SEC mulls derivative instruments
Help investors to hedge risk, encourage higher
participation:
Hiran H.SENEWIRATNE
Sri Lanka’s markets regulator, the Securities and Exchange Commission
(SEC), will create a strong derivative instruments market around shares
prices on the Colombo bourse, with the assistance from Indian expertise.
Creating of a Central
Clearing Corporation in Sri Lanka will also creat a strong
capital market, as it is an important facet of having a strong
market where the share trading is concerned. |
“These will help investors hedge risk and encourage higher
participation in the market”, Senior Fellow National Institute of Public
Finance and Policy in India,” Ajay Shah said.
He said Sri Lanka has not yet explored its opportunities in the
derivatives market, which could be increased 10 to 15 fold in the stock
market trading especially in small deposits, if Sri Lanka introduces
reforms to the market.
Because Sri Lanka’s capital market is stuck in one place due to the
absence of a strong capital market, which could be helped to become a
major financial hub in the region. The proposed report on reforms will
be released shortly.Initially we can have the All share Price Index (ASPI)
related futures and then we can roll out industry related indices,” says
Shah referring to a popular type of derivatives (futures), which is an
agreement to buy or sell an asset at a specified future date.
Derivatives are financial instruments whose value changes responding to
changes in underlying variables like stocks, bonds or commodity prices.
Shah said Sri Lanka is missing a lot of areas including intra-trading
and tradings, Derivatives Market and capital opportunities like tea
futures and rubber futures could be introduced to reap benefits, he
said. Therefore, Sri Lanka could create a vibrant tea futures and rubber
futures markets in the country. Creating of a Central Clearing
Corporation in Sri Lanka will also creat a strong capital market, as it
is an important facet of having a strong market where the share trading
is concerned. It will create a strong and smooth function of trading in
both ends i.e. buyer and seller side, he said.
This proposed Central Clearing Corporation will have to have a strong
risk management system in line with other countries,’ he said.
“Large profits from a small capital outlay while on the other side
investors use them to reduce risk of an unanticipated market movement.
The SEC, which has commissioned a feasibility study on introducing
derivative products from two Indian capital markets expects to introduce
the product soon”.
“Index-based futures (tradable in the stock market) are usually a
first step in introducing derivative products to emerging markets. You
can have 6 to 7 indices and thereafter you can launch - depending on the
strength of the market - individual stock related derivatives,” Shah
said.
SEC- whose mandate includes the promotion and development of the
securities market- is aware of the reputation derivatives have gained.
Sri Lanka have to get the platform ready like having the IT systems
ready, ensure supervision is ready and ensure the margins and other
requirements which address the risk aspects are in palace for
derivatives, he said.
In 2006 the Asian Development Bank funded an Ernst & Young Malaysia
consultancy to develop a Capital Markets Master Plan for Sri Lanka.
The proposed report also recommended that stockbrokers be allowed to
introduce derivative products. |