Why depository and clearing functions should be integrated into the Capital Market Stabilisation Fund

Representational image. File Photo: Mehedi Hasan/TBS

A depository institution, like the Central Depository of Bangladesh Limited (CDBL), holds and maintains the electronic registry or ledger of securities, such as shares. This institution ensures the safekeeping and accurate recording of investors' holdings and facilitates the transfer of ownership when securities are bought or sold.

Clearing and settlement are vital processes in trading transactions; clearing reconciles buy and sell orders, ensuring that both parties fulfill their obligations, while settlement finalises the transaction by transferring securities to the buyer and payment to the seller.

In many countries, depositories also manage clearing and settlement, streamlining operations and enhancing efficiency. However, in Bangladesh, these functions are separated.

CDBL handles the depository services, while Counterparty Clearing of Bangladesh Limited (CCBL) was established in January 2019 and started operations in July 2020 to manage the clearing and settlement for the Dhaka Stock Exchange and the Chittagong Stock Exchange. 

Despite its establishment, CCBL is still not operational. This separation of functions in Bangladesh mirrors practices in markets like India, where distinct entities handle depository and clearing functions to ensure robust oversight and minimise conflicts of interest. The effectiveness of this model depends on the successful activation and operation of institutions like CCBL.

However, the separation or combination of these functions depends on the regulatory framework, market structure, and historical evolution of the capital markets in each country. Let's explore how this works in various countries:

India

Depository: In India, the two main depositories are the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Clearing and settlement: The clearing and settlement of transactions are handled by the clearing corporations like the National Securities Clearing Corporation Limited (NSCCL) and Indian Clearing Corporation Limited (ICCL).

Combination: While NSDL and CDSL handle the custody and transfer of securities, the clearing corporations ensure that the transactions are settled efficiently. The depositories are not directly involved in clearing and settlement but work closely with the clearing corporations to ensure that the securities are correctly transferred after settlement.

Malaysia

Depository: Bursa Malaysia Depository Sdn Bhd is the central depository in Malaysia.

Clearing and settlement: The clearing and settlement are conducted by Bursa Malaysia Securities Clearing Sdn Bhd.

Combination: Bursa Malaysia integrates both the depository and clearing functions within the Bursa Malaysia group, allowing for seamless operations. The depository and clearing house work together to ensure that transactions are cleared and settled accurately and efficiently.

Australia

Depository: The Australian Securities Exchange (ASX) operates the CHESS (Clearing House Electronic Subregister System), which acts as both the depository and a clearing/settlement system.

Clearing and settlement: CHESS is responsible for both the electronic transfer of ownership (depository function) and the clearing and settlement of transactions.

Combination: Australia's CHESS system exemplifies a case where the depository and clearing/settlement functions are combined in a single system, which has been effective in providing efficiency and security.

Saudi Arabia

Depository: The Securities Depository Center Company (Edaa) is the central securities depository in Saudi Arabia.

Clearing and settlement: The clearing and settlement functions are managed by Muqassa, the Securities Clearing Center Company.

Separation: In Saudi Arabia, there is a clear separation between the depository (Edaa) and the clearing entity (Muqassa), ensuring that each entity focuses on its specific function while coordinating closely.

United Arab Emirates 

Depository: In the UAE, the depositories are operated by the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM).

Clearing and settlement: Clearing and settlement services are also provided by the respective exchanges (ADX and DFM) through their clearing houses.

Combination: Similar to Malaysia, the UAE's markets often integrate depository and clearing/settlement functions within the same organization, facilitating streamlined processes.

United Kingdom 

Depository: Euroclear UK & Ireland operates CREST, the UK's central securities depository.

Clearing and settlement: CREST also handles the clearing and settlement of transactions, performing both functions.

Combination: The UK's CREST system is another example where depository and clearing/settlement functions are combined within a single system, providing efficiency and reducing the need for multiple intermediaries.

United States

Depository: The Depository Trust Company (DTC) is the primary depository institution in the US.

Clearing and settlement: The National Securities Clearing Corporation (NSCC) and the Fixed Income Clearing Corporation (FICC) are the primary clearing organizations, both under the Depository Trust & Clearing Corporation (DTCC) umbrella.

Combination: While DTC, NSCC, and FICC operate as distinct entities, they are all part of the DTCC, ensuring close coordination and integration between the depository and clearing functions.

Canada

Depository: The Canadian Depository for Securities (CDS) is the central depository in Canada.

Clearing and settlement: CDS also provides clearing and settlement services, functioning as both a depository and a clearing house.

Combination: Canada's CDS is an example where the depository and clearing/settlement functions are unified, offering a streamlined and integrated system for handling securities.

Is it wrong for depositories to handle clearing and settlement?

There is no inherent wrong in having depositories also perform clearing and settlement functions. In fact, many markets operate effectively with combined depository and clearing/settlement functions, as it can lead to greater efficiency, reduced operational risks, and improved coordination.

However, separating these functions can also have benefits, such as reducing conflicts of interest, enhancing specialization, and providing an additional layer of checks and balances within the financial market infrastructure.

The capital market stabilisation fund

In 2021, Bangladesh Securities and Exchange Commission (BSEC) also formed a new company called Capital Market Stabilisation Fund or CMSF that acts as a custodian of undistributed cash and stock dividends, non-refunded public subscription money and un-allotted rights shares from the issuer of listed securities. By regulation though, the cash and stocks in the fund are to be returned back on due claim by the Shareholders or Investors at any time in the indefinite perpetuity.

As CMSF was set up as a separate entity, it also has its own governing board as well as management. While this is not very common in other parts of the world, some countries do have similar entities. Having said so, such activities that are performed by CMSF could be easily handled by CDBL as both CDBL and CMSF have a lot in common.

The decision to combine or separate depository, clearing, and settlement functions depends on a country's regulatory landscape, market needs, and historical context. In Bangladesh, the establishment of CCBL and CMSF as separate entities has led to fragmented operations and increased operational costs.

The current non-operational status of CCBL presents a unique opportunity to merge CCBL and CMSF with CDBL into a single FinTech company. This merger would not only streamline processes but also enhance efficiency by integrating technology platforms, reducing overhead costs, and leveraging FinTech innovations such as real-time data analytics, automated clearing, and blockchain-based ledger systems.

Running the merged entity as a FinTech company would foster a more agile, technology-driven approach to handling both depository and clearing/settlement transactions. It would enhance service delivery, lower transaction costs, and introduce innovative solutions like digital wallets for investors and automated dividend distributions.

Additionally, investors who funded CCBL would have the opportunity to recoup their investments, as the combined entity would be positioned for greater profitability and sustainability.

It's time to establish a new company that integrates CDBL, CCBL, and CMSF under a unified FinTech framework. This new entity should operate with a focus on technological innovation, efficiency, and customer-centric solutions, setting a new benchmark for capital market infrastructure in Bangladesh and aligning with global best practices

Sketch: TBS

Tarique A Bhuiyan is the former managing director of the Dhaka Stock Exchange. He has also worked as a consultant for TCS, Accenture, and Infosys.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.