Chandra J writes to COPE Chief on failure of primary dealers

Good governance activist Chandra Jayaratne has written to Committee on Public Enterprises (COPE) Chairman MP Sunil Handunnetti over the alleged failure of primary dealers to honour contractual obligations in terms of associated control/regulatory failures and review of consequential socio-economic impact. Following is the text of Jayaratne’s letter which has been copied to President, Prime Minister, Finance Minister, Speaker of Parliament, Secretary Finance, Auditor General, Governor and Members of the Monetary Board, Chairman Securities Exchange Commission and the media:

You would recollect that the Central Bank of Sri Lanka was reported to have taken over the management of a leading primary dealer in early January 2016, and later handed over its management to a state banking enterprise. It was also reported that the Securities & Exchange Commission had taken action to remove some directors of this entity from other financial services entities which were licensed by them. 

The 2013/14 annual report and audited accounts of this listed entity is available in the web and positions itself as a very successful going concern, which is profitable and a highly recognised entity, with a track record of growth and financial stability. Trading in its shares of this entity was suspended early this year and it is reported that its assets are inadequate to meet its liabilities.

Media reports have associated the aforesaid primary dealer with a purported contractual failure in regard to the nonrenewal of a security of significant value placed in government securities, on behalf of a provident fund of a public utility coming under the review of your Committee. It is believed that high net worth individuals and high net worth individuals’ controlled financial services entities also have significant exposure to the said primary dealer.

The Central Bank of Sri Lanka in its Audited Accounts for 2015 make reference to uncollateralised REPOs, with an appropriate caveat with each such reference detailing the consequential impact on the accounts and financial status of the Central Bank and/or funds controlled by the Bank. (Reference in Part II- Pages; 42 and 52). There is however, no transparency of how this situation came about to negatively impact the Regulator itself, nor whether a primary dealer or other financial institution is directly associated with such contingent losses, and if so the party/parties concerned are not disclosed.

The Committee on Public Enterprises is therefore urged to immediately institute a review, with the assistance of the Auditor General, to bring out any systems weaknesses leading to  the reported failures of Primary Dealers to honour their contractual obligations; and the associated control/regulatory failures; and review of consequential socioeconomic impact; including the assessment of any contingent liabilities that may as a consequence attached to public finance and state enterprises coming under the purview of COPE.

In the context that the Central Bank of Sri Lanka, Securities & Exchange Commission and the Public Utility referred to above come under the oversight accountability of the COPE,  I submit for your kind consideration the under noted recommendations to form a part of the COPE inquiries;

1. Seek clarification from the Central Bank of Sri Lanka of the level of due diligence, control and risk management oversight applied by them as regulators of primary dealers, including, but not limited to;

a. Licensing of primary dealers;

b. Ensuring that directors and key management of primary dealers are “fit and proper persons”;

c. The primary dealers are going concerns at all times;

d. Effective funds management and asset allocations, and managing asset liability mismatches are effectively in place;

e. The primary dealers meet with their contractual obligations to their customer;

f. The management controls and compliance processes in place are strong and subject to required oversight and audit;

g. The effective and accurate allocation of securities to custodians are made under oversight to provide effective security to clients

2. Recommend that the Securities & Exchange Commission, with appropriate amendment to its enabling legislation, take over the accountability for oversight, control and regulation of secondary market operations of primary dealers trading in government securities

3. Secure from the Central Bank of Sri Lanka a clear turn around and rescue plan for the primary dealer now in distress, with associated costs, write offs  and likely state capital infusions required; as well as an accurate estimate of probable shortfall funds of the primary dealer.

4. Secure from Central Bank of Sri Lanka the areas in which controls, compliances and regulatory processes have failed, within the primary dealer entity as well as within the regulator, together with lessons learnt and strategic action steps proposed to be taken to mitigate future risks

5. Recommend that all primary dealers be public companies, which publish their accounts quarterly in the media for public information;

6. Secure from the public utility concerned, areas in which the controls, compliances and regulations have failed within the utility and the primary dealer entity, together with lessons learnt and strategic action steps taken to mitigate future risks

In view of significant other disclosures made in Part II of the Central Bank of Sri Lanka Accounts of 2015, dealing with its operations and accounts for 2015, it is an essential imperative of priority, that the COPE under your leadership, review same and issue an interim report with the Committee’s recommendations.