Single Tier Settlement Cycle at T+3 comes into force

The Securities and Exchange Commission of Sri Lanka (SEC) is pleased to inform that as per SEC directive to the Colombo Stock Exchange (CSE) dated 3rd September 2007, a single tier settlement cycle of trade day + 3 days (T+3) shall be adopted with effect from 10th December 2007. This change will apply to transactions (on equity) carried out with effect from 10th December 2007.

Accordingly the new settlement cycle will be as follows.

Buyer’s settlement T+3
Seller’s settlement T+3
Inter-participant settlement T+3
Custodian Banks will be required to submit trade confirmations/rejections to CDS by 1430 hours on trade day + 1 day.

Current Status
Currently the settlement day for the Buyer is (T+3) while the settlement day for the Seller is (T+4). Such a gap is critical in terms of risk for a market such as ours where a fully fledged settlement guarantee mechanism is not in place. Throughout developed markets, in spite of there being mechanisms where settlements are guaranteed, the settlement risk is carried only for two days or less (i.e. T+2 Settlement). The longer the delay in settlement of share transactions, the higher the systemic risk the market as a whole carries. Further, in all developed markets, settlement is done on a single tier basis.

Rational for Implementation of Single Tier Settlement
Under the prevailing two tier system, there exists a one day gap between the day the buyer of securities pay the Broker, and the Broker pays the seller of securities. Moving to a single tier settlement system will address this issue and reduce the risk associated with the settlement cycle.

Thus the implementation of (T+3) is widely viewed positively by investors both foreign and local who have expressed their concern in this regard to the SEC on numerous occasions.

The banking system of the country being well established with relatively advanced settlement systems will complement and contribute to the success of this initiative which will depend on the ability of market intermediaries to make working arrangements with their bankers to ensure smooth settlement. As a consequence of this Rule, all investors will be required to ensure that funds for purchases are available with their Brokers by T+3 days.

The shift to a single tier system also enables the Secretariat to be in compliance with International Standards, as set out by Principle 30 of the International Organisation of Securities Commissions (IOSCO – SEC Sri Lanka is a signatory to the IOSCO MMoU), which states that the system for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.