Sri Lanka to set up clearing house for capital markets transactions

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News article by EconomyNext involving BTA Consulting

COLOMBO (EconomyNext) – The Colombo Stock Exchange (CSE) signed an agreement with BTA Consulting (BTA) of the United Kingdom to set up a clearing house for capital market transactions including shares, corporate debt, government securities and other instruments.

The clearing house, which will act as a Central Counterparty (CCP) for settlement of securities, is expected to be set up within a two-year period, a statement said.

“The CCP will also enable the CSE to move to a Delivery Vs. Payment (DVP) settlement system, significantly minimizing the risk of settlement failure and counterparty risk in the secondary market for shares.”

BTA, a UK-based consultancy firm specializing in capital market related assignments globally, will provide consultancy and project management services to set up a clearing house.

It is a joint initiative between the Central Bank of Sri Lanka (CBSL), the Securities and Exchange Commission of Sri Lanka (SEC) and the Colombo Stock Exchange (CSE).

Presently, for equities the delivery of shares occur immediately upon the execution of the transaction while fund settlement takes place three market days after the transaction date (T+3), exposing the seller to a three-day settlement risk.

For government securities, the process is bi-laterally agreed.

The CSE said some interim measures have been introduced to reduce settlement risk now.

But the globally accepted mechanism for minimizing settlement risk is through a CCP-DVP system where the securities and funds are exchanged simultaneously, finally with full irrevocability on the settlement day.

The consultants from BTA Consulting will work with a project team of specialists from CBSL, SEC and CSE.

A Steering Committee consisting of the Governor of the CBSL, the Chairman of the SEC, the Chairman of the CSE, the Deputy Director General of the SEC and the Chief Executive of the CSE will have the overall oversight of the project.

A Working Group consisting of the Chief Operating Officer of the CSE, Director Capital Market Development of the SEC and the Superintendent Public Debt CBSL, will be responsible for the implementation of the project.

The statement said that in preparation for the CCP, two preliminary phases have already been initiated by the CSE.

In November 2014 the CSE launched a new generation Millennium Central Securities Depository (CSD) provided by the London Stock Exchange Group replacing the 19 year old legacy system which will be compatible with a DVP environment for securities  settlement.

The second phase is the commissioning of new Broker Back Office (BBO) and Order Management Systems (OMS) for stock brokers, the CSE said.

The OMS will contain a Risk Management System which will be a pre-requisite for the market to move to a CCP-DVP system.

Stock brokers are expected to select and enter into agreements with one of the four shortlisted vendors offering such systems which are expected to be in place within 2015, the CSE said.

The CSE is also working in parallel with Primary Dealers, CBSL, SEC and Millennium IT (MIT), the CSE’s Trading System supplier to facilitate secondary trading of government securities through the CSE’s Automated Trading System (ATS).

The modalities and systems modifications for such trading are being designed by CBSL, Primary Dealers, CSE and MIT.

“The CCP will usher in a new era for securities trading in Sri Lanka,” said Vajira Kulatilaka, Chairman of the CSE.

The introduction of the CCP with DVP will be a ‘game changer’ for the securities market as this was one of the key criteria for re-classification of our market as an emerging market, he added.

CSE Chief Executive Rajeeva Bandaranaike said that the CCP and DVP system of settlement will facilitate plans to diversify the CSE’s product range.