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Scripless securities from September

The Central Bank will start issuing scripless securities in September with 'Lankasecure' becoming fully operational. Scripless securities will increase efficiency in the government debt securities market by improving secondary market trading while eliminating the risks associated with paper-based securities. The Sunday Observer interviewed Superintendent and Registrar of Public Debt K.G.D.D. Dheerasinghe on the proposed system. Here are excerpts of the interview.

Q.What are Scripless Government Securities?

A. Government securities such as Treasury Bills and Treasury Bonds which are presently issued as paper certificates are called scrip securities. Scripless securities are issued in data entry form without paper certificates. To enable the issuing and recording of transactions on scripless securities, a computer-based central depository and a settlement system will be installed. When securities are transferred, the central depository will record such title transfers. These securities will be settled through an electronic settlement called Scripless Securities Settlement System (SSSS). The SSSS and the central depository are named 'LankaSecure'.

What are the reasons for moving from scrip to scripless securities?

The main reason is to improve efficiency in the government debt securities market by improving secondary market trading and eliminating risks associated with paper-based securities. Since the system operates electronically on-line, trading will be convenient to all market participants i.e., primary dealers, banks and investors. Under this, the Central Depository System (CDS) will be the registry as well as the custodian for government securities. The ownership of securities will be recorded electronically in the CDS.

Securities are presently transferred by manual endorsement. This will be a very safe system for holders of government securities to maintain records of their ownership. The corresponding payments for securities or settlement of funds in scripless securities is based on a Real Time Gross Settlement System (RTGS).

What is the Central Depository System ?

It is a computer-based data recording system for the holdings of government securities. This will be a customer-based depository. At any time, the holders of scripless securities in the CDS will be able to confirm their holdings. The transfer of holdings of scripless securities will be recorded electronically in the CDS according to instructions received from participants of the system i.e. primary dealers and licensed commercial banks. The CDS will be linked to participating institutions which trade in government securities. It will issue monthly statements confirming the balances held by investors in government securities. The CDS will also advise the parties involved in a transaction carried out within the system.

What is Scripless Securities Settlement System ?

The SSSS will enable the settlement of government securities transactions electronically, online in a computer-based system. Whenever a transaction takes place, securities will be transferred from one account to another. In an outright buying and selling transaction, there will be a buyer who will receive securities and whose account will be credited with securities and the seller's securities account will be debited. The buyer will pay through the RTGS, which is instantaneous.

Who are the participants of the CDS and SSSS?

There are two categories of participants:

(a) Primary dealers and licensed commercial banks who are called 'dealer direct participants' and

(b) Any other institution permitted by the Monetary Board who are called 'direct participants'.

Dealer direct participants will maintain accounts on their own account and on behalf of their customers. Direct participants will maintain accounts only on their own account. Where will the CDS be located?

The CDS will be installed and maintained in the Public Debt Department of the Central Bank. Both dealer direct participants and direct participants will be linked online to the CDS.

Do individual customers or investors need to open and maintain accounts in the CDS?

Accounts will be opened through dealer direct participants of the CDS on their own account and on behalf of their customers for recording and changing ownership of scripless securities. Each investor will have a separate account in the CDS.

How and on what basis will ownership be recorded in the CDS?

Accounts of investors will be maintained in the CDS by dealer direct participants. The instructions by an investor regarding a transaction should always be sent to the CDS through a primary dealer or a licensed commercial bank with whom the investor maintains his/her securities account.

How and on what basis will ownership be determined in repurchase (repo) transactions?

A repurchase is a sale of securities with an agreement to buy back. Once the buyer and seller of a repo have agreed on the terms, the details of the transaction will be reported to the CDS. There will be a separate account in the CDS for recording repo transactions. After the funds are settled for the underlying repo transaction by the buyer, the ownership of securities will be transferred to his/her repo account in the CDS. The procedure for recording is similar to that of outright transactions. There is a provision for freezing securities under repos preventing further transactions on the securities that have been given for the repo. On the reversal date, the buyer and seller are expected to settle their obligations through reversing entries in the repo account held in the CDS. What are the advantages of the SSSS to the investor?

Investor's risks associated with holding and trading of paper-based securities will be eliminated under the SSSS. The investor will not experience the hassle of dealing with physical certificates of government securities as at present.

The new system will operate on Delivery Vs Payment (DVP) basis.

Other advantages include saving of time as the system will operate more efficiently. The efficiency of the system will improve liquidity in the government debt securities market, benefiting the investor as dealers can reduce their margins due to enhanced liquidity. Further, investors will have access to an advanced system which will operate on modern technology.

What is the role of intermediaries in the SSSS ?

Dealer direct participants of the system also play the role of intermediaries in the CDS and SSSS. Primary dealers and licensed commercial banks also act as custodians for their customers in the CDS. This role of custodianship has the following responsibilities:

* to promptly and accurately record the name, address and national identity number, passport number or company registration number of the customer in the CDS when a customer obtains legal ownership of a security;

* to promptly and accurately record any change of ownership of a security;

* to account and make payment to any coupon or maturity proceeds due to a customer;

* to effect transactions on customers' behalf, if such transactions are legal and do not place the participant in breach of system rules.

How will the new system contribute to reduce risks?

Generally, government securities are free of credit or default risks. Under the new system, since the records of transactions and holdings are maintained electronically in a centralised database with a hot backup, the risk of technical failure is minimum.

Furthermore, account holders can view their positions of holdings in the system any time through 'browser workstations' made available to the system participants.

Would the CDS maintain records of each and every investment?

Yes. Investor-wise records of transactions will be maintained in the CDS. Accounts in the CDS are defined according to participant accounts, customer-owner accounts and other types of accounts. Accounts will be created automatically in the CDS based on the instructions received from participants.

Who will issue letters of confirmation to investors?

The CDS in the Central Bank (Public Debt Department) will issue the following statements to the account holder:

(a) A statement confirming the transactions that took place during the day;

(b) A statement confirming the outstanding balance held by each investor as at end of each month or quarter;

(c) A statement indicating the maturity proceeds and/or interest payments whenever such payments are made to an investor.

What is the authenticity of a statement issued by the CDS?

The statements issued by the CDS will provide official confirmation of the securities holdings or transactions that have taken place. In addition, all investors through participants of the CDS can view details of their accounts through 'browser workstations'. This will enable the investor to doubly confirm the accuracy of the statement issued by the CDS.

Is the statement issued by the CDS transferable and tradable?

This is not a transferable or tradable instrument and will only serve the purpose of confirming either a transaction or holdings of securities by an investor. Can the statements of confirmation be pledged as a security to, for example, obtain a loan?

The statements maybe used as evidence of holding of securities. However, there is a risk of producing an old statement of which securities have since been sold. Therefore, a statement of confirmation issued by the CDS may not always indicate the current ownership or holdings of securities by an investor.

If an investor wants to change his/her personal particulars in the CDS account, who should be contacted?

The customer or investor should contact the primary dealer or licensed commercial bank which maintains his/her account in the CDS. Changes will be made on the instructions received by the CDS from the investor through the primary dealer or commercial bank.

If there is a discrepancy in the statement, who should be contacted?

Any clarification regarding a statement should be referred to the issuer. If the statement has been issued by a primary dealer or licensed commercial bank, any inquiry should be directed to them. If the statement has been issued by the CDS, any inquiry should be referred to the Public Debt Department of the Central Bank.

Can a customer or investor make online inquiries regarding the status of his/her investment?

Yes. This can be done only through a participant of the system, with whom the customer or investor maintains account(s) in the CDS. Through the system called browser workstation, account holders (both participants and customers) can view their positions without any payment.

How does an investor access information from the CDS?

The system's participants can access CDS accounts for information through browser workstations which will facilitate viewing customer accounts as well. The customer inquiry will be directed to the CDS by the relevant system's participant. Participants will not have access to information relating to accounts maintained by other participants. What are the charges of the SSSS and CDS?

Primary dealers and licensed commercial banks may charge their customers to cover the cost they may incur on account of any SWIFT messages and to cover any charges levied by the RTGS. SWIFT is the safest, globally accepted messaging system used for financial transactions. A standard format will be used by all participants in this system.

The SSSS and CDS will operate on the SWIFT messaging system. The RTGS will charge a fee for transactions as determined by the Central Bank. There will not be any charge on either the participant or the customer for the statements issued by the CDS. Will revenue authorities have access to the records of investments in the CDS?

Information recorded in the SSSS and the CDS will be treated as strictly confidential. There will not be any access to information in these systems by any authority or individual other than the Central Bank. Participants will have limited access to information relating to their customer holdings and accounts maintained on their own behalf.

Can an investor or customer appoint a nominee for his/her investment?

One may appoint a nominee and the procedure will be outside the CDS.

How do investors collect maturity proceeds and coupon payments under the new system?

Maturity proceeds and interest payments will be computed on the due dates by the CDS. There will not be any change to the formula of computation and procedures adopted at present. Payments will be made to the registered holders through respective primary dealers and licensed commercial banks.

Are the reminders to investors regarding maturity and interest payments generated by the CDS?

There will not be an advance reminder regarding payments. However, account holders will be informed individually by the CDS about payments that will be made to a system's participant on account of each investor. Primary dealers and licensed commercial banks will issue advance notices regarding payments to their customers.

Whom should an investor advise for re-investment of maturity proceeds and coupon interest payments?

An investor can advise the primary dealer or licensed commercial bank with whom the maturing securities are held for reinvestment of maturity proceeds and coupon payments. They can make prior arrangement with a primary dealer or commercial bank regarding the reinvestment of maturity proceeds or coupon payments on the same day on which maturity proceeds or coupon payments are received, thus maximising the benefits. What will happen in the case of a death of a securities holder?

Claims regarding an investment of a deceased should be sent to the primary dealer or commercial bank with whom the deceased party has maintained the CDS account. How safe is the data stored in the CDS?

Security features of the CDS are very advanced. Accessing the system will be restricted only to authorised officers of the Central Bank. There will be a back-up site where records are updated automatically and simultaneously with the CDS. The service providers have ensured maximum safety available in similar systems used in other countries.

In a system failure or disaster, what are the recovery methods?

The Central Bank will have a disaster recovery plan for the SSSS and the CDS. If the system fails, facilities will be available to continue operations from back-up sites. Is there a possibility of securities being stolen or lost?

In the CDS, records are maintained electronically and cannot be stolen or lost. Records are updated concurrently as and when transactions take place. Transmission of information on transactions from the participants to the CDS takes place within a few seconds. Therefore, there is no time lag in executing a transaction and hence the probability of omissions in the process would be minimal.

Who will take the responsibility for maintaining confidentiality of information in the CDS?

Participants of the CDS will sign an agreement with the Central Bank for maintaining strict confidentiality of the information. The information for which the system's participants have access will always be treated as confidential.

What are the operating hours of these systems?

LankaSecure will be operating on all business days from 8.00am to 3.00pm. What is the minimum value of investment that can be made in scripless securities? Scripless securities will be issued with a minimum face value of Rs 10,000 and any denomination in multiples of Rs 10,000. Transactions in the system will specify the securities to be transferred in number of units. One unit is equivalent to the minimum face value of Rs 10,000.

Will scrip securities be available if required?

There will not be scrip securities once 'LankaSecure' has commenced operations. The Central Bank will start issuing securities only in scripless form starting from the second week of September.

How will instructions be given for transferring securities in the CDS? Securities will be moved from one account to another on a request by a customer through the CDS participant. Once the deal is agreed upon by the counter parties involved, transaction will take place on DvP, Receive Vs Payment, Deliver Free, Receive Free or Repositioning.

How will the settlement of funds and securities take place simultaneously? Whenever there is a securities transaction pending, the system will check whether funds are available in the RTGS account. If both securities and funds are available, the transfer of securities will take place in the CDS.

What will happen to scrip securities that are already in circulation?

Existing securities in scrip form will be converted into scripless form within a short period after the new system commences operation. In the conversion process, priority will be given to securities held by primary dealers and licensed commercial banks since the system will require sufficient securities in scripless form from day one to enable the Central Bank to provide intra-day liquidity to participants. All scrip securities held by investors are expected to be converted into scripless form within three months.

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