Covering counter party risk: NCCPL asked to introduce settlement guarantee system

Lahore Stock Exchange has demanded of the National Clearing Company (NCCPL) to immediately introduce the settlement guarantee system in Pakistan to cover the counter party risk resulting from lack of commitment by any of its clearing members for smooth settlement operations for a whole range of market instruments.
In a letter to the NCCPL, the central clearing and settlement company established in Pakistan during 2003, LSE has stated that since the inception of the NCCPL no such central counter party mechanism with full settlement guarantee has so far been established whereby it could be possible to meet the obligations of failing members from within the resources created by the NCCPL.
LSE has asked the Company that in the wake of the expected demutualisation of the exchanges wherein the existing seats of the members would be converted into trading rights entitlements and would become non-saleable, there is a need to devise a settlement guarantee mechanism wherein non-performance by any of the parties does not affect the other party and whereby NCCPL is fully able to fulfill the obligations of the defaulting party through its own Settlement Guarantee Fund as per the international best practices. LSE has further told the NCCPL that the present system of referring back to the Exchanges for meeting/fulfilling some obligations in case of delivery default of the member would become redundant due to the replacement of the seats with trading rights entitlements. Accordingly, LSE urged NCCPL that it was high time not only to change the NCCPL regulations to discontinue its reliance on the stock exchanges to settle the trade default matters but also to introduce steps to directly create the capacity of the NCCPL to manage the default risk act as the sole counter party in the country.
It may be mentioned that at international level, the integrity of the financial markets is ensured by delivering internationally best accepted clearing and settlement services for the equity, futures, leverage and bond transactions. The world over, the clearing and settlement companies perform the sole role as a guarantor and act as central counter party to assure the settlement obligations of the trades through a Novation process. Under this mechanism, the clearing and settlement companies become the buyer for every seller and the seller for every buyer thereby protecting the brokers and other market participants from central counter party default risk.-PR