CSE performs better despite challenges

While statistics show that the Colombo Stock Exchange (CSE) in some ways performed better than some of the other markets, the fact remains that the CSE continues to be dogged by structural and macro issues that inhibit its development, said Chairman, CSE, Nihal Fonseka in its annual report.

He said chief among them are the high level of broker risk, the lack of traded products, high transaction cost and poor liquidity. With regard to eliminating broker risk, a decision has been made to introduce a central counter party for settlements and the CSE is working on this.

The CSE is one of, if not the most, expensive exchange in the world to trade on. A proposal to reduce the threshold for negotiated brokerage from the current high level of Rs 100 m per transaction did not find favour with the member brokers. There is a move to reintroduce a minimum brokerage for even high value transactions which is a retrograde step.

The CSE also attempted to improve liquidity for the benefit of investors by improving the market microstructure and proposed (a) reducing the tick size to 0.10 cents from the current 0.25 cents, (b) reducing the lot size to one share from the current 100 and doing away with odd lots, and, (c) increasing the threshold for crossings from the current Rs 10 m to a minimum of Rs 25 m. None of these proposals could be implemented as they did not receive the approval of our broker members.

In fairness to our members, it must be said that they did offer counter arguments against the proposals and also made the point that these proposals may not improve liquidity but on the other hand increase their processing costs.

Although nothing was indeed certain but since none of these measures were irreversible, the reluctance to try some new initiatives that would also force them to improve their own productivity was somewhat disappointing.

These constraints will continue until such time as the ownership of the exchange is divorced from those who use its platform for trading.

This has been done successfully in many other countries through demutualization.

There have been positive discussions in this regard with our members as well as the Securities and Exchange Commission and it is hoped that it could be progressed expeditiously. It is also to the credit of our broker members that there have been no settlement failures but the current infrastructure for risk management is woefully inadequate to move to a higher level of activity.

The next group of stakeholders that the CSE addressed in 2008 was the listed companies. The listing rules were revamped taking into account the new Companies Act, the costs relating to continuous listing, flexibility to raise new equity and better investor protection.

With regard to investor protection, the CSE also commissioned a new automated surveillance system aimed at identifying irregular transactions.

The draft rules were published for public comment and some changes were introduced taking into account the responses.

As usually happens in Sri Lanka those who remained silent during the consultative phase have taken exception to some of the provisions relating to changes to disclosure requirements; specifically the removal of the requirement to send quarterly accounts to every shareholder or publish these in the newspaper and the ability, if they so wish, for companies to send their annual reports on magnetic medium instead of in a printed form with an option available for shareholders to obtain a full annual report upon request.