CSE steps up risk management; hires Indian counterpart for DVP

Wednesday, 28 September 2011 00:51 -     - {{hitsCtrl.values.hits}}

The Colombo Stock Exchange (CSE) has appointed the National Stock Exchange of India (NSE) to act as a consultant for the implementation of a Risk Management System and a Delivery Versus Payment (DVP) system for the settlement of all secondary market transactions in equity securities traded on the CSE.

DVP is one of the best practices advocated by the International Organisation of Securities Commissions (IOSCO). It is a mechanism which is effective in minimising risk and currently has been implemented in all leading bourses.

By implementing DVP, both the ownership transfer and payment for securities will occur simultaneously, thus minimising risk. The implementation of DVP and risk management practices is to be completed in mid-2012 and will be a first step towards transforming the CSE into a modern exchange on par with the most developed global exchanges.

NSE would be acting as a consultant throughout the implementation process. The NSE is considered a leading exchange in a global context. As one of its pioneering innovations, the NSE set up the first clearing corporation in India, National Securities Clearing Corporation Limited (NSCCL). NSCCL was a landmark in providing innovation on all spot equity market and derivatives market trades in India.

The new developments in risk mitigation would contribute to the enhancement of market efficiency and help the CSE in the transition from frontier to emerging market status in the future.

Commenting on the initiatives, CSE Chairman Krishan Balendra said: “The introduction of a progressive risk management model will certainly aid the transformation of the CSE. In addition to size and liquidity, post-trade risk mitigation features prominently on leading market index selection criteria. As a frontier market, our transition to the more accepted emerging market level depends on these enhancements.”

Commenting on the initiatives NSE Joint Managing Director Chitra Ramkrishna said: “NSE has a long-standing relationship with the Colombo Stock Exchange through multiple initiatives. We will assist CSE in setting up market infrastructure and implementing global best practices that enables CSE to further strengthen market safety and integrity, thereby creating the platform to offer globally benchmarked products and services.”

The strategy for implementation of risk plans at the CSE envisions an extensive consultation process with market participants, custodians, investors and regulators.

For the successful completion of the process brokers and other participants would have to take steps to convert to the new settlement mechanism and risk management practices. This would entail meeting necessary technical requirements, streamlining of back office operations, participating in related training and adopting of certain procedures in particular with respect to the maintaining of liquid assets for margining requirements.

NSE, located in Mumbai, is the largest exchange in India by daily turnover and number of trades, for both equities and derivative trading.

NSE was given recognition as a stock exchange in April 1993 and has since played a leading role in transforming the Indian Capital Market to its present form. NSE is also the third largest stock exchange in the world in terms of the number of trades in equities.

NSE has set up infrastructure that serves as a role model for the securities industry in India, in terms of trading systems, clearing and settlement practices and procedures. The standards set by NSE in terms of market practices, products, technology and service standards have become industry benchmarks.

NSE stresses on innovation in technology and was the first exchange in the world to use satellite communication technology for trading.

NSE’s pioneering efforts in the Indian capital market include: Setting up the first clearing corporation in India – ‘National Securities Clearing Corporation Limited’ (NSCCL). NSCCL was a landmark in providing innovation on all spot equity market and later derivatives market trades in India; and co-promoting and setting up of National Securities Depository Limited, the first depository in India Delivery versus Payment (DVP): a link between a securities transfer system and a funds transfer system that ensures that delivery occurs if, and only if, payment occurs.