The Botswana Stock Exchange (BSE), through its subsidiary, the Central Securities Depository Botswana (CSDB) has approved the establishment of a Settlement Guarantee Fund, said Basimane Bogopa, the Board Chairman at CSDB.
Bogopa made the presentation at the BSE Annual General Meeting last week Thursday. The BSE and the CSDB Board of Directors approved the introduction of the fund. They however await an approval by the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) before the fund kicks in.
At the AGM, Bogopa said, one of the CSDB key priorities is the introduction of the Settlement Guarantee Fund.
“The establishment of the fund is critical for the envisaged operating model under the new CSD system. The fund will serve to elevate the Company and place it at par with its regional counterparts in terms of efficient settlement,” he noted.
A Settlement Guarantee Fund (SGF) is a fund normally maintained by an exchange or a depository that will be used to settle any settlement defaults in the market.
In addition, the BSE Chief Executive Officer (CEO) Thapelo Tsheole said the SGF process operates like a self-insurance mechanism where participants themselves contribute to the fund. He noted that the primary objective is to guarantee the settlementof trades executed at the exchange trading platform thus reducing and/or eliminating counterparty risk. In the event of a settlement participant failing to honor their obligations, Tsheole added that the SGF will be used to fund the obligations and complete settlement without affecting the normal settlement process.
He said all settlement participants shall be required to make contributions to SGF in the form of cash and securities from amongst a list of eligible securities notified by CSDB Board from time to time.
“The initial contributions shall be maintained by members until such a time where there will be requirement to increase the initial contribution due to market movements. SGF finance resources will include the members contribution in the SGF capital fund, contribution from BSE/CSDB, Charges from members who violate settlement rules as well as returns from investment of the fund’s capital,” he said.
Further, Tsheole noted that the presence of a guarantee fund provides confidence that settlement shall take place in time and completed irrespective of default by some members. He said it ensures stability and control of the market.
“Management is desirous in maintaining confidence of the market by ensuring that all trades are settled within the specific settlement cycle and hence the introduction of the settlement guarantee fund. The fund will replace the liquidity requirements that participants provide on daily basis after trading; the funds which are normally used for compensation in the event of a failed transaction. Liquidity funds do not guarantee settlement but rather used to compensate the aggrieved in the event of a settlement default,” stated Tsheole.
Bogopa further pronounced that the past year has been transitional for the CSDB. To him, ttransformation, re-invention and introspection with a view to seek new opportunities are a necessity for endurance in the capital markets landscape.
The company’s investment in technology this past financial year, particularly the new world-class CSD system is a response to the needs of their clients and stakeholders by availing a broader spectrum of new services, products, efficient and safer practices in clearing, settlement and custody of instruments, according to Bogopa.
CSDB is a company that was formed by the BSE with the objective of operating a central securities depository in which shareholders and their shareholding of companies listed on the local bourse will be recorded.
As part of its efforts to develop the BSE into a world class securities exchange, the BSE introduced the Central Securities Depository (CSD) in 2008 to deal with efficient clearing and settlement. The Automated Trading System (ATS), which was later introduced in 2012, was brought forth to complement the CSD by automating the trading of securities on the Exchange. This was to revolutionize the way in which securities are to be traded on the Botswana Stock Exchange. In addition, the implementation of the CSD also paved the way for the elimination of paper certificates and the dematerialization of securities.
The Central Securities Depository Botswana (CSDB) is mandated by the Bank of Botswana (BoB) to operate a clearing settlement system in accordance with the provisions enshrined in the National Clearance and Settlement Systems Act (No. 5 of 2003). Hence, the central bank regulates funds settlement processes whereas NBFIRA is responsible for the securities market processes.