Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
Sri Lanka’s controversial bond issue:
ethics, judgement and governance in
financial services
26 July 2015
Fresh look at bo...
The purpose
 This presentation is an attempt to shed light on the
potential dark side of a recent bond issue in Sri
Lanka...
Background
A recent government bond issue by the Central Bank
of Sri Lanka has become a key discussion topic in Sri
Lanka ...
Sri Lanka’s controversial bond
issue in perspective
 SL’s controversial bond issue is almost
unprecedented
 When a centr...
Governance and compliance
 There seems to be governance issues at high level
 Communication of facts has failed and/or f...
Wrong start - political appointee not a
central banker
 Appointment of a foreign citizen – unusual move
 Candidate with ...
Triple “mistakes” – Volume, Price,
Duration and Mix
 Importance of metrics ignored - one cannot
manage what one cannot me...
Triple “mistakes” – Volume, Price,
Duration and Mix
 It appears that some of the participants were
aware of the volume. T...
Determining price - know thy price
 Trading price or price range should be realistic
 It should be meaningful relative t...
Determining price – market efficiency
 Market distortion created by “unlimited information
to limited number of participa...
Determining price – use of available
information
 Price is relative to the prevailing environment
 Prevailing environmen...
Duration – transparent information
 Duration is basic information that any treasury
manager should know
 Duration of the...
Duration – internal strategy ignored?
 Required information was available
 Duration was clear
 Current interest structu...
Unusual Trinity – Was interest of CBSL
compromised by Governor/Son-in-law
relationship?
Central Bank
of Sri Lanka
(CBSL)
P...
Triple failures
Failure 1: Related party was not
disclosed
Failure 2: Unusual related party
transaction was not disclose...
Slow response from regulators
 Regulators’ response has been slow
 Only after extreme pressure from the lawmakers
the Pr...
President the whistle blower
 President identified the problem
 Some may argue President does possess the
required knowl...
Unprecedented damage is
underestimated
 There are estimates of US$ billion of
damage
 These estimated do not take into a...
Upcoming SlideShare
Loading in …5
×

Sri lanka’s controversial bond issue

762 views

Published on

Sri Lanka's recent controversial bond issue

Published in: Economy & Finance
  • Hello! I have searched hard to find a reliable and best research paper writing service and finally i got a good option for my needs as ⇒ www.HelpWriting.net ⇐
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • I’ve personally never heard of companies who can produce a paper for you until word got around among my college groupmates. My professor asked me to write a research paper based on a field I have no idea about. My research skills are also very poor. So, I thought I’d give it a try. I chose a writer who matched my writing style and fulfilled every requirement I proposed. I turned my paper in and I actually got a good grade. I highly recommend ⇒ www.WritePaper.info ⇐
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here

Sri lanka’s controversial bond issue

  1. 1. Sri Lanka’s controversial bond issue: ethics, judgement and governance in financial services 26 July 2015 Fresh look at bond saga in Sri Lanka - Strategist 27/07/2015
  2. 2. The purpose  This presentation is an attempt to shed light on the potential dark side of a recent bond issue in Sri Lanka. While relying on secondary information we also review some “unusual” events that have taken place. Like in many other countries regulators in Sri Lanka cannot make an absolutely safe environment for financial services. Financial services sector in general and central banking in particular depend on, to a large extent, on ethics, judgement and morals of participants. Here we look at whether it is the system or the responsible persons have failed.
  3. 3. Background A recent government bond issue by the Central Bank of Sri Lanka has become a key discussion topic in Sri Lanka and overseas. The issue appears to have the hallmarks of mismanagement at best and fraud at worst. Many academics and professionals have participated in the discussion. The estimated accounting loss is estimated at Rs 6 billion. However, most of the analysts have not taken into account the resultant reputational damage and likely negative impact on future bond issues and economy in general.
  4. 4. Sri Lanka’s controversial bond issue in perspective  SL’s controversial bond issue is almost unprecedented  When a central banker had come under scrutiny governments have acted swiftly to remove or suspend them  Nigeria’s Central Bank governor was suspended by the president for financial irregularities http://www.bbc.com/news/world-africa- 26270561
  5. 5. Governance and compliance  There seems to be governance issues at high level  Communication of facts has failed and/or facts were communicated but ignored  Processes and procedures may not have been the best but they were sufficient  Real issue appears to be the failure to comply with existing processes and procedures.
  6. 6. Wrong start - political appointee not a central banker  Appointment of a foreign citizen – unusual move  Candidate with commercial experience but very little central banking experience at senior level  Candidate was not aware of the procedures of the Central Bank.  Knowledge and skill of monetary policy setting was also questionable.  Consideration was not given to internal candidates  Politics was a hindrance to rational thinking  Recruitment and appointment process was flawed
  7. 7. Triple “mistakes” – Volume, Price, Duration and Mix  Importance of metrics ignored - one cannot manage what one cannot measure  Volume: before purchase one needs to know how much to purchase. This should have been documented. It is the policy of any treasury operation. Transparency was lacking.  Communication of the volume is paramount to market efficiency – foundation of financial markets.  It appears reasonable effort was not made to communicate the volume needed in an impartial manner
  8. 8. Triple “mistakes” – Volume, Price, Duration and Mix  It appears that some of the participants were aware of the volume. This disadvantaged the other participants  Bank staff have raised this issue  Once again market efficiency was compromised
  9. 9. Determining price - know thy price  Trading price or price range should be realistic  It should be meaningful relative to the prevailing market conditions  Efficient markets should deliver efficient prices  Extreme price volatility is a sign of market distortions  Up to 300 b.p. (basis points) above the market is an unacceptable variation  Price does not reflect the prevailing interest rate structure
  10. 10. Determining price – market efficiency  Market distortion created by “unlimited information to limited number of participants” created a privileged position for some  Arms length rule was not followed  Relationship between the governor and a participant was not disclosed  Related party transaction gives rise to insider trading claims which in turn is a serious offence  Punishment for insider trading is a prison sentence in many countries
  11. 11. Determining price – use of available information  Price is relative to the prevailing environment  Prevailing environment should have been analysed using available information  Dealing and research teams had the required information  Did decision makers “intentionally” ignore the information and recommendations?  In a well-developed central banking system why was the communication so poor between the governor and his advisors?
  12. 12. Duration – transparent information  Duration is basic information that any treasury manager should know  Duration of the portfolio should have been analysed and discussed in debt management strategy meetings  Yield curve – relationship between interest rates and time to maturity of the bonds – should have been available on documents and on computer screens (or even mobile phones)  Given the published information available better decisions on duration could have been made.
  13. 13. Duration – internal strategy ignored?  Required information was available  Duration was clear  Current interest structure and expectations were reasonably clear – global interest rates were unlikely to increase sharply  Available information has not been taken into account
  14. 14. Unusual Trinity – Was interest of CBSL compromised by Governor/Son-in-law relationship? Central Bank of Sri Lanka (CBSL) Perpetual Treasuries (PT)Bank of Ceylon
  15. 15. Triple failures Failure 1: Related party was not disclosed Failure 2: Unusual related party transaction was not disclosed giving rise to an insider trading claim Failure 3: Expert advice ignored
  16. 16. Slow response from regulators  Regulators’ response has been slow  Only after extreme pressure from the lawmakers the Prime Minister agreed to a parliamentary enquiry  It is reasonable to assume that “political obstacles” forced regulators go slow.
  17. 17. President the whistle blower  President identified the problem  Some may argue President does possess the required knowledge without giving credit to his senior advisors  Common procedure is for the CB Governor to step down.  Failure to do so created further interest.
  18. 18. Unprecedented damage is underestimated  There are estimates of US$ billion of damage  These estimated do not take into account the reputational damage and resultant increased in interest rates for future issues  Also they do not take into account cost of high interest to the wider economy

×