22nd May 2012), the Commission deliberated at length the transaction of The Finance PLC shares by National Savings Bank (NSB) through the stockbroker firm Taprobane Securities (Pvt) Ltd.
In the aftermath of this transaction, the Commission explored the ways and means of enhancing the smooth functioning of the payment and settlement cycle of the Capital Market of Sri Lanka. The SEC is of the view that the Settlement Risk which currently exists between T (Trade Day) and T+3 (Settlement Day) will be fully eliminated only after Central Counter Party (CCP) is in place. Therefore the SEC will intensify its efforts to implement the CCP for all transactions at the Colombo Stock Exchange (CSE) to eliminate this risk of settlement failure.
Having considered and discussed the above stated aspects, the Commission has decided to implement the following interim remedies until CCP settlement regime is in place. Further steps may be taken as appropriate in the coming weeks.
1. General Rule Changes
• Prohibit employees and Directors of all market intermediaries to trade (buy shares and sell within six months of buying) except in the case of IPO purchases. Investments (over 6 months) are allowed.
• Crossings transactions to have 20% upper limit unless exceptionally allowed by the CSE on a case by case basis. Clarification in this regard to be communicated to the CSE.
• Current 15% margin before trade execution to be strictly enforced including for NSB.
• To have a more robust enforcement mechanism with clearly defined punitive measures for violations of rules by stockbroker firms, CEO’s, Directors and investment advisors. Clarification in this regard to be communicated to the Market shortly.
2. On future transactions where NSB is a party
• All large (defined as transactions with a total value of Rs. 20 Mn and over) NSB orders to have a certified Board Resolution.
• NSB to use a third party custodian bank.
A separate communiqué will follow on the interim actions to be taken on the other parties of this transaction.