Colombo Stock Exchange (CSE) is to set up a ‘Central Counterparty System’ (CCP) as a measure to safeguard both the investors as well as the stockbrokers. This is being done for the first time in Sri Lanka, CSE Chairman Vajira Kulatilaka said this morning (26 February).

The CCP is a fund which would safeguard both parties in a CSE transaction, according to Kulatilaka. Currently, if a stockbroker/investor faces a problem after a transaction he has no assurances for relief. The Central Counterparty System will be a mechanism to provide this relief.

Vajira Kulatilaka added that most Stock Exchanges in other countries have this Central Counterparty System. Even Bangladesh has this fund and in that way it is ahead of Sri Lanka.

“The Securities & Exchange Commission, the Colombo Stock Exchange and the Central Bank of Sri Lanka are discussing the details to establish the Central Counterparty System. A Malaysian consultant is advising them on this issue.

“Presently there is a Settlement Guarantee Fund, with a Rs. 600 million capital in hand from where investors/stockbrokers could obtain relief. This fund will be transferred to the Central Counterparty System. From there, those dealing in the stock market could contribute towards this,” explained the CSE Chairman.

The ‘Central Counterparty System’ (CCP)
The Investopedia defines a CCP as ‘an organization that exists in various countries that helps facilitate trading done in derivatives and equities markets. These clearing houses are often operated by the major banks in the country. The house's prime responsibility is to provide efficiency and stability to the financial markets that they operate in.

There are two main processes that are carried out by CCPs: clearing and settlement of market transactions. Clearing relates to identifying the obligations of both parties on either side of a transaction. Settlement occurs when the final transfer of securities and funds occur.

CCPs benefit both parties in a transaction because they bear most of the credit risk. If two individuals deal with one another, the buyer bears the credit risk of the seller, and vice versa. When a CCP is used the credit risk that is held against both buyer and seller is coming from the CCP, which in all likelihood is much less than in the previous situation.