CSE to introduce Delivery Vs. Payment mechanism to Sri Lankan Stock Market

The Securities and Exchange Commission of Sri Lanka (SEC) and the Colombo Stock Exchange (CSE) announce the introduction of a Delivery vs Payment (DVP) system for stock market transactions. The Go Live is scheduled for 26th July 2021 subject to a final round of testing and industry wide mock runs.

The objective of introducing a DVP system for the stock market in Sri Lanka is to minimize the Asset commitment risk of sellers. Under the DVP system the physical custody of shares will be transferred to buyers only on settlement date.

Presently the delivery of shares occurs immediately upon the execution of the transaction while fund settlement takes place 3 market days after the transaction date (T+3), thus exposing the seller to a 3-day settlement risk. Although stringent measures had been introduced to reduce settlement risk and the CSE has never experienced a settlement failure, the globally accepted mechanism for minimizing settlement risk is through a DVP system where the securities and funds are exchanged simultaneously on the settlement date.

The implementation of DVP, a much needed market infrastructure enhancement, will increase the overall credibility and integrity of the Sri Lankan stock market. Furthermore, the adaptation of the DVP settlement mechanism by CSE will be an additional qualification in obtaining the emerging market classification on international market indices.

Significant upgrades have been made to the Automated Trading System (ATS), the Central Depository System (CDS) including the development of a Risk Management and Margining System. The technology at all Stock Brokering Offices has been strengthened and upgraded to include risk management in Order Management Systems (OMS) and Broker Back Office systems (BBO).

The SEC has granted the necessary regulatory approvals for the amendments to the CDS Rules, ATS Rules, Listing Rules and Stockbroker Rules of the CSE to facilitate the implementation of the DVP Settlement Mechanism and enhanced margining model. Subsequent to the successful completion of the User Acceptance Testing (UAT) on the system changes, the CSE completed Market wide testing (Mock runs). The CSE will shortly commence the final round of Market wide testing which is due to be completed by 15th July 2021.

The Go Live of the DVP will mark a milestone in the history of share trading in Sri Lanka and pave the way to set up a Central Counter Party System (CCP), which has been a long-awaited necessity in the Sri Lankan capital market.