By Shihar Aneez
COLOMBO Aug 8 (Reuters) - Sri Lanka's Securities and Exchange Commission (SEC) on Monday said it is seriously considering a stockbrokers' proposal to ease a margin trading ban, at least on a temporary basis to help smaller investors in the Colombo Stock Exchange .
The island nation's regulator has directed all brokers to phase out margin trading by end of this year, a change which has hit trading volumes and which brokers blame for cooling business and prices on the bourse.
All but two of Sri Lanka's 28 brokerages last month submitted a joint proposal to the SEC to relax some rules, particularly the margin phase-out.
"The commission is reviewing their proposal very favourably with an emphasis of granting relief to small investors with certain limitations," SEC Director General Malik Cader told Reuters.
By smaller investors, Cader was referring to those who have portfolios of less than 1 million Sri Lanka rupees ($9,115.355), who account for around 60-70 percent of the bourse's volume but 15 percent of its value.
Those investors never had access to margin facilities, which were reserved for a handful of large investors on the clubby exchange, which has had a longstanding reputation for casualness about insider trading.
Cader however said the commission would not back off on the plan to end margin trading by the end of the year, but would reintroduce in a more supervisable form with the deployment of an automated trading system at the start of 2012.
"This will be a temporary measure until such time there will be a proper risk assessment mechanism where the broker back office will be linked through the stock exchange trading system, where it will happen instantly,' he said.
More than once, small players have been caught short by trading on unfounded rumours that drive up shares, including those without any real earnings or sound fundamentals, only to be left holding the bag when large investors sell out.
The SEC since the end of a 25-year civil war in May 2009 has toughened up its regulatory regime with an eye to encouraging more offshore investment into a market that has also been less attractive because it lacks many shares with large free floats.
That however has prompted resistance from local large investors who say that is nearly impossible to enforce strict rules about insider trading, given the small and close-knit nature of Sri Lanka's business elite.
The SEC's margin trade phase-out has reduced the total outstanding debt in the bourse to 3 billion rupees from 8.5 billion early this year. ($1 = 109.705 Sri Lanka Rupees) (Editing by Bryson Hull)