News
Sequence of events: Suspicions all round
View(s):The Monetary Board of the Central Bank (CB) met Monday, February 23 and on the following day issued its monthly monetary policy stating that the interest rates were unchanged. Thereafter between February 24 and 26, an interested party sold treasury bonds (that it held) with the date of payment settlement being a week from then, compared to the norm of a two-day settlement from the purchase period.
On the morning of Friday, February 27 (day of the controversial auction) the CB spoke to some dealers while a few others had called the regulator. They were told that the possible rate at which the CB would purchase the bonds was at 9-9.7 per cent. Such calls and providing an indicative rate are a normal practice and not unusual. When the auction was announced at noon, dealers were not only surprised at the total amount accepted but also the interest rates. “This was shocking because the CB in the morning said the rates will be around 9-10 per cent and now we find they have gone up as high as 12.5 per cent. Something was wrong,” one dealer recalled.
To add fuel to the fire, 2-3 hours after the auction, the CB announced the removal of restrictions to place excess funds of commercial banks in a CB facility.
Furthermore the decision on ‘excess funds’ was believed to have been taken by the Monetary Board on Monday but only announced on Friday coinciding with the bond auction. “Why was the announcement delayed till Friday? Did anyone in the market know about this decision together with the CB move to increase the bond auction quantity?” the dealer asked.
On Monday, March 2 as a result of these twin moves interest rates jumped by 100-150 basis points. More was in store for unsuspecting market dealers. On Tuesday/Wednesday, March 3-4, one of the parties was reported to have begun buying bonds raising questions. Was any party actually re-stocking its bond portfolio ahead of the March 6 payment settlement when it had to find bonds it had (short sold) sold the previous week? “There was suspicion that Perpetual resorted to short selling – which means selling something you don’t have/own which is illegal – and was the reason for it to buy bonds to balance its books when it had to offload by March 6,” the dealer said, adding that all these issues should be probed by the committee.
He said that transactions at the bond auction should be taken in conjunction with the transactions on February 24-26 and March 3-4 along with the CB’s auction and policy announcement on February 27, to arrive at whether there was insider trading or not. “This complex set of transactions needs to be closely examined by experts which the committee should co-opt,” the dealer said.
Another issue that was of a suspicious nature was that a party made a bid far more than its equity base which no trader does. The company, which had an equity base of Rs. 300 million when it started trading in April 2014 after receiving a licence in October 2013, had made an offer of Rs. 2 billion and another Rs. 3 billion through the Bank of Ceylon (totalling Rs. 5 billion). “This is an unbelievably high amount and a massive risk. All traders have limits placed by their board of directors and this seemed very suspicious,” the dealer said.
He said to succeed through such a risky decision, the trader either had inside information about rates and the total to be accepted, or had a buyer lined up who would take such a large amount. “In the market there is no one that could absorb such a huge amount,” he said