Sebon delays trade guarantee fund, auction trading

Published On: November 24, 2016 01:00 AM NPT By: Republica  | @RepublicaNepal

KATHMANDU, Nov 24: The Securities Board of Nepal (Sebon) put the process to approve the Draft of Trade Guarantee Fund Bylaws and Auction Trading Working Procedure submitted by Nepal Stock Exchange (Nepse) three months ago, citing procedural flaws. 

The delay in operating the fund and the auction trading market is hitting the settlement process following trading of shares in the secondary market. 

“The Nepse has sent the working procedure. Our opinion is, it should come as bylaws or both mechanisms should have been in the same bylaws. It will be approved soon after we receive it in that way," Sebon Chairman Rewat Bahadur Karki told Republica.

With transaction volume in the secondary market rising with every passing day, stock brokers have warned that that there could be a disaster in the market if such mechanisms intended to 'rescue' transactions that go wrong either due to  error of either brokers or investors. 

The operation of trade-guarantee fund and auction-trading market is aimed at easing the clearing and settlement process even when there is a shortfall of cash payment or securities during the trading process.

"Many often, the number of shares intended to sell remains short of the order after the trading order is executed due minor error from either the client's side or the broker's side.

We could have compensated for the shares shortfall had there been auction-trading market,” Priya Raj Regmi, president of the Stock Brokers Association of Nepal (SBAN), said.

The auction trading working procedure allows the auction trading of securities so that any deficit of shares from the seller can be bought and provided to the buyers.  

“Nepse has been suspending brokers from trading for a week if they fail to make payment on time to the seller brokers due to many reasons, including the fault of clearing bank and investors. This can also hit the settlement cycle. If these mechanisms and infrastructures are not put in place in time, there could be a big disaster in the market," he added.

When buyers fail to meet their obligation of payment, there could be a shortfall of payment to the sellers, thereby hindering clearing and settlement process.

Nepse, so far, has been suspending the broker for a week and restricting it from trading if it defaults on payment or in handing over securities. The broker is allowed to trade only after it clears its dues. 

Once the Trade Guarantee Fund Bylaws is introduced, there will be a fund to reimburse the seller brokerages or investors whenever there is shortfall in payment from the buyer. 

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