CSE and SEC set to introduce DVP mechanism to Lankan stock market

• DVP system Go Live scheduled for July 26, 2021
• Aims to minimise asset commitment risk of sellers
• To result in securities and funds exchanged simultaneously on settlement date
• To contribute to obtain emerging market classification on int’l market indices

The Securities and Exchange Commission of Sri Lanka (SEC) and Colombo Stock Exchange (CSE) are gearing to  introduce a Delivery vs Payment (DVP) system for stock market transactions. 

The Go Live is scheduled for July 26, 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 minimise 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 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 and the CSE has never experienced a settlement failure, 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.

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 the CSE will be an additional qualification in obtaining the emerging market classification on international market indices. 

SEC Chairman Viraj Dayaratne, PC commenting on the initiative stated that the SEC is pleased that they were able to fast-track the implementation of DVP through the facilitation of the regulatory framework. 

He added that DVP is a critical risk management mechanism and it would also complement the efforts in attracting more foreign investor participation in the stock market. He further added that the industry should now commence work on a Central Counterparty System (CCP).

SEC Director General Chinthaka Mendis stated that he is pleased to note how the SEC was able to secure technical assistance from the World Bank and Asian Development Bank to advise the SEC to facilitate the launch of DVP, which is in fact the most significant milestone of the CSE since the implementation of the Automated Trading System (ATS) in 1997. 

He further stated that this would contribute towards upgrading the CSE status in risk assessments carried out by international bodies and would enable the Sri Lankan market to better position itself within the spectrum of foreign portfolio investments.

CSE Chairman Dumith Fernando said that he is delighted to see the introduction of DVP, which was a long-felt need for the Sri Lankan stock market. 

He commented that this is a result of a three-year-long project and is a landmark achievement for Sri Lanka’s capital market made possible by a substantial amount of planning, hard work and resource allocation on the part of all stakeholders – the CSE, SEC and stockbroking community. 

While thanking the SEC for its support in approving the DVP framework quickly, he further expressed confidence in the fact that all stakeholders had collaborated to develop a robust DVP model, which suits the local environment and will be able to mitigate the asset commitment risk.

CSE CEO Rajeeva Bandaranaike remarked that the introduction of a DVP mechanism is a milestone development. He said that with DVP, the CSE is aligning itself with global market practices and strengthening the overall credibility and integrity of the market.  He further appreciated the support given by all stakeholders who have collectively contributed to enable the CSE to transition to a DVP environment. Significant upgrades have been made to the Automated Trading System (ATS), Central Depository System (CDS), including the development of a Risk Management and Margining System. The technology at all stockbroking 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 July 15, 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.