CDC has once again taken a revolutionary leap forward towards achieving straight-through-processing in the settlement of securities mechanism. The new mechanism called “Automated Transfer of Securities” was successfully implemented in the month of December 2010 in collaboration with National Clearing Company of Pakistan Limited (NCCPL) and The Karachi Stock Exchange.
The newly introduced mechanism has brought increased efficiency and transparency in the transfer mechanism of securities. It has also transformed the process of securities movement by eliminating the role of Main Account (transitory account of a Participant) to a large extent. The securities are now directly transferred to the target depository custody account based on the Unique Identification Number (UIN) of the investors.
Linking Trading and Custody Accounts
In order to develop this straight-through path to deliver into and out from depository custody accounts for the securities traded on Stock Exchanges, it was necessary that investors’ trading account and depository account be associated through their respective Unique Identification Numbers (UIN).
In view of the above, the concept of “tagging” was introduced. Previously, clearing members could associate only their clients Trading Accounts/Back Office IDs with their respective UINs in NCSS (National Clearing and Settlement System). Now, an additional field for the depository account number has been introduced in order to tag it with client trading account as well as UIN.
Clearing Members may select one depository account for many Back office IDs or different depository accounts for different Back office IDs with the same UIN. For the purpose of tagging, the UIN(s) of the principal and joint account holders in CDS database should perfectly match with NCCPL database to successfully tag the accounts.
Note: A custody account, which is blocked / closed and / or not linked with the back office ID registered through the NCSS UIN functionality, is not eligible for
Client level netting:
After the implementation of this project, client level netting has been achieved for the purpose of settlement. Settlement instructions (Balance Order), which were previously generated on clearing member level, are now generated on the basis of investors’ UIN to achieve client level netting of trades. The clearing members are only required to make deliverable securities available in the respective depository custody accounts (CDS House Accounts and Sub-Accounts) for settlement.
The system is designed in a manner that most of the settlement instructions are settled before the start of the settlement day, except where the securities were not available in the sellers custody account. Remaining securities settlement takes place as and when the securities are made available. This process runs at frequent intervals (after every half an hour) until the completion of overall settlement.
Since only the clearing member can participate in the settlement process of the Clearing Company, all investors who wish to trade in the market are required to open sub accounts with clearing member Participants. However, Investors may maintain the custody of their securities in Investor Accounts Services of CDC and can move the securities for settlement to the Sub-Account in their name with a Clearing Member Participant.
Limiting the function of Transitory Account (Main Account) in Free Delivery Transaction:
The new mechanism has enabled the transfer of securities from one custody account (House, Sub-Account or IAS Account) of a Participant to the respective target custody accounts directly under another Participant umbrella without involving the Main Account. Therefore, usage of Main Account would be limited for reasons such as Off-Market transactions and transfer of unlisted securities.
Another key aspect of this development is the logical binding of reason codes (reason for transactions) with UIN. The investors need to select the reason codes while doing free delivery transaction.
Marking the day of implementation:
The successful execution of the first settlement took place under the new automated securities transfer regime on December 27, 2010, marking significant improvement and strengthening of the settlement structure for the securities traded on the country’s stock exchanges.
As a result of this project, the settlement of the vast majority of securities transactions executed on the three stock exchanges in the country are now being performed directly from the respective accounts of investors, without the need for any manual input of transaction, thus ensuring complete transparency and straight-through-processing in the market.
With this development, CDC achieved a comprehensive redesign of securities settlement processes which will bring greater efficiency in reducing load of work and reducing risk of unauthorized movement of securities for the industry.
While announcing the successful implementation of this project, CDC’s CEO Muhammad Hanif Jakhura said that “The Automation project has radically changed the entire securities settlement mechanism in the country. It also marks a significant and positive change in the operations of the capital market in Pakistan. This project is an immaculate example of what can be achieved by close cooperation between institutions.”