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Will the new settlement system clear the cloud? By Mohib Rashid
***A young business graduate says introduction of the netting system without automation will create scope for manipulation***
In recent days, there has been a lot of talk about the system of settlement in stock exchanges. A new clearing and settlement system namely "Fixed Accounting Settlement Procedure" (FASP) for traded securities is likely to be introduced to the country's two stock exchanges. It was interesting to observe that the Dhaka Stock Exchange (DSE) authority at first blamed the Securities and Exchange Commission (SEC) for allowing netting settlement System to the Chittagong Stock Exchange (CSE). This system is being followed by the CSE since Its inception, which allows the members of the stock exchange to submit the scrips and money to settle the deals after a regular interval of one week.
DSE blamed that the volume of trading increased heavily in the CSE because the netting system allows settlement once a week. They pointed out the danger of this system in a volatile market and argued two systems of settlement cannot exist in a country. This was understood, since the netting settlement opens scope for violating Securities and Exchange Ordinance (1969) 17(e) (ili).(iv),(v) regarding prohibition of fraudulent acts. But when DSE insisted on allowing them to follow the same so-called danger system,
eyebrows are raised naturally.
Things moved dramatically concerning controversy over netting system. On Aug 19, DSE members insisted the SEC chief on implementing a uniform settlement system in accordance with the present rules and regulations of the Commission. The day before, they also met the Finance Minister for the same Burpose. It was learned that the SE members were even ready to ignore SEC. the watchdog of the capital market. They argued that SEC approved the netting system in CSE and why the DSE would not get that facility.
Next, the DSE council called on Prime Minister and complained her about the non-co-operation of the SEC and for bureaucratic red-tapism that delayed the activities to ensure transparency in the country's capital market.
General investors were truly moved by the concern of DSE members over transparency. It reminds the devastating scam in the history of stock exchanges. which resulted in fall of share price index to even below halt of Finance Minister
Kibria's crash point to 748.32 on 01/09/97.
DSE chairman complained further that SEC has given permission to CSE to settle share dealing through netting system although the existing trading rules did not allow it.
A five-member committee with an SEC member as convenor was formed to examine present settlement systems and to propose an identical system for the country's stock exchanges. The committee, thanks for its quickness, suggested an uniform settlement system. The report says that under the new system traded scrips will be settled twice a week on the basis of netting. This means a modification of the existing CSE clearing and settlement system that settles all the deals once a week irrespective of the day of trading in the previous week.
Settlement twice Instead of once a week will surely help in reducing the scope of showing excessive trading in a manipulative way. but cannot eliminate It. This new system will not be transparent without automation. Introduction of the
netting system without automation will create scope for manipulation. This is indeed simple: two members of the exchange can engage in fictitious trading between themselves to increase the price and show high trading volume. At the same time, it may lead to speculation by way of trading for the whole week without actual transfer of shares, since the brokers need not produce the shares or deposit cheques to the stock exchange for all the transaction under this system.
In addition, netting system will delay the process of settlement and cause suffering to the investors. Meanwhile, the committee on automation of DSE in its last report (31/08/97) identified some loopholes in the ongoing process of the automation programme, a must for ensuring transparency in a netting based settlement system. Thus there is much doubt on successful operation of the new system.
Besides, the reason for scrapping the existing T+4 rolling system is not explained. Well, it Is not new. the concerned authority never felt the
need for explaining their action. To Impose or to withdraw lock-in period for the foreign ■placement of share, for instance. two sets of arguments, one for' and other against', was ever kept ready to use. leaving the investors to wonder every time. The rollover system of settlement requires settlement on fourth working day after the day of trading as shown in the chart.
It is considered to be an Investor-friendly settlement system and it goes In accordance with the G 30 recommendation that Is supported by Federation of International Stock Exchange Association However there is scope for further reduction of the settlement period from present T+4 to T+2 or T+3. to expedite settlement for the benefit of investors, a precondition for an efficient stock mar ket.
In the whole controversy over the system of settlement, some questions remain and will probably remain unan swered:
Firstly, what are the prob lems with rolling system of set tlement followed by DSE?
Secondly, why. instead of addressing more urgent needs of automating the stock exchange operation, introduction of the Central Depository System, separation of DSE's elected council and administrative body, and others, a comparatively minor issue of settlement system attracted so much inter est, specifically on part of DSE?
Thirdly, the share price index is expected to rise from Its fresent level of below half of inance Minister's crash point (that is 750 points), with the help of manipulative jugglery. Is this the reason to give the State attention in expediting the settlement issue so efficiently?
Fourthly, has Share Investors Forum, the body supposed to voice general investors view, expressed (or was asked to express) Its view on this issue9 Though there may not be a legal requirement, would not It be a healthy practice to consider investors -view In a policy matter that may affect them sharply?
One only thinks that resolving these issues will help general investors feel that they are not being taken for granted and thus help address a more acute problem of gradually vanishing investor's confidence In Bangladesh capital market.