Nov 26, 2015 (LBO) – The Colombo Stock Exchange is moving ahead with setting up the Central Counter Party institution for secondary market transactions, the bourse said on Thursday.
This system will allow delivery upon settlement and establishing a derivatives market including short selling which will raise the Colombo bourse to international standards, Rajeeva Bandaranaike, the chief executive of the CSE, said.
“The initiative to set up a central counter party system would bring the CSE closer to its goal of achieving world class status,” Bandaranaike said, speaking to media to announce the next phase.
A separate institution will be incorporated in December and commence procurement of the IT infrastructure and systems.
“RFPs will be called soon for the platform,” Bandaranaike said.
MillenniumIT is expected to be a strong contender for providing the additional system, although the CSE will seek the best bidder.
Currently the delivery of shares from the seller to the buyer occurs immediately in equity transactions while the fund settlement to the seller takes places three market days from the transaction date.
Although stock brokers and custodian banks have never defaulted payments, the internationally accepted mechanism for minimizing settlement risk is through a CCP system where the securities and funds are exchanged simultaneously.
“In guaranteeing the settlement of a transaction the CCP would act as a buyer to the seller and the seller to the buyer in all secondary market transactions.”
This process is called ‘novation,’the legal act of replacing the contract between the buyer and the seller with two contracts between the buyer and the CCP and the seller and the CCP.
Government securities will initially not be linked to this system, Bandaranaike said, although the option to do so will be available.
A financial committee headed by K. Kanag-Isvaran, an architect of the Companies Act of 2007, currently meets regularly to finalize the legal process.
The SEC Act necessary for final implementation is scheduled to be passed by end next year, according to the SEC.
The consultants selected for the project are BTA Consulting of UK who provide consultancy and project management services for the clearing house. BTA specializes in capital market related work, and the consultancy is jointly funded by the CSE and the SEC.
The Central Bank of Sri Lanka funded one third of the initial phase.
According to the bourse, phase 1 of the project has been completed and Phase 2 and 3 — procurement and vendor management, and legal, regulatory and operational documentation — will begin in December.
The CSE expects to launch CCP in January 2017.