COLOMBO (EconomyNext) – The Colombo Stock Exchange (CSE) plans to introduce a capital adequacy ratio rule for stockbrokers as part of measures to develop the market under a medium term strategic plan, its Chief Executive Rajiva Bandaranaike said.
The bourse will also introduce a clearing house and a Central Counter Party (CCP) settlement system to address the settlement risks prevalent for the equity and debt market as part of new risk management measures, he told a news conference.
“The clearing house and CCP will be the next big thing for the CSE which we will have by 2016."
Now the buyer gets the money only three days after the order while the share is transferred to the seller instantly, as a result of which there is a counterparty risk and no guarantee of payment.
“Globally that’s not a good practice,” Bandaranaike said. “That’s why we initiated the project to introduce DVP (delivery versus payment) which means shares and the money are exchanged on the same day so that when you buy the share you have to pay the money at the same time – eliminating the risk of default.”
The clearing house will be interposed between buyer and seller and guarantee settlement – delivery of shares to buyer and delivery of money to the seller.
Chairman of the CSE Vajira Kulatilaka the bourse aims to manage risks according to world standards.
“We have just assigned the task of doing the whole turnkey operation to the consultants. Their report will be out by June 15 and then we will start implementing the CCP.”
Bandaranaike said under the CSE’s three year plan, this year it plans to introduce a series of interim measures to mitigate clearing and settlement risk until the clearing house is set up.
Under the CSE’s plans for the development of infrastructure and capabilities of market intermediaries it is going to introduce a capital adequacy ratio for stock broker firms replacing the existing net capital that they have.
The capital adequacy ratio was approved by the CSE Board of Directors the week before last.
The CSE will now discuss the move with the regulator, the Securities and Exchange Commission.
“It is likely that it will be implemented in the next couple of months,” Bandaranaike said.
One of the interim measures to control settlement risk includes taking a margin for large transactions of over 20 million rupees so that in the event of a default and there’s a price loss that margin can cover that loss.
“We also have implemented some internal systems where we can identify and isolate a large trade,” Bandaranaike said.
“Now if a trade were to fail, for example, as the system stands now the entire settlement in the market will fail.
As a result the CSE now has implemented a system where it can identify a particular large trade and take it out of settlement – delaying settlement on that transaction so that it can let the rest of the market continue.
”This is a global practice which unfortunately we did not have,” Bandaranaike said.
“The good news is that in the last 30 years we never had occasion to use that but we can’t ride on luck and that’s the reason why we are introducing interim measures until a clearing house comes.”