Lack of technological progress haunts CSE
The COVID-19 pandemic has posted an unprecedented threat on Colombo’s stock market. The market was closed from March 20 with the curfew and the shutdown declared by the government.
However stockbrokers and investors are raising many concerns on why the share market is closed. For starters, Sri Lanka is the only market that has been closed. Bangladesh and the Philippines had closed for a few days but reopened. Stockbrokers and investors say that one should be able to buy or sell shares whenever which is one of the fundamentals of a free market.
Investors, especially foreigners aren’t happy with the way things are going, analysts say. Already the Sri Lankan currency has depreciated to Rs. 200 levels against the US dollar and foreigners have lost 5 to 10 per cent in value in their investments. This poses a fresh threat in attracting foreigners henceforth – mainly because they will attach a risk premium when investing in the Colombo Stock Exchange (CSE) because of this closure.
Dimantha Mathew, Head of Research, First Capital noted that there will be a big sell-out by both local and foreign investors when the market eventually opens due to the ‘negatives’ attached to this closure. “The closure itself is a risk especially for the foreigners and everyone including the locals and foreigners will sell,” he told the Business Times.
Cash is ‘stuck’ since March 20 and investors are restless, analysts said. Local investors will shift their cash into fixed income securities like fixed deposits in banks. Added to the stock market woes, companies will also weaken during the next few quarters owing to the coronavirus pandemic-related issues. This will further burden the stock market and it will be dreary during this year, analysts noted.
A stockbroker said that retailers who got burnt in February due to margin calls will not be returning to the market immediately. The banks are shut and wont encash/deposit cheques. Even if they were, the curfew is in force immobilising transportation.
All this is true. But the authorities’ hands are tied. They had brought it upon themselves. The Central Counterparty System (CCP) and the Delivery versus Payment (DVP) which were ‘only’ talked about (but not implemented) for the last one and a half decades have now come to haunt the market’s operations.
A CCP interposes itself between counterparties to shares traded becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts. Sri Lanka is one of the few Asian countries without a CCP. Now a buyer requires a seller to deliver shares and the seller requires the buyer to pay. Everyone is exposed to each other and the CSE has no control over the counterparty risk which to say the least is frightening.
CCP follows DVP. Legal reform (through a new Securities and Exchange Commission Act) is needed because current laws and rules were not designed for a CCP. The current Act doesn’t provide certainty, finality and irrevocability of DVP settlements. This is essential when preparing financial contracts.
If these were active, investors and brokers could have carried on with their operations. But they can’t. As usual, Sri Lanka is too little, too late.