CB to amend rules to facilitate non-residents to trade in RSS

The Central Bank is amending rules to facilitate non-residents to transact in regulated short selling (RSS), an instrument recently facilitated by the Colombo Stock Exchange (CSE), officials said.

RSS happens when a short seller or the borrower of shares trades on the CSE based on a stock borrowing and lending agreement. The short seller does an RSS transaction to buy back, such as at a future point in time, ideally at a price that is lower than the initial sale price to deliver the said shares to the lender.

Renuke Wijayawardhane, Chief Regulatory Officer CSE told the Business Times at a CSE-organised awareness programme for media held in Colombo recently that the new rules by the banking regulator will enable more foreign residents and non-residents to transact in RSS.

“Regulated Short Selling will enhance market efficiency by incorporating the views of short sellers in determining the share price, which was absent previously. This will narrow the bid-ask spreads and improve better price discovery, resulting in enhancing liquidity. The result is improving the market microstructure of CSE,” Mr. Wijayawardhane said.

Investors with idle portfolios will have the opportunity of lending their shares (as lenders) for a specific period, giving them an additional fee-based income, while there’s an opportunity to borrow shares (as borrowers) and profit from a potentially declining market, he said in his presentation.

Enhancing market efficiency and price discovery and providing a hedging mechanism that can be used in a falling market were highlighted as the benefits of going for RSS.

“Creating additional liquidity in the market, and also attracting institutional investors engaging in short selling or employing sophisticated investment strategies - contribute towards the increase in foreign inflows to Sri Lanka, diversify market participation, and contribute to the overall growth of the capital market.”