CSE urged to look at alternative mechanisms to mitigate impact of forced selling of stocks

By Hiran H.Senewiratne

CSE should look at alternative mechanisms to mitigate forced selling of stocks by broker credit and margin credit, through its regulator, the Securities and Exchange Commission (SEC), Head of Sales – Soft Logic Stockbrokers Eardley Kern said.

“At this juncture, the CSE cannot fully stop forced selling but they could mitigate it to a great extent in the best interest of investors and other stakeholders by various mechanisms. Reducing the threshold for forced selling would prevent it to a great extent, Kern told The Island Financial Review.

Kern expects the SEC to carefully consider the ground situation in the market that has been induced by it. He said the SEC needs to evaluate the impact the present situation in the country could have on the stock market, in particular the ability to conduct an orderly and fair market for trading in securities.

Kern said that forced selling or forced liquidation usually entails the involuntary sale of assets or securities to create liquidity in the event of an uncontrollable or unforeseen situation. Therefore, forced selling is normally carried out in reaction to an economic event, personal life changes, company regulations or legal order.

Kern added: ‘In the event of a crisis, portfolio managers might be forced to sell certain assets in order to mitigate their losses. For example, some hedge fund managers, who invested hundreds of millions, were forced to exit their long-held assets.

‘Whatever it is, forced selling should be mitigated. Therefore, reducing the threshold would be one of the mechanisms to do so.

‘Company quarterly results/ earnings will prevent a further drop in the market. This year, the first two and a half months were a bit manageable for corporates.’

Meanwhile, Sri Lanka’s Treasury Bill yields rose across maturities with the 3-month yield up 350 basis points to 23.21 per cent, though only half the offered volumes were sold, data from the State Debt Office showed. The 6-month yield went up 204 basis points to 24.77 per cent. The 12-month yield went up 100 basis points to 23.36 per cent.

The Debt Office sold Rs 45.15 billion of 3-month bills and Rs 1,997 million of 6-month bills.

The Central Bank’s indicative spot was quoted at Rs 335 against the US dollar. Yesterday, the Central Bank’s telegraphic transfer rate was Rs 327.5/339.99 against the US dollar, remaining the same as on the previous day.