SEC and CSE form joint committee to set up Central Counterparty

The Securities and Excchange Commission (SEC) and the Colombo Stock Exchange (CSE) have formed a joint committee to set up a Central Counterparty  (CPP), which is enabled under the the new SEC Act which came into force on September 19, 2021.

Accordingly, SEC Chairman Viraj Dayaratne has nominated Commission Member Sunil Lankatilaka to head the Joint Committee which will include Director General, Chinthaka Mendis and Acting Director Capital Market Development, Prabash Wanigatunga from the SEC. 

The CSE has nominated CSE directors Dilshan Wirasekera Director and Suren De Silva, CEO Rajeeva Bandaranaike CEO, CRO Renuke Wijayawardhane CRO, ERM Head Dulani Warnakulasooriya and Head of Compliance and Regulatory Policy Lankesha Molligoda.

The committee’s key mandate will be to identify the manner of implementation of a CCP and to recommend the entire procedure including matters pertaining to procurement. 

The expectation is that it could be completed before the end of next year. The first meeting of the committee will be held during the first week of January 2022.

A CCP can offer significant benefits to the financial market in Sri Lanka and can be considered as part of the critical financial market infrastructure that is needed and is of national interest. The effectiveness of CCPs in acting as firewalls have been proven in other markets especially during the global financial crisis in 2008 where they successfully contained the contagion of losses resulting as consequences of default by certain financial institutions spreading to other financial institutions active in markets cleared by those CCPs. 

In order to complete the transitioning of the market towards adopting a full-blown CCP mechanism for clearing and settlement that would not only enhance the post trade risk management but also unlock the potential for the launch of other complex and new instruments such as derivatives, for which provision is made in the SEC Act. 

Further, having a robust post trade management mechanism in place is one of the requirements considered by foreign portfolio investors in identifying the most suited investment destinations. 

As such, upon implementing a CCP mechanism, Sri Lanka would be able to lure much needed foreign investment flows to the country. 

Moreover, as per the MSCI Market Classification Framework, having a well-functioning clearing and settlement system based on the broad framework published by the Bank for International Settlements including a DVP will positively contribute towards in the efforts of elevating the CSE to ‘emerging market’ status from the current frontier market status.