The Importance of Trust in Debt Securities: Pan Asia Primary Dealer Ban Extended

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Title: The Importance of Trust in Debt Securities: Pan Asia Primary Dealer Ban Extended

Date of Publication: Friday, August 15, 2025 4:33 pm

Source: EconomyNext- http://www.economynext.com/

By K.M.S.K. Herath –(236047D)


Debt securities are essential in Sri Lanka's financial sector, comprising Treasury bills and bonds issued by the government to raise funds. Investors like banks and individuals find these a secure investment with interest returns. Primary dealers, being authorized financial institutions, buy such securities from government auctions and resell them in the secondary market. Their functions are to arrange successful auctions, introduce liquidity to investors, maintain uniform interest rates through active transactions, and act as intermediaries between the government and investors. Dysfunctional behavior of primary dealers may result in auction failures, price instability, and investor doubt, thus pointing out their significance.

Image from: https://www.investopedia.com/terms/d/debtsecurity.asp#:~:text=A%20debt%20security%20is%20a%20type%20of%20financial%20asset%20that,corporations%20and%20sold%20to%20investors.


Central Bank Extends Ban on Pan Asia’s Primary Dealer Unit

The Central Bank of Sri Lanka on August 15, 2025, further extended the suspension of Pan Asia Banking Corporation's (PABC) main dealer license for a further six months, a suspension which dates back to 2017 for having a stake in Perpetual Treasuries Ltd (PTL) in the bond scam that caused the government as well as the Employees' Provident Fund (EPF) huge losses. Primary dealers play a vital role in the government debt securities market by conducting Treasury bill and bond auctions and providing liquidity and stability for secondary market trading, and in acting with integrity, they provide also liquidity and stability for the government and the investors. But misuse of such a position, as in the case of PTL, leads to enormous financial loss and loses confidence in what is allegedly one of the safest investment opportunities. In my view, maintaining the ban on PABC is necessary since it is better to defend people's trust in the financial system than it is to defend an institution's interest. Although the Central Bank confirms that there is no effect on PABC's normal banking business, the move sends a very clear message that transparency and responsibility are of utmost concern, bringing to mind the need for good supervision so as to protect public funds and make Sri Lanka's financial market more robust.

                                           


             Image from:  https://www.cbsl.gov.lk/en/about/bank-premises/bank-headquarters


Advantages and Disadvantages of Debt Securities

Debt securities such as Treasury bills and bonds are useful both to the government and investors in several ways. They provide periodic income that is attractive to investors like the Employees' Provident Fund (EPF), which relies on government securities for yield at retirement. Governments and institutions can raise funds without forgoing ownership, like Sri Lanka utilizing Treasury bills and bonds to finance infrastructure and public spending. Such securities are also comparatively low-risk, particularly government securities, as investors are assured that they will receive back their principal at maturity.

Debt securities are risky, too, as highlighted by the Pan Asia Banking Corporation (PABC) primary dealer ban carried by EconomyNext on August 15, 2025. PABC mismanagement and Perpetual Treasuries Ltd caused high EPF losses and undermined market credibility, showing how reliance on intermediaries has been able to create operational as well as moral risks. Other threats are volatility of interest rates, which depreciates bond prices, and the increasing burden of the national debt due to successive borrowing. The case of the PABC, in my view, highlights that only when market integrity, transparency, and proper supervisory regulatory control are guaranteed are the benefits of debt securities harvested.

The following Sri Lankan government security yield curve illustrates how interest rates vary with a change in maturities. It helps investors to consider potential returns and risks involved in Treasury bills and bonds.

                           


                       Image from: https://www.dailymirror.lk/print/bus.../273-302580


Main Features of Debt Securities

Debt securities have several key features that define their structure and appeal to investors. They carry an issue date and issue price, referring to when and at what price the securities are initially sold. Investors are rewarded by an interest in the form of a coupon rate either fixed or variable and a maturity date that signifies when the principal amount together with any interest accrued is returned, thus defining securities as short-, medium-, or long-term. The second major measure is yield-to-maturity (YTM) that estimates the yearly yield if held to maturity. Debt securities also have credit ratings to indicate risk and liquidity, facilitating trading in the secondary market. In the case of Pan Asia Banking Corporation (PABC), although the bank is not precluded from trading in the secondary market, it is precluded from trading in the primary issuance of Treasury securities. This highlights the importance of regulatory oversight in the maintenance of market integrity.

                                                  


                                      Image from: https://www.pabcbank.com/treasury/reverse-repo/

 

Key Institutions, Market Participants, and Pricing of Debt Securities

The de-designation of Pan Asia Banking Corporation (PABC) as a primary dealer is indicative of the key institutions and market participants of Sri Lanka's debt securities market and the importance of ethical conduct in making the market efficient. According to the Central Bank of Sri Lanka (CBSL), primary dealers are licensed financial institutions that buy government securities directly from the CBSL and resell them to investors, while also ensuring compliance with regulatory standards. (cbsl, n.d.)These intermediaries are employed by investors like commercial banks, insurance companies, pension funds like the Employees' Provident Fund (EPF), and individuals to access safe debt securities. Secondary market participants trade these securities in an effort to generate liquidity and effect price discovery. The PABC and Perpetual Treasuries Ltd fraud, as reported by Economyext  (economynext, n.d.) and analyzed in the Sunday Times (sundaytimes, n.d.) demonstrates how unethical behavior by a party hurts other stakeholders, including the EPF, and erodes market credibility. Theoretically, debt securities are priced by their current value of future cash flows, including interest and principal. When there is asymmetry in auctions or trading, fair pricing is distorted, and the government is compelled to pay excess interest, increasing the cost of borrowing overall. This case illustrates very well the interdependence between market integrity, good regulation, and effective pricing in ensuring a credible debt securities market.

 

Conclusion

Debt securities are a cornerstone of the Sri Lankan financial system, giving the government an instrument to raise funds and providing investors with safe, predictable returns. But the Pan Asia Banking Corporation (PABC) suspension reminds us that even the safest financial instruments can become tainted when misused by intermediaries. The case highlights the dual nature of debt securities—their advantages of stability, returns, and liquidity are enjoyed only when institutions act ethically and laws are enforced. My belief is that maintaining strict control, as the Central Bank did, is not only about punishing one institution but about safeguarding trust in the entire market. Absent transparency and accountability, debt securities' benefits can be lost in the process. Lastly, market confidence is the actual pillar of Sri Lanka's debt securities market, and its protection should be the utmost priority.

 

Referenses

https://economynext.com/sri-lankas-central-bank-extends-pan-asia-primary-dealer-ban-for-further-6-months-236572/

https://www.investopedia.com/terms/d/debtsecurity.asp#:~:text=A%20debt%20security%20is%20a%20type%20of%20financial%20asset%20that,corporations%20and%20sold%20to%20investors.

https://www.cbsl.gov.lk/en/about/bank-premises/bank-headquarters

https://www.dailymirror.lk/print/bus.../273-302580

https://www.cbsl.gov.lk/en/financial-system/financial-system-stability/primary-dealers

 https://www.pabcbank.com/treasury/reverse-repo/

Lecture Note: Topic 6 – Debt Securities (IM2231)

 

 

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