Capital Market Development Program (RRP SRI 49365) SRI LANKA CAPITAL MARKET STRATEGY Regulatory and Institutional Trading, Clearing and 1. Draft the new Act, obtain approvals of the Commission and the Cabinet, and enact it into law through the Parliament. 2. Enact a securitization act to provide for a comprehensive legal and regulatory foundation for securitizations. 3. Enact the new Takeovers and Mergers Code. 4. Draft the Demutualization Act, obtain approvals of the Commission and the Cabinet, and enact it into law through the Parliament. 5. Develop a comprehensive implementation plan for the demutualization of the CSE. 6. Develop a viable plan for the listing of the CSE. 7. Review the existing organizational and governance structure of the with benchmarking to International Organization of Securities Commissions (IOSCO) standards. 8. Assess technical capacity building needs across all divisions of the, identify modalities for such capacity building, and implement the plan in a properly sequenced approach. 9. Develop and implement comprehensive corporate governance reforms in line with international principles such as G20/OECD Principles of Corporate Governance. 10. Install an enhanced electronic market surveillance system. 11. Complete the segregation and listing of insurance companies. 12. Complete the implementation of the Risk-Based Capital (RBC) model for insurance companies. 13. Establish a central counter party system and a clearing company for exchange-listed securities. IBSL IBSL
2 Settlement Systems Equity 14. Establish a single, transparent trading system with a market making mechanism where all secondary market trading of government securities is conducted. 15. Establish a central counter party system and a clearing house for government securities. 16. Consider linking the domestic clearing, settlement and depository systems with international platforms such as Euroclear or Clearstream to enhance market access for foreign investors. 17. Establish a national policy framework for public enterprise reforms linked to capital market development. 18. Implement public enterprise reforms to restructure SOEs to make them profitable and financially strong. 19. List at least a minority stake of viable SOEs on the stock market. 20. Establish an alternative board for listing small and medium scale enterprises. 21. Establish an alternative board for listing BOI companies. 22. Establish an alternative board for listing foreign-currency denominated securities. 23. Create rules and regulations enabling the use of capital markets to raise funds for infrastructure development projects. 24. Implement higher public float requirements to increase liquidity of listed equity. 25. Establish a market making mechanism along with necessary regulations for exchange-traded products in order to ensure a continuously liquid market 26. Plan to move towards fully negotiated brokerage. 27. Develop and implement a comprehensive framework for riskbased minimum capital requirements for market intermediaries., MOF, MPED, MPED, MOF MPED,, CSE MOF CSE, SBA, SBA
3 Government Securities Corporate Bond Market 28. Adopt a universal brokerage model where market intermediaries deal in all capital market products such as equity, debt, mutual funds, and derivatives etc. 29. Establish an evenly distributed maturity structure that spans both medium-term and long-term segments. 30. Develop a reliable benchmark yield curve by issuing relatively more of benchmark securities at key points along the yield curve. 31. Publish a quarterly auction calendar in advance containing security type, term to maturity, coupon rate, volume, announcement date, auction date and settlement date in order to provide credibility and predictability to auctions, and to make government borrowings more predictable. 32. Establish policies to avoid practices such as private placements, partial filling of auctions and outright cancellation or rejection of announced auctions in order to ensure a market-based, continuous price discovery process. 33. Enhance competition in the primary market for government securities by allowing participation of a more diversified pool of institutional investors. 34. Undertake policy reforms to increase institutional investor including pension funds participation in the listed corporate debt market in order to create a strong investor base for corporate debt. 35. Introduce repurchase agreements on listed corporate debt securities. 36. Lower transactions costs for debt securities trading. 37. Enact necessary rules and regulations to bring unlisted corporate debt market under the regulation., SBA, PDD,, PDD,, PDD,, PDD,, PDD,
4 Financial Derivatives Commodity Derivatives Unit Trusts 38. Establish the regulatory framework for financial derivatives and commodity futures through the new Act and develop the necessary trading, clearing and settlement infrastructure for financial derivatives. 39. Undertake a comprehensive assessment and prepare a realistic road map for developing financial derivatives products on stocks and bonds. 40. Enhance knowledge and competencies of market professionals and participants on financial derivatives by strengthening the existing financial industry qualification framework. 41. Assess the economic and practical feasibility of introducing commodities derivatives and the needs for an enabling regulatory, trading, clearing and settlement infrastructure. 42. Develop knowledge and competencies on commodities derivatives and using them for risk management purposes. 43. Implement comprehensive plan for educating the saving and investing public about benefits of unit trusts as a saving and investing vehicle., UTA 44. Review the Unit Trust Code and the existing unit trust structure and enact as needed amend the Unit Trust Code to strengthen the legal foundation for unit trusts and other collective savings products. 45. Assess the existing taxation framework for unit trusts and make any changes to provide proper economic incentives for long-term development of the unit trust industry. 46. Establish mechanisms for wider distribution of unit trust products including leveraging technology. 47. Introduce new mutual fund products including perpetual closed-end funds, exchange-traded funds and rea estate investment trusts. UTA, UTA
5 Pension Funds Education, Training and Certification 48. Create more broadly diversified portfolios subject to the investment constraints to optimize the riskreward structure of the portfolios. 49. Offer portfolio choices to subscribers and create investment portfolios based subscriber preferences within prudent guidelines. 50. Allow external fund management of some portions of pension portfolios as a way to help establish performance benchmarks, diversify portfolios and enhance returns to subscribers.. 51. Strengthen the professional fund management and ICT capacities at superannuation funds. 52. Develop a multi-layered licensing framework to accommodate all asset classes to include re-designation of selected qualifications as appropriate. 53. Update and create new exams for broker certification. 54. Revise and update course material used for training and education to make them current 55. Draft updated versions of three securities market books: The Securities Market in Sri Lanka (Sinhala), Equity Securities (English), and Debt Securities (English). 56. Develop a series of short courses including training materials on internal compliance (short term), mutual funds (short term), derivatives (medium term), commodities markets (medium term) training materials. 57. Develop a program for continuing education. 58. Design a comprehensive program to train local professionals as instructors for its licensing programs. 59. Translate Equity Securities and Debt, EPF,, EPF,, EPF,, EPF,,,,,,,, Securities into Sinhala. = Central Bank of Sri Lanka; CMAC = Capital Market Advisory Council; EPF = Employee Provident Fund; = Employee Trust Fund; IBSL = Insurance Board of Sri Lanka; = Securities and Exchange Commission of Sri Lanka; MOF = Ministry of Finance: MOL = Ministry of Labor; MNPEA = Ministry of
6 National Policy and Economic Affairs; MPED = Ministry of Public Enterprise Development; SBA = Stock Brokers Association; UTA = Unit Trust Association