Jesny M

 Financial Market in SriLanka Contents Financial Market4 1. Money Market4 1.1 Sub Markets in Money Market4 1.2 Organizations Which Are Activated In Money Market5 1.3 Instrument Traded In Money Market5 2. Capital Market6 2.1 Sub Markets & organizations In Capital Market6 2.2 Instrument Traded In Capital Market6 3. Colombo Stock Exchange (CSE) limited7 3.1 Functions of CSE7 3.2 Security And Exchange Commission Of Sri Lanka (SEC)7 3.3 Objectives of SEC8 3.4 Powers, Functions, & Duties of SEC8 4. Chart of the Financial Market9 5. Developments in Financial Markets10 Inter-bank Call Money Market10 Domestic Foreign Exchange Market11 Government Securities Market11 Corporate Debt Securities Market13 Equity Market13 Financial Market This is the market where financial assets are traded This can be a specific place or a electronic exchange by using computers According to maturity period of financial instrument, financial market can be divided into 2 parts. 1. Money Market 2. Capital Market 1. Money Market Money market is that portion of financial market which deals with the short-term financing activities. There are 5 sub markets activated in money market. Treasury Bill Market Interbank Call Money Market Internal Foreign Exchange Market The Off Share Market Certificate of Deposit Market 1.1 Sub Markets in Money Market Treasury Bill Market This include buying & selling activities of treasury bills This includes a primary market as well as a secondary market Inter-bank Call Money Market This includes supply of short term loans by those banks with an excess liquidity to those with a liquidity shortages Internal Foreign Exchange Market This is the international currency division of inter-bank call money market The Off Shore Market This includes activities of the non-residence foreign currency (NRFC) banking unit activities Certificate of Deposit Market This is the market where certificate of deposits are traded 1.2Organizations Which Are Activated In Money Market Central bank of Sri Lanka Licensed commercial bank Finance companies Insurance companies Money brokers companies EPF ETF 1.3Instrument Traded In Money Market Short term money Instrument Issuing organization Treasury Bills Central bank Of SL Certificate of deposit Licensed Commercial Bank or registered finance companies Commercial papers Quoted Companies Security papers Central bank Of SL 2. Capital Market Capital market is the portion of the financial market which deals with the long term fund generation Main Functions I. Allocate new funds to those industries and firms could most effectively use them II. Provide liquidity to investors who desire to make portfolio adjustments 2.1Sub Markets & organizations In Capital Market Share Market (Colombo Stock Exchange) Licensed Commercial Bank (Long term Loan Market) Non-banking Finance companies (Long term Loan Market) Licensed specialized bank (Savings & Development Bank) Unit Trust Finance & Leasing companies EPF & ETF Insurance Companies 2.2Instrument Traded In Capital Market Instrument Issuing organization Ordinary shares Public limited companies Preference Shares Public limited companies Non-voting shares Public limited companies Share warrants Public limited companies Debentures /Bonds Public limited companies Treasury bonds Central bank Of SL 3. Colombo Stock Exchange (CSE) limited   CSE is the organization responsible for the organization & running of shares trading floors in Sri Lanka. Main Function Organization & maintenance of trading floor for the trading activities of Shares of listed companies   3.1 Functions of CSE a) Listing of companies b) pricing of shares through incorporated brokers c) Publication & listing of daily share prices traded in the trading floor d) Publication of share market indices e) Notification of bonus issues, right issues and dividend payment f) Managing the central depository systems limited [CDS (Pvt) Ltd] -a subsidiary of CSE   3.2 Security And Exchange Commission Of Sri Lanka (SEC)   SEC is the regulatory body established by the government to supervise control & regulate the share market in Sri Lanka Incorporated by security commission act No.36 of 1987 3.3 Objectives of SEC A. Creation & maintenance of a fair & orderly securities market  B. Protection of the financial interest of the investors  C. Operation of the compensation fund to compensate investors against the losses arising from the failure of brokers /dealers to fulfill their contractual obligation  D. Regulation of the securities market & the maintenance of professional standards in the market 3.4 Powers, Functions,& Duties of SEC I. Issuing licenses to stock exchanges, stock brokers, stock dealers & unit trusts (Licensing Power)  II. Issuing directions to stock exchanges and unit trust (Regulatory Power )  III. Suspend or cancel the listing of any securities of the trading of any securities for the protection of the investors if there is evidence that some irregularity (controlling Power)  IV. Advise the government on the development of the securities market V. Inquiring into the business affairs & examine books of licensed stock exchange, stock brokers, stock dealers unit trust, PLC s if there is evidence that irregularity or a malpractice has been done by any of these institutions (Examining Power )  VI. Handling the settlement of investors disputes (Settlement Power ) VII.  Declaring regarding any misconduct by trading floor, share brokers share dealers or any listed company (Declaration Power) 4. Chart of the Financial Market 5. Developments in Financial Markets Inter-bank Call Money Market During the first nine months of 2013, short-term interest rates in the inter-bank market declined responding to the easing of monetary policy by the Central Bank. The Repurchase rate and the Reverse Repurchase rate of the Central Bank were revised downward on 10 May 2013 to 7.00 per cent and 9.00 per cent, respectively, from 7.50 per cent and 9.50 per cent. The Statutory Reserve Ratio (SRR) was reduced with effect from 1 July 2013 to 6 per cent from 8 per cent releasing funds of Rs. 48 billion to the market. Inflows of foreign funds to the banking sector meanwhile resulted in adding further liquidity to the money market. As a result, overnight market liquidity was in a surplus position about 93 per cent of the time during this period, despite varying between a deficit of Rs. 13.9 billion and a surplus of Rs. 88 billion. In view of monetary policy easing and excess liquidity in the money market the average weighted call money rate (AWCMR) declined. During much of the period from January to September 2013, AWCMR which was at 9.83 per cent at end 2012 declined to 8.44 per cent by end September 2013 and remained within the policy rate corridor since around mid-February 2013. The tax adjusted AWCMR prevailed within the policy rate corridor throughout this period, moving between a range of 8.86 per cent and 7.57 per cent. The Central Bank took a number of measures during the year to improve liquidity management by banks whilst raising the effectiveness of its open market operations. First, the reserve maintenance period was extended from one week to two weeks, to be effective from 01 June 2013. Second, short-term auctions (Repo and Reverse Repo) up to 7 days, on the same day settlement (T+0) basis, were introduced. Third, the Rs. 100 million limits on the use of the repo standing facility on days when the Central Bank offers a reverse repo auction, applicable to each bank, was withdrawn with effect from 01 June 2013. These measures helped banks utilize their liquid funds more efficiently, reducing the necessity for ad-hoc or unplanned market borrowings. The gradual narrowing down of the AWCMR spread after the implementation of these measures compared to the positions at the beginning of the year indicates that the short-term interest rates have started to respond to such measures in a favorable manner. Domestic Foreign Exchange Market The US dollar/LKR exchange rate depreciated marginally by 3.54 per cent over the first nine months of 2013, reaching Rs. 131.98 by 30 September 2013. During the first five months, the exchange rate appreciated by 0.65 per cent with increased inflows by way of foreign investments, worker remittances and tourism. However, with expectations of the stimulus package in the US being tapered off earlier than expected, the currencies of many emerging economies depreciated and the appreciating trend of the US dollar/LKR exchange rate also gradually reversed commencing June 2013. In the government bond market, foreign investors were seen hedging their portfolios which, along with importer demand, exerted pressure on the US dollar/LKR exchange rate. The rupee depreciated slightly against the Euro but appreciated against the Sterling Pound, the Indian Rupee and the Japanese Yen. The Central Bank intervened in the domestic foreign exchange market, buying as well as selling US dollars during the period under review with the intention of curbing excess volatility in the exchange rate. During the period, the Central Bank absorbed US dollars 715.2 million and supplied US dollars 628.7 million resulting in a net absorption of US dollars 86.6 million. Trading volumes in the domestic foreign exchange market decreased marginally by 0.51 per cent up to 30 September 2013 compared with the corresponding period of the previous year due to the decline in international trade related payments. The total volume of inter-bank foreign exchange transactions during the period under consideration in 2013 stood at US dollars 10.3 billion as against US dollars 10.4 billion in the corresponding period of 2012. The total volume of forward transactions up to 30 September 2013 was US dollars 4.0 billion compared to US dollars 3.2 billion recorded in the corresponding period of 2012. The daily average turnover in the inter-bank foreign exchange market including the forward market too decreased marginally and stood at US dollars 56.9 million as against US dollars 57.2 million in the corresponding period of 2012. Government Securities Market The yield rates in the government securities market declined gradually during the first nine months of 2013. Yield rates throughout the yield curve pertaining to government securities (i.e. Treasury bills and Treasury bonds) of 3 months to 20 years declined in a range of 24 bps to 149 bps. The yield rate for the 6 month tenure declined the most by 149 bps. The decline in yield rates was a result of the easing of monetary policy by the Central Bank in view of the decline in inflation and inflation expectations. In addition, increased participation of foreign investors in the government securities market and the excessliquidity that prevailed in the money market during much of this period also contributed to the lower yields. The management of the public debt was further strengthened while improving the risk profile of the public debt portfolio. A Treasury bond with a maturity of 30 years was issued in June 2013 at a yield rate of 12.50 per cent. As a result of issuing a large volume of long dated Treasury bonds during the first nine months of 2013, the Average Time to Maturity (ATM) of the Treasury bond issuance increased to 9.81 years by end September 2013 from 6.27 years as at end September 2012. As a result, the ATM of the entire domestic debt portfolio increased to 5.98 years by end September 2013 from 3.83 years as at end September 2012. Corporate Debt Securities Market The commercial paper market has been relatively active in the first eight months of 2013. The value of commercial paper (CP) issued with the support of banks amounted to Rs. 20.2 billion in the first eight months of 2013 in comparison with Rs. 21.4 billion in the same period in 2012. The interest rates on CPs increased to a range of 12.15 per cent to 22.00 per cent in 2013 from a range of 11.25 per cent to 18.50 per cent in 2012. CPs with a maturity of up to 3 months accounted for 81 per cent of the market, while the shares of CPs with 6 month and 12 month maturities were 9.9 per cent and 9.1 per cent, respectively. The total outstanding value of CPs amounted to Rs. 9.4 billion as at end August 2013 compared to Rs. 10.9 billion by August 2012. The market for debentures posted improved performance for the first nine months of 2013. Measures, taken by the government, such as the exemption of withholding tax on interest income earned from investments in listed debt have contributed towards increasing the popularity of corporate debt. There were thirty eight listings of corporate debentures (including one introduction) by fourteen corporate institutions during this period. The maturity periods of these debentures varied from 1 year to 10 years. The total funds mobilised through these debentures amounted to Rs. 28.2 billion and they carried both fixed and floating interest rates. The fixed rates of interest, payable monthly, quarterly, semi-annually and annually, pertaining to thirty two debentures were in the range of 13.50 – 20.00 per cent, while six debentures were issued with floating rates. Moreover, a number of debenture issues are in the pipeline and some debentures will be issued in the latter part of the year. The trading turnover of debentures listed on the Debt Securities Trading System (DEX) of the CSE was comparatively high at Rs. 407 million in the first nine months of 2013 compared to Rs. 39 million in the corresponding period in 2012. Equity Market Key indicators of performance of the Colombo Stock Exchange such as the All Share Price Index (ASPI), the S&P SL 20 index, market capitalisation as well as the market price earnings ratio indicated an improvement in the nine-month period ending September2013. The downward trend in domestic interest rates, foreign investments and the healthy earnings posted by most listed companies primarily contributed towards this improvement. The ASPI and the S&P SL 20 index increased by 2.8 per cent and 4.2 per cent, respectively, during the period under review. The market price earnings ratio (PER) stood at 16.5 as at end September 2013, compared to 15.9 at end 2012. Market capitalisation increased to Rs. 2.4 trillion by 30 September 2013 from Rs. 2.2 trillion at end 2012. A total of Rs. 1.4 billion raised through four rights issues during this period also contributed towards the increase in market capitalisation. Domestic investors continued to account yyfor a large part of the turnover. Domestic investors accounted for about 62 per cent of the turnover during the first nine months of the year, compared with 78 per cent during the corresponding period in 2012. Accordingly, an increase in turnover levels in relation to foreign investors has been recorded during this period. Among domestic investors, retail investors accounted for around 33 per cent of the turnover while domestic companies accounted for about 29 per cent. The average daily turnover during the first nine months of 2013 was Rs. 874 million compared to Rs. 884 million during the first nine months of 2012. The netInflow of foreign funds to the market during this period amounted to Rs. 19.9 billion, i.e., US dollars 151 million. Market capitalization increased by 10.2 per cent (i.e., Rs. 222 billion), to Rs. 2.4 trillion by end September 2013, which is equivalent to 28 per cent of GDP. Several policy initiatives were taken as per the national budget for 2013 to enhance the performance of the CSE. A 3-year tax holiday was offered to new companies which would be listed on the CSE by offering 20 per cent of the shares to the public before December 2013. This is an encouraging initiative to enhance the depth of the stock market, which currently carries a market capitalisation to GDP ratio which is far behind the other regional markets. Moreover, this will enable companies with a relatively short operating history to speed up their shareholders’ payback period by obtaining a listing on the CSE whilst accessing more equity capital for future expansion. In addition, the 0.1 per cent stamp duty charged on shares transferred to margin trading accounts was abolished to encourage margin trading on the Colombo Stock Exchange. In order to enhance investor confidence and develop the capital market, the Securities and Exchange Commission of Sri Lanka (SEC) has initiated a consultative process with all key stakeholders. The SEC has identified the following ten tasks/projects in its capital market road map to be implemented over the next three years: a) to expedite SEC Act amendments so as to be in line with the International Organization of Securities Commission (IOSCO) standards, b) encourage more public and private listings, c) attract new foreign and local funds, d) develop infrastructure such as trading, back-office system etc., e) develop the corporate debt market, f) intensify education and awareness, g) develop the unit trust industry, h) strengthen risk management, i) develop new products and j) demutualise the CSE from a member owned company to a company owned by shareholders. (Web Site :- Central Bank of Srilanka – Resent Development)