SRI LANKA: CSE Introduces DVP Mechanism

Monday June 21 2021

On 18^th June 2021, the Colombo Stock Exchange (CSE) announced the introduction of a Delivery vs Payment (DVP) system for stock market transactions. The Go Live is scheduled for 26^th July 2021 subject to a final round of testing and industry wide mock runs.

The objective of introducing a DVP system for the stock market in Sri Lanka is to minimize the Asset commitment risk of sellers. Under the DVP system, the physical custody of shares will be transferred to buyers only on settlement date.

Presently the delivery of shares occurs immediately upon the execution of the transaction while fund settlement takes place 3 market days after the transaction date (T+3), thus exposing the seller to a 3-day settlement risk. Although stringent measures had been introduced to reduce settlement risk and the CSE has never experienced a settlement failure, the globally accepted mechanism for minimizing settlement risk is through a DVP system where the securities and funds are exchanged simultaneously on the settlement date.

The implementation of DVP, a much needed market infrastructure enhancement, will increase the overall credibility and integrity of the Sri Lankan stock market. Furthermore, the adaptation of the DVP settlement mechanism by CSE will be an additional qualification in obtaining the emerging market classification on international market indices.

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