CSE looks to reinvent

Chairman lists host of measures, some of which fail to find favour from weaker hearted broker members

Although the Colombo Stock Exchange (CSE) performed better than some others in 2008 and has said that it was, ‘a year without parallel in modern economic history,’ it has looked within to better itself.
Colombo Bourse’s Chairman, Nihal Fonseka in his review in the 2008 Annual Report, noted that while statistics show that the Colombo Stock Exchange 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.

Nihal Fonseka CSE Chairman

“Chief among them are the high level of broker risk, the lack of traded products, high transaction cost and poor liquidity,” Fonseka said.
With regard to eliminating broker risk, he said a decision has been made to introduce a central counter party for settlements and the CSE is working on this.
Noting that “CSE is undoubtedly one of, if not the most, expensive exchange in the world to trade on,” the Chairman noted saying that 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. In fact, there is a move to reintroduce a minimum brokerage for even high value transactions which the Chairman described as “a retrograde step.”
The CSE in 2008 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 1 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. However, “none of these proposals could be implemented as they did not receive the approval of our broker members,” lamented Fonseka
Nevertheless, he added, “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 certain, since none of these measures were irreversible, Fonseka said the reluctance to try some new initiatives would also force them to improve their own productivity. “I believe that 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 de-mutualisation. 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 done expeditiously,” he said.
Though noting the fact that it was to the credit of broker members that there have been no settlement failures, CSE chief however said the current infrastructure for risk management is woefully inadequate to move to a higher level of activity.
During 2008, the CSE also addressed certain issued faced by listed companies. The Chairman said 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.
Fonseka said 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,” he added.
Specifically it was 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. Along with these changes, the CSE also reduced the time granted for quarterly and annual disclosure of financial performance by 2 and 4 weeks respectively.
The Chairman said that the CSE believes, given that no investor can trade on the exchange except through a broker, the investors are well within their right to require their brokers to provide value added information, relating to their investments by disseminating financial information related to listed entities. The significant cost saving to companies brought about by these changes will eventually accrue to the benefit of shareholders.
It was emphasised that the CSE remains committed to increasing the market liquidity and a short term initiative under consideration is to encourage same day trading.
“Day trading is not popular in Sri Lanka due to high transaction costs, although it is very popular elsewhere. Moves are afoot to get the transaction costs reduced for day trades. A longer term initiative is to introduce a limited range of derivative trading such as futures on indices and in liquid shares. The establishment of a central counter party to reduce the counter party risk is an essential pre-requisite for implementing this initiative,” Fonseka emphasised.