The Central Bank (CB) is yet to respond to a request from primary market dealers trading in Treasury bonds for an urgent meeting to discuss the crisis in the bond market exacerbated by allegations of insider trading, traders said.
Soon after a crisis erupted on Friday February 27, 2015 when the CB accepted bids for Rs. 10 billion, 900 per cent more than the advertised amount of Rs. 1 billion, an association represented dealers met at an emergency session and decided to meet the CB’s Superintendent of Public Debt whose department handles these issues.
Traders said a meeting-request letter was sent on March 2 but a response had not been received as yet as of Thursday.
The issue of accepting bids over the advertised amount has been nagging primary dealers for many years, and it was brought to the notice of the earlier administration too. “The practice of accepting bids more than what is advertised is an unhealthy one and could leave room for manipulation,” said one trader.
While there have been instances in the past where the CB has accepted bids over the advertised amount, the large amount it accepted at the controversial February 27 auction surprised many and caught the market off guard. Interest rates were also higher and along with a CB policy change on the same day, pertaining to interest rates, traders were caught on the back foot.
Bids worth Rs. 5 billion – directly and indirectly – by Perpetual Treasuries, a market trading company owned by the family of Arjun Aloysius, son-in-law of CB Governor Arjuna Mahendran, were accepted raising questions as to whether they had prior information about the CB accepting upto Rs. 10 billion in bids.
The Government, in a response to the criticism, said that there had been a discussion on February 26 where the need to urgently raise up to Rs. 15 billion in bonds for road contract payments, etc was decided. This, it said, was the reason why the CB decided to accept bids over than the requested amount.
In response, dealers say the CB could have asked the dealers on the same day (February 26) to submit an amended bid for the auction closing the next day (February 27). “This is not difficult since traders are networked to the CB and fresh bids could have been electronically submitted,” one dealer said, adding that the CB could use this formula to make the auctions more transparent in the future.
Dealers said after the scandal, Perpetual was maintaining a low profile and few banks were said to be dealing with the firm on bond related issues.
Clarity
This benefit unfortunately will not apply to those caught up with the January 31 cut-off date who had over Rs. 1 million in their deposits, they said. “This is a huge mess by the Government. The right hand doesn’t know what the left hand is doing,” said one affected senior citizen.
Turmoil in the bond market
There are 16 primary dealers registered in the money markets. When a Treasury bond is offered by the Central Bank (CB), the dealers are obliged to make an offer (even if they are not interested) and in such a situation, uninterested parties are likely to make bids of 10 per cent or less of the total amount sought.
The Bank of Ceylon’s combined bid totalled Rs. 3.58 billion while the next highest came from Perpetual Treasuries with a combined total of Rs. 2 billion (while its balance Rs. 3 billion was said to have been routed through the Bank of Ceylon). Dealers also allege that swings in the interest rates in the money market which impacted on pre-bond and post-bond trades may have also benefited this particular trader.
In such cases, these uninterested dealers make what are called ‘dummy’ bids at high rates in the hope and presumption that these high bids would be rejected as the CB generally accepts the lower bid range, unless the banking regulator is desperate for funds.
In the latest case, 10 per cent of Rs.1 billion worked out to little over Rs. 62 million per dealer (16 in total). According to a leaked document on the final bids accepted by the CB, the CB table revealed a total of 13 out of 26 bids which were Rs. 100 million and below (one at Rs. 8 million; seven at Rs. 100 million and eight at Rs. 50 million). There were four bids, one at Rs. 3 billion (Bank of Ceylon) and three at Rs. 1 billion and slightly over.
Soon after a crisis erupted on Friday February 27, 2015 when the CB accepted bids for Rs. 10 billion, 900 per cent more than the advertised amount of Rs. 1 billion, an association represented dealers met at an emergency session and decided to meet the CB’s Superintendent of Public Debt whose department handles these issues.
Traders said a meeting-request letter was sent on March 2 but a response had not been received as yet as of Thursday.
The issue of accepting bids over the advertised amount has been nagging primary dealers for many years, and it was brought to the notice of the earlier administration too. “The practice of accepting bids more than what is advertised is an unhealthy one and could leave room for manipulation,” said one trader.
While there have been instances in the past where the CB has accepted bids over the advertised amount, the large amount it accepted at the controversial February 27 auction surprised many and caught the market off guard. Interest rates were also higher and along with a CB policy change on the same day, pertaining to interest rates, traders were caught on the back foot.
Bids worth Rs. 5 billion – directly and indirectly – by Perpetual Treasuries, a market trading company owned by the family of Arjun Aloysius, son-in-law of CB Governor Arjuna Mahendran, were accepted raising questions as to whether they had prior information about the CB accepting upto Rs. 10 billion in bids.
The Government, in a response to the criticism, said that there had been a discussion on February 26 where the need to urgently raise up to Rs. 15 billion in bonds for road contract payments, etc was decided. This, it said, was the reason why the CB decided to accept bids over than the requested amount.
In response, dealers say the CB could have asked the dealers on the same day (February 26) to submit an amended bid for the auction closing the next day (February 27). “This is not difficult since traders are networked to the CB and fresh bids could have been electronically submitted,” one dealer said, adding that the CB could use this formula to make the auctions more transparent in the future.
Dealers said after the scandal, Perpetual was maintaining a low profile and few banks were said to be dealing with the firm on bond related issues.
Clarity
This benefit unfortunately will not apply to those caught up with the January 31 cut-off date who had over Rs. 1 million in their deposits, they said. “This is a huge mess by the Government. The right hand doesn’t know what the left hand is doing,” said one affected senior citizen.
Turmoil in the bond market
There are 16 primary dealers registered in the money markets. When a Treasury bond is offered by the Central Bank (CB), the dealers are obliged to make an offer (even if they are not interested) and in such a situation, uninterested parties are likely to make bids of 10 per cent or less of the total amount sought.
The Bank of Ceylon’s combined bid totalled Rs. 3.58 billion while the next highest came from Perpetual Treasuries with a combined total of Rs. 2 billion (while its balance Rs. 3 billion was said to have been routed through the Bank of Ceylon). Dealers also allege that swings in the interest rates in the money market which impacted on pre-bond and post-bond trades may have also benefited this particular trader.
In such cases, these uninterested dealers make what are called ‘dummy’ bids at high rates in the hope and presumption that these high bids would be rejected as the CB generally accepts the lower bid range, unless the banking regulator is desperate for funds.
In the latest case, 10 per cent of Rs.1 billion worked out to little over Rs. 62 million per dealer (16 in total). According to a leaked document on the final bids accepted by the CB, the CB table revealed a total of 13 out of 26 bids which were Rs. 100 million and below (one at Rs. 8 million; seven at Rs. 100 million and eight at Rs. 50 million). There were four bids, one at Rs. 3 billion (Bank of Ceylon) and three at Rs. 1 billion and slightly over.
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