DvP to go live next month
The launch of the much-awaited Delivery versus Payment (DvP) will be rolling out in July, wiping the settlement risk in share trading, and mooting foreign purchases in the Colombo Stock Exchange (CSE).
The ‘Go Live’ is scheduled for July 26 subject to a final round of testing and industry-wide mock runs, CSE officials said.
The objective of introducing a DvP system for the stock market in Sri Lanka is to minimise the asset commitment risk of sellers. Under the DvP system, the physical custody of shares will be transferred to buyers only on the settlement date.
This means a buyer’s cash payment for shares must be made before or at the same time as their delivery of the shares, cutting the settlement risk days by three. Presently the delivery of shares occurs immediately upon the execution of the transaction while fund settlement takes place three market days after the transaction date (T+3), thus exposing the seller to a three-day settlement risk. “Although stringent measures had been introduced to reduce settlement risk, the globally accepted mechanism for minimising settlement risk is through a DvP system where the securities and funds are exchanged simultaneously on the settlement date,” a CSE official said.
This system is a big part of building trust with foreign clients, he told the Business Times adding that the CSE board approved the relevant rules for the DvP and the Securities and Exchange Commission (SEC) has sanctioned them at its last commission meeting. Amongst them, 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 were approved.
After 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 July 15.
The CSE was planning to launch it this month, but pandemic-related issues delayed some test runs, the officials said.
Significant upgrades have been made to the Automated Trading System and the Central Depository System 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 and Broker Back Office systems.