By Charindra Chandrasena The Securities and Exchange Commission of Sri Lanka (SEC), which regulates the Colombo Stock Exchange (CSE), has defended the new circuit breaker system which debuted this week against criticism and mixed reviews from certain quarters. “The introduction of circuit breakers with the cooling off periods has given the opportunity for the market participants to think, reassess and reevaluate their investment decisions and has mitigated panic selling setting into the market. Amidst the pandemic, it is commendable to note that the local equity market has remained so far resilient,” a senior SEC official told The Sunday Morning Business today (16) on condition of anonymity. The SEC introduced the new system on 30 April, under which the market automatically closes for the day if the S&P SL20 index, which includes the 20 largest companies listed on the CSE, drops by 10% or more. Under the old system, trading was halted every time the S&P dropped 5%, with the market closing for the day if it dropped 5% at or after 2 p.m. The new system removed this 2 p.m. mark, allowing the market to be closed as early as 11.30 am if the S&P drops 10% or more. The new system came in for heavy criticism after the CSE saw its shortest trading day in history on Monday (11) when the market had to be halted, and then closed, after the S&P dropped 9.6% in 38 seconds, triggering the new circuit breaker on its debut. Analysts pointed out that the possibility of an early market closure may have precipitated the panic selling and that the closing point should be when the S&P drops further than 10% as 10% was not sufficient. It was also alleged that this new system had been imposed arbitrarily by the SEC upon its licensee, the CSE, without due consultation. This allegation was vehemently denied by the SEC official. The official also pointed out that during the mid to latter part of the week, the indices eroded losses registered at the beginning of the week and ended the week on a positive note. The ASPI and S&P both closed the week in the green, with the ASPI up 1.04% and the S&P up 2.84%. The daily average turnover was a healthy LKR 1.9 billion for the week. However, both indices ended the week down from the previous week, which included just a half a day of trading due to government imposed holidays and the sudden imposition of curfew, with the ASPI down 2.90% WoW at 4,439.04 points and the S&P down 9.85% WoW at 1,755.51 points. The CSE suffered a net foreign outflow of over Rs. 3.5 billion in less than 8 hours of trading this week, due to what analysts believe was the pent-up selling pressure created by a seven-week closure of the market being released. The curfew imposed in the evening on 20 March made the CSE one of the stock markets that was closed for the longest period in the world due to Covid-19. However, the SEC official said that all Asian markets have suffered a foreign outflow following the Covid-19 outbreak and pointed instead to the high local participation. “As all the Asian markets have witnessed, during the COVID-19 pandemic period the local market too experienced a foreign outflow during the first week of the recommencement of the market. For the stability of any market, increase in local investor participation is paramount. Large participation of domestic high net worth individuals, local funds and much expected aggressive retail participation increased by 278% for the week on week ending 15^th May 2020.” Meanwhile, SEC Chairman Viraj Dayaratne PC decided to appoint a joint committee of the SEC and the Colombo Stock Exchange (CSE) in order to consider measures that need to be taken to broadbase the Sri Lankan capital market and to educate and create awareness amongst the general public and to make recommendations in that regard. Earlier, the SEC appointed a similar Committee for digitization and has identified other areas in which the SEC and the CSE should work together and intends to have more committees appointed in the future in order to create sustainable capital market.