The biggest handicap in the Sri Lankan financial market is the absence of a dedicated derivatives market, which helps investors leverage their financial portfolio risk and the market is now ripe for such products, analysts say.
Derivatives get their name from the fact that they derive their value from the value/price of an underlying financial asset or parameter such as a stock, currency, commodity, index or an interest rate. Among the most common derivatives are options, futures and swaps.
“People who love derivative markets are those who love financial leverage. They also by necessity are risk seekers since high leverage is always associated with high risks and of course high expected returns,” Sarath Rajapakse, Director Capitals Trust said, explaining that in every population there is a certain proportion of risk seeking individuals just as there are groups risk averse and risk neutral people.
Malik Cader, Deputy Director General, Securities and Exchange Commission (SEC) said the SEC Act has to undergo some changes in order to make it possible for firms to introduce such products. “This is a process and we’re on it. There will be some changes to the SEC Act and by next year we will see the introduction of derivatives,” he added.
But capital market experts note that Sri Lanka has low literacy levels in terms of capital markets and many investors cannot comprehend between basic equity and debt instruments, which are a deterrent to having creative and advanced products such as derivatives. According to Hareendra Dissa Bandara, Director Financial Services Academy (FSA), there’re only about 200,000 share market investors which correspond to about 1% of the total population.
“It’s difficult to raise this number up as there’s little awareness,” he noted, adding that before one passes risk, the first step is to take it. He said that FSA is striving to do this to some extent. “Without some understanding on these products, it will be difficult to popularize them,” he added.