The Securities and Exchange Commission of Sri Lanka (SEC), which regulates the Colombo Stock Exchange (CSE) today (30) introduced a new system under which the market will automatically close for the day if the S&P SL20 index drops by 10% or more.
The last day the CSE was open, 20th March 2020, it dropped by 11.72%. It has been closed ever since, which the SEC has attributed to the curfew situation in the country and complications around settlement.
The SEC said the new circuit breaker mechanism shall take effect from the date the market re-opens. This appears to be in preparation of the reopening of the market as the Government has asked businesses to reopen on Monday (4) as it moves from a strict 6-week long curfew to a lockdown with greater freedom for businesses.
Under the current system trading is halted every time the S&P SL20 drops 5%, with the market closing for the day if it drops 5% at or after 2.00 p.m. The new system has essentially done away with this 2.00 p.m. mark, allowing the market to be closed as early as 12noon if it the S&P SL20 drops 10% or more.
The three Tiered Circuit Breaker Structure is as follows.
- First Circuit Breaker –After commencement of trading of the Colombo Stock Exchange (CSE) for the day, a Market Halt to be imposed for 30 minutes in the event the S&P SL20 index drops by 5%.
- Second Circuit Breaker – Having re-commenced trading after the cooling off period of 30 minutes following the S&P SL20 drop of 5%, if the S&P SL20 index drops again by another 2.5%, a Market Halt to be imposed for another 30 minutes.
iii. Third Circuit Breaker – Upon re-commencing trading subsequent to cooling off period of 30 minutes following the S&P SL20 drop of 2.5% (altogether S&P SL20 has dropped by 7.5%) if the S&P SL20 index drops by a further 2.5% (S&P SL20 index has fallen altogether by 10% for the day), trading will be halted and the market shall be closed for the day.
The SEC said it has deemed it necessary to amend the current methodology by introducing a Three Tiered Circuit Breaker structure having taken in to consideration the prevailing market conditions
“Accordingly, a Three Tiered Circuit Breaker structure is hereby introduced in order to strengthen the capital market and ensure that precautionary measures are in place to eradicate distortion in the S&P SL20 Index by providing a layered approach.”
It has directed the CSE to implement the Three Tiered Circuit Breaker structure from the date the market re-opens and said that it shall remain in force until further notice notwithstanding anything to the contrary contained in the ATS or the CDS Rules of the CSE or any decision of the Board of Directors of the CSE that may have been taken in respect of market wide circuit breakers.