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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Colossal Correction : SEC clarifies its directive regarding the new Interim Measures

Colossal Correction : SEC clarifies its directive regarding the new Interim Measures

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SunilNayaka


Equity Analytic
Equity Analytic
Colossal Correction

Go to Link: http://lankabusinesstoday.com/news/market/1936-colossal-correction

SEC clarifies its directive regarding the new Interim Measures

May 25, 2012 (LBT) –Despite Sri Lanka's top stock market billionaires, and Directors and investors raising concerns over a 'Press Communique' issued by stock market watchdog on Monday the 22 May 2012 after the 'Controversial NSB-TFC Doomed Deal", another statement from the watchdog's house said that further to the Media release of 22nd May 2012, the directive on the Interim measures to enhance the smooth functioning of the payment and settlement cycle for trades carried out through the Colombo Stock Exchange is released.

Earlier on Monday SEC said in its release that "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."

Followed by the move it is learnt several top investors in Colombo had raised concerns since market intermediaries include several licensed commercial banks and registered finance companies and listed investment management companies of the country that represent island's top billionaires who represent almost a 90% of listed companies in the country and a majority of people who trade in Colombo stocks.

It was later learnt from sources SEC after discussing on the matter for a length of days later issued an extended version on the same directive on today, Friday the 25 May 2012.

However SEC said that in the letter which was addressed to all licensed Stockbrokers and Stock dealers, that at its 301st Meeting held on 22nd May 2012 it discussed and directed to introduce an upper limit on the price of transactions carried out on the crossings board, where the price variance of a unit share price does not exceed twenty per centum (20%) from that of the closing price. The “closing price” shall have the same meaning as set out in the Automated Trading Rules of the Colombo Stock Exchange; it added.

Secondly the notice added to amend the relevant provisions of the Automated Trading Rules to incorporate clause (1) above; (Clause 2)

Thirdly, when undertaking transactions for an on behalf of the National Savings Bank (NSB) to require all Stockbrokers to obtain a Certified Board Resolution in respect of all transactions of Rs. 20 Million and above. The format of the Certified Board Resolution of the bank to be in compliance with the provisions of the National Savings Bank Act No. 30 of 1971 (as amended).(Clause 3)

It also noted that to require the National Savings Bank to use a third party custodian bank in respect of all custodial trades of the bank in the future. (Clause 4)

The notice said that the Central Depository System (CDS) will ensure strict compliance with the Central Depository Systems Rules by all participants and discourage the adoption of practices deviating from the Rules especially in respect of the minimum margin rule of 15 % which has to be provided by the Brokers for all purchases over and above the value of Rs. 20 Million and the rule pertaining to the affirmation of trades by the custodian banks by T+1 in respect of all purchases, both of which are currently in force. (Clause 5)

The notice added that Clause (1) of the directive shall come into effect on 5 th June 2012 and shall continue to be in force until a DVP system is established by the Colombo Stock Exchange.

SEC noted that Clauses (2) to (5) of this directive shall come into effect from 1 st June 2012 and shall continue to be in force until a DVP system is established by the Colombo Stock Exchange.

SEC added that the Directive is issued under Section 13(c) of the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended).

Statement also highlighted that in addition to the above, the SEC was concerned about some investment advisors not following best practices with regard to avoiding conflicts of interest between themselves and their clients. "Therefore it was decided to introduce trading restrictions to all employees of Stockbroking Companies until the SEC is satisfied that the industry has adopted improved practices and effective compliance mechanisms on the procedures followed by licensed Stockbrokers in handling staff trades" it added.

The statement pointed that therefore the Colombo Stock Exchange is further directed; to prohibit Executive Directors, Employees, their spouses and their nominees of all licensed Stockbrokers and Stock dealers from selling listed shares purchased from the secondary market for a period of six (6) months from the date of purchase and this directive shall come into effect on 1 st June 2012.

"The above said prohibition shall not apply to shares purchased at an Initial Public Offering, shares owned as an entitlement under an Employee Share Option Scheme or with regard to subscriptions to a rights issue" it added.

The notice added that The Securities and Exchange Commission (SEC) of Sri Lanka at its 301st Meeting held on 22nd May 2012 having deliberated at length on the transaction of “The Finance Company PLC” shares by National Savings Bank (NSB) through the Stockbroker-Taprobane Securities (Pvt) Ltd which also led to a settlement failure by the custodian bank, decided to introduce certain interim measures to enhance the smooth functioning of the payment and settlement cycle for trades carried out through the Colombo Stock Exchange until a Delivery Versus Payment (DVP) System is introduced as a pre cursor to the establishment of a clearing house which will manage the Central Counterparty risk.

The both statements are below:

Statement One: 22 May 2012

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.

Statement Two : 25 May 2012

Re: Directive issued under Section 13(c) of the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended).

The Securities and Exchange Commission of Sri Lanka at its 301st Meeting held on 22nd May 2012 having deliberated at length on the transaction of “The Finance Company PLC” shares by National Savings Bank through the Stockbroker-Taprobane Securities (Pvt) Ltd which also led to a settlement failure by the custodian bank, decided to introduce certain interim measures to enhance the smooth functioning of the payment and settlement cycle for trades carried out through the Colombo Stock Exchange until a DVP System is introduced as a pre cursor to the establishment of a clearing house which will manage the Central Counterparty risk.

Therefore the Colombo Stock Exchange is hereby directed;

1.To introduce an upper limit on the price of transactions carried out on the crossings board, where the price variance of a unit share price does not exceed twenty per centum (20%) from that of the closing price. The “closing price” shall have the same meaning as set out in the Automated Trading Rules of the Colombo Stock Exchange;

2. To amend the relevant provisions of the Automated Trading Rules to incorporate clause (1) above;

3. When undertaking transactions for an on behalf of the National Savings Bank to require all Stockbrokers to obtain a Certified Board Resolution in respect of all transactions of Rs. 20 Million and above. The format of the Certified Board Resolution of the bank to be in compliance with the provisions of the National Savings Bank Act No. 30 of 1971 (as amended).

4. Require the National Savings Bank to use a third party custodian bank in respect of all custodial trades of the bank in the future.

5.The CDS to ensure strict compliance with the Central Depository Systems Rules by all participants and discourage the adoption of practices deviating from the Rules especially in respect of the minimum margin rule of 15 % which has to be provided by the Brokers for all purchases over and above the value of Rs. 20 Million and the rule pertaining to the affirmation of trades by the custodian banks by T+1 in respect of all purchases, both of which are currently in force.

In addition to the above, the SEC was concerned about some investment advisors not following best practices with regard to avoiding conflicts of interest between themselves and their clients. Therefore it was decided to introduce trading restrictions to all employees of Stockbroking Companies until the SEC is satisfied that the industry has adopted improved practices and effective compliance mechanisms on the procedures followed by licensed Stockbrokers in handling staff trades.

Therefore the Colombo Stock Exchange is further directed;

6. To prohibit Executive Directors, Employees, their spouses and their nominees of all licensed Stockbrokers and Stock dealers from selling listed shares purchased from the secondary market for a period of six (6) months from the date of purchase.

The above said prohibition shall not apply to shares purchased at an Initial Public Offering, shares owned as an entitlement under an Employee Share Option Scheme or with regard to subscriptions to a rights issue.


Clause (1) of this directive shall come into effect on 5 th June 2012 and shall continue to be in force until a DVP system is established by the Colombo Stock Exchange.

Clauses (2) to (5) of this directive shall come into effect from 1 st June 2012 and shall continue to be in force until a DVP system is established by the Colombo Stock Exchange.

Clause (6) of this directive shall come into effect on 1 st June 2012.

Colombo Stock Exchange is required to inform all licensed Stockbrokers and Stock dealers of this Directive.

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