SEC unveils new, tougher rules post NSB-TFC fiasco

The Securities and Exchange Commission (SEC) yesterday announced several new tougher measures to mitigate settlement risks following the NSB-TFC fiasco.

The move follows the SEC Commissioners deliberating at length the transaction of The Finance Plc shares by NSB through the stockbroker firm Taprobane Securities Ltd.

SEC said in the aftermath of this transaction, the commission explored the ways and means of enhancing the smooth functioning of the payment and settlement cycle of the capital market.

The SEC is of the view that the Settlement Risk which currently exists between T (Trade Day) and T+3 (Settlement Day) will be fully eliminated only after Central Counter Party (CCP) is in place. Therefore the SEC will intensify its efforts to implement the CCP for all transactions at the CSE to eliminate this risk of settlement failure. Having duly considered and discussed, the commission has decided to implement the following interim remedies until CCP settlement regime is in place. Further steps may be taken as appropriate in the coming weeks.

1. General rule changes:

• Prohibit employees and directors of all market intermediaries to trade (buy shares and sell within six months of buying) except in the case of IPO purchases. Investments (over six months) are allowed.
• Crossings transactions to have 20% upper limit unless exceptionally allowed by the CSE on a case by case basis. Clarification in this regard to be communicated to the CSE.
• Current 15% margin before trade execution to be strictly enforced including for NSB.
• To have a more robust enforcement mechanism with clearly defined punitive measures for violations of rules by stockbroker firms, CEOs, directors and investment advisors. Clarification in this regard to be communicated to the market shortly.

2. On future transactions where NSB is a party:

• All large (defined as transactions with a total value of Rs. 20 m and over) NSB orders to have a certified Board resolution.
• NSB to use a third party custodian bank.

A separate communiqué will follow on the interim actions to be taken on the other parties of this transaction.