CCP progressing fast: July to see key decisions in implementation
The final report by the Consultant to set up a Central Counterparty (CCP) and implement a Clearing and Settlement System for facilitating the transactions in the domestic financial markets will be out by mid next month, paving the way to hedge risk in th Colombo Stock Exchange (CSE), an official said.
“By next month’s end we hope to take (crucial) steps ahead with the CCP,” Vajira Kulatilaka Chairman CSE told the Business Times.
The report will show a business case for the proposed CCP following an appraisal of the Sri Lankan financial markets and the expected development in the market infrastructure and risks.
The CCP is a mechanism which acts in between counterparties to financial contracts traded in one or more markets. The CCP is essential for demutualisation and dematerialisation (the process through which a member-owned company becomes shareholder-owned) of the CSE, which will be a natural progression, Mr. Kulatilaka said.
He said that with a CCP in place the CSE will see a 20 to 30 per cent rise in turnover. Industry analysts say that Sri Lankan capital market involves high risk. 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 buyers and seller comes from the CCP, which in all likelihood is much less than in the previous situation,” an industry analyst said. A CCP will add to the liquidity of the market because it tends to reduce risks to participants, he added.
Mr. Kulatilaka said that the CSE is now in the process of creating an environment for the capital market players to design new instruments for trading once the CCP is established.