Default risk: Lahore bourse demands settlement system

Clearing company will be able to meet obligations of defaulting member.

LAHORE:

The Lahore Stock Exchange (LSE) has asked the National Clearing Company of Pakistan Limited (NCCPL) to immediately put in place a settlement guarantee system to cover counter-party risk resulting from lack of commitment by clearing members for a smooth settlement of trades in a whole range of market instruments.

In a letter addressed to NCCPL, LSE stated that since the inception of the clearing company no such central counter-party mechanism with full settlement guarantee has been established. In such a mechanism, it is possible to meet obligations of failing members from within the resources created by NCCPL.

LSE asked NCCPL that in the wake of the expected demutualisation of exchanges, there is a need to devise a settlement guarantee mechanism wherein non-performance by any of the parties does not affect the other party and NCCPL is able to meet the obligations of the defaulting party through its own Settlement Guarantee Fund as per international best practices.

Demutualisation refers to a process by which a member-owned exchange is reorganised as a shareholder-owned exchange, thereby switching from private to public ownership.

LSE said that the present system of referring back to the exchanges for meeting some obligations in case of delivery default of the member would become redundant after demutualisation.

It asked NCCPL to discontinue its reliance on the stock exchanges to settle default matters and introduce steps to directly create capacity to manage the default risk.





Published in The Express Tribune, May 31^st, 2011.