Full text of SEC’s directive to CSE on new rules

The Securities and Exchange Commission (SEC) on Friday evening issued the directive incorporating a new set of rules following the fiasco involving the NSB-TFC transaction via broking firm Taprobane Securities Ltd. Here is the full text of the directive.

The Securities and Exchange Commission of Sri Lanka at its 301st Meeting held on 22 May 2012 having deliberated at length on the transaction of ‘The Finance Company PLC’ shares by National Savings Bank through the Stockbroker-Taprobane Securities (Pvt) Ltd which also led to a settlement failure by the custodian bank, decided to introduce certain interim measures to enhance the smooth functioning of the payment and settlement cycle for trades carried out through the Colombo Stock Exchange until a DVP System is introduced as a pre cursor to the establishment of a clearing house which will manage the Central Counterparty risk.

Therefore the Colombo Stock Exchange is hereby directed;

1. To introduce an upper limit on the price of transactions carried out on the crossings board, where the price variance of a unit share price does not exceed twenty per centum (20%) from that of the closing price. The “closing price” shall have the same meaning as set out in the Automated Trading Rules of the Colombo Stock Exchange;

2. To amend the relevant provisions of the  Automated Trading Rules to incorporate clause (1) above;

3. When undertaking transactions for an on behalf of the National Savings Bank to require all Stockbrokers to obtain a Certified Board Resolution in respect of all transactions of Rs. 20 Million and above. The format of the Certified Board Resolution of the bank to be in compliance with the provisions of the National Savings Bank Act No. 30 of 1971 (as amended).

4. Require the National Savings Bank to use a third party custodian bank in respect of all custodial trades of the bank in the future.

5. The CDS to ensure strict compliance with the Central Depository Systems Rules by all participants and discourage the adoption of practices deviating from the Rules especially in respect of  the  minimum margin rule of 15 % which has to be provided by the Brokers for all purchases over and above the value of Rs. 20 Million and the rule pertaining to the affirmation of trades by the custodian banks by T+1 in respect of all purchases, both of which are currently in force.

In addition to the above, the SEC was concerned about some investment advisors not following best practices with regard to avoiding conflicts of interest between themselves and their clients. Therefore it was decided to introduce trading restrictions to all employees of Stockbroking Companies until the SEC is satisfied that the industry has adopted improved practices and effective compliance mechanisms on the procedures followed by licensed Stockbrokers in handling staff trades.

Therefore the Colombo Stock Exchange is further directed;

5. To prohibit Executive Directors, Employees, their spouses and their nominees of all licensed Stockbrokers and Stock dealers from selling listed shares purchased from the secondary market for a period of six (6) months from the date of purchase.

6. The above said prohibition shall not apply to shares purchased at an Initial Public Offering, shares owned as an entitlement under an Employee Share Option Scheme or with regard to subscriptions to a rights issue.

7. Clause (1) of this directive shall come into effect on 5th June 2012 and shall continue to be in force until a DVP system is established by the Colombo Stock Exchange.

8. Clauses (2) to (5) of this directive shall come into effect from 1 June 2012 and shall continue to be in force until a DVP system is established by the Colombo Stock Exchange.

9. Clause (6) of this directive shall come into effect on 1 June 2012.  

10. Colombo Stock Exchange is required to inform all licensed Stockbrokers and Stock dealers of this Directive.