SEC to introduce interim remedies to mitigate settlement risks

23 May 2012 07:51 am - 0 - {{hitsCtrl.values.hits}}

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Securities and Exchange Commission (SEC) has decided to implement several key interim measures to reduce settlement risk involving the transactions of the Colombo Stock Exchange (CSE) until a Central Counter Party (CCP) is in place.

A communiqué by SEC which was released to the media yesterday evening said that these interim measures were decided during its 301 Commission Meeting, where the SEC Commission Members deliberated the recent controversial transaction between National Savings Bank (NSB) and The Finance Company PLC at length, which led the market to a settlement crisis, creating a systemic risk.

“In the aftermath of this transaction, the Commission explored the ways and means of enhancing the smooth functioning of the payment and settlement cycle of the capital market of Sri Lanka,” the SEC communiqué said.

The interim remedies the SEC plans will prohibit employees and Directors of all market intermediaries to trade (buy shares and sell within six months of buying) except in the case of IPO purchases. Investments (over 6 months) are allowed.

The new rules will also require the crossings transactions to have 20% upper limit unless exceptionally allowed by the CSE on a case by case basis. Currently, crossing only have 5 percent lower limit rule.

The new rules also expect to strictly enforce the current 15% margin before trade execution.

The SEC Commission following yesterday’s meeting also decided to implement a more robust enforcement mechanism with clearly defined punitive measures for violations of rules by stockbroker firms, CEO’S, Directors and investment advisors. According to SEC, clarification in this regard will be communicated to the market shortly.

Meanwhile, the SEC Commission also decided to enforce a few NSB specific rules, probably a way to penalize NSB-for not honouring the due payment in the said transaction— within its own regulatory framework, as the banking regulator the Central Bank is not appeared to be taking any action against the savings giant.

According to the new rules, in future transactions involving NSB, above Rs.20 million in value, the bank is required to produce a certified board resolution. The new rules also demand the NSB to use third party custodian banks in any future transactions.

The SEC in its communiqué openly admitted that a settlement risk currently exists between T (Trade Day) and T+3 (Settlement Day), which according to analysts is a very progressive move by the regulator.

The SEC also said that the once the CCP will be fully eliminated only after the CCP in place.

“Therefore the SEC will intensify its efforts to implement the CCP for all transactions at the Colombo Stock Exchange (CSE) to eliminate this risk of settlement failure,” it noted.

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SEC to introduce interim remedies to mitigate settlement risks

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