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The Central Depository System(CDS) and Scripless Securities Settlement System for Government Securities for Nepal

Friday, August 14th, 2009
Scripless Government Securities The government securities such as Treasury Bills and Bonds are being issued at present in the form of paper certificates. They are called scrip securities. The scripless securities are issued in data entry form without a paper certificate. To enable the issuing and recording of transactions on scripless securities, a computer based central securities depository and a settlement system will be installed. When securities are transferred from one beneficial owner to another, 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 as ‘NepagovSecure’. NepagovSecure is purposed and can be changed with decision of concerned authority.
Reasons for moving from scrip to scripless Securities The main reason for moving from scrip to scripless form is to improve efficiency in the government debt securities market by making dynamic and efficient secondary market trading and eliminating risks associated with paper based securities. It also plays most important role in a major move to enhance financial sector efficiency through modernized payments and settlements.  Since the System will operate electronically on-line, trading will be convenient to all market participants i.e. market makers, banks and investors. Under the proposed system, 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. At present, the transfers of securities done by manual endorsement. This new system 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) through which funds will be settled instantaneously on real time. This also enables on-line reporting to the authorities of all treasury bills and government bonds.

Central Depository System (CDS)
The Central Depository System (CDS) is a computer based data recording system which records the holdings of government securities. This will be a depository, maintaining records at the beneficial client level. At any given point in time, the holders of scripless securities in the CDS will be able to obtain confirmation of 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 (market makers) and licensed commercial banks. The CDS will be linked electronically to participating institutions which trade in government securities. The CDS will periodically (generally monthly) statements confirming the balances held by investors in government securities. The CDS will also advice the parties involved in a transaction, whenever a transaction is carried out within the System.
Scripless Securities Settlement System The Scripless Securities Settlement System (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, for instance, there will be a buyer who will receive securities and his account will be credited with securities and the seller’s securities account will be debited. The buyer of securities will pay funds through the normal banking procedures. Given these electronic and efficient systems, it is expected that there will be a large number of transactions taking place in any given business day in the government debt securities market. The settlement of securities on account of all these transactions will be recorded through the SSSS
Participants of the CDS and SSSS There are two categories of participants in the CDS and SSSS. They are:

  • Market makers and licensed commercial banks who are called ‘dealer direct participants’ and
  • any other institution permitted by the Nepal Rastra Bank who are called ‘direct participants’.

The ‘dealer direct participants’ will maintain accounts on their own account and on behalf of their customers. The direct participants will maintain accounts only on their own account.

CDS location The CDS will be installed in Nepal Rastra Bank and maintained in the Public Debt Management Department of the Nepal Rastra Bank. Both dealer direct participants and direct participants will be linked online to the CDS.
Individual customers/investors need to open and maintain accounts in the CDS Accounts will be opened through dealer direct participants of the CDS, i.e. primary dealers and licensed commercial banks 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. Movement of securities and outstanding positions of investors are electronically recorded in these accounts.
Information is required to open an account in the CDS Investors have to provide name, address and their personal details such as the national identity/passport number to open an account in the CDS. Since the primary dealers and licensed commercial banks are the dealer direct participants of the CDS, investors have to provide this information to the primary dealer or licensed commercial bank from whom securities will be purchased. Upon receipt of required information from the investor, the relevant participant will communicate with the CDS and take steps to open an account and record the securities transactions by the investor. The main difference between the existing system and the proposed system is that transactions in the proposed system will take place in scripless form electronically and the CDS will maintain the records whereas in the existing system the certificate has to be endorsed by holder to transfer it to another person.
Ownership be recorded in the CDS Accounts of investors will be maintained in the CDS by dealer direct participants. The investors will have to deal with the CDS through primary dealers and commercial banks. 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 securities account.

Ownership of scripless securities will be recorded with details such as name, citizenship certificate(nagarikata) number, address etc. in the case of an individual investor. The accounts will also indicate the type of securities i.e. Treasury Bills and Treasury Bonds, maturity, date of purchase and value.

The holders of scripless securities in the CDS will be issued confirmation of transactions as well as periodic account statements of their holdings.
Repurchase (repo) transactions A repurchase (repo) is a sale of securities with an agreement to buy back. Once the buyer and seller of a repo have agreed on the terms of the repo, the details of the transaction will be reported to the CDS. There will be a separate account in the CDS for recording the repo transactions. After the funds are settled for the underlying repo transaction by the buyer, the ownership of securities will be transferred to his repo account in the CDS.

However, the procedure for recording is quite similar to that of outright transactions. There is provision for freezing securities under repos preventing further transactions on the securities that have been lent as collateral 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.

Adantages of the SSSS to the investor
Investor’s risks associated with holding and trading of paper based securities will be totally eliminated under the SSSS. The investor will not experience the hassle of handling the paper-based certificates involving safekeeping, endorsement and physical delivery as at present. The new system will operate on Delivery Vs Payment (DVP) basis. The other advantages in the SSSS include saving of time as the system will operate more efficiently. The efficiency of the system will improve liquidity in government debt securities market thus benefiting the investor as dealers can reduce their margins due to enhanced liquidity. Further, investors will have access to an advanced system which will be based on the state-of-the-art technology.
Role of intermediaries in the SSSS Primary dealers and licensed commercial banks who are dealer direct participants of the system also play the role of intermediaries in the CDS and SSSS. The SSSS will be based on an on-line connection between CDS and its participants. 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 citizenship certificate no(nagrita)/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, on any coupon or maturity proceeds due to a customer.
  • to effect transactions on their customer’s behalf, provided such transactions are legal and do not place the participant in breach of the system rules.
Lowering Risk Generally, government securities are free of credit or default risk. Under the new system, since the records of transactions and holdings are maintained electronically in a centralized database with a hot back-up, the risk of technical failure is minimized. Furthermore, account holders can view their positions of holdings in the system at any time through ‘browser workstation’ made available to system’s participants. Thus scripless securities will eliminate the risk that is associated with scrip securities.
Records of each and every investment The investor-wise records of transactions will be maintained in the CDS. The CDS will be a registry of transactions and holdings of securities. It will also be the custodian of these securities, holding nominee ownership of the securities, on behalf of the beneficial owners. 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.
Issue letters of confirmation to investors The CDS in the Nepal Rastra Bank (Public Debt Management Department) will issue the following statements to the account holder.

A statement confirming the transactions that took place during the day. If no transactions have taken place during the day, no statement will be generated by the system:

  • A statement confirming the transactions and outstanding balance held by each investor as at end of each month/quarter.
    A statement indicating the maturity proceeds and/or interest payments whenever such payments are made to an investor.

These statements will be issued directly to the name and address of the investor, as registered in the CDS. Apart from these statements, it is possible to generate other prescribed statements.
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 their respective participant of the CDS) can view details of their accounts with the CDS through browser based workstations. This will enable the investor doubly confirm the accuracy of the statement issued by the CDS.
Statement issued by the CDS transferable and tradable The statement issued by the CDS is not a transferable or tradable instrument and it will only serve the purpose of confirming either a transaction or holdings of securities by an investor.
Statements of confirmation be pledged as a security, say to obtain a loan The statements issued by the CDS may be 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. A pledging facility is available in the CDS, which enables investors to pledge their holdings electronically with banks or other financial institutions, so that those shares are then maintained under the control of the bank or financial institution, for the duration of the pledging transaction.
Investor  wants to change his personal particulars in the CDS account To notify any changes, the customer/investor should contact the primary dealer or licensed commercial bank who maintains his/ her account in the CDS. Changes will be made on the instructions received by the CDS from the investor through the relevant primary dealer or the licensed commercial bank.
In the event of a discrepancy in the statement Any clarification regarding a statement should be referred to the party who has issued the statement. If the statement has been issued by a primary dealer or a licensed commercial bank any inquiry should be directed to the respective primary dealer or the licensed commercial bank. Similarly, if the statement has been issued by the CDS, any inquiry should be referred to the Public Debt Department of Nepal Rastra Bank.
Customer/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/investor maintains his account(s) in the CDS. Account holders (both participants and customers) can view their positions using a browser-based workstation, without any payment.
Access information residing in the CDS The system’s participants i.e. primary dealers or licensed commercial banks can access CDS accounts for information through browser-based workstations which will facilitate viewing his customer accounts as well. The customer inquiry will be directed to the CDS by the relevant system’s participant. This is a facility available in the System in addition to the statements issued by the CDS. No participant will have access to information relating to accounts maintained by the other participants.
Charges of the SSSS and CDS Primary dealers and licensed commercial banks may charge their customers to cover the cost that they may incur on account of any SWIFT transaction. SWIFT is the safest, globally accepted messaging system used for financial transactions. It is a standard format which will be used by all participants in this System. The SSSS and CDS will operate on the SWIFT messaging system. There will not be any charge on either the participant or the customer for the statements issued by the CDS.
Access to the records of investments in the CDS Information recorded in the SSSS and the CDS will be treated strictly confidentially. There will not be any access to information in these systems by any authority or individual other than the Nepal Rastra Bank. The participants of the System will have limited access to information relating to their customer holdings and accounts maintained on their own behalf.
Investor/customer appoint a nominee for his/her Investment The primary dealers and licensed commercial banks will act on instructions from their customers. An investor/customer may appoint a nominee and the procedure will be outside the CDS.
Collection  maturity proceeds and coupon payments The 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 in the same way as such payments are made at present. Primary dealers and licensed commercial banks are responsible for making payments to respective investors/customers.
Reminders to investors regarding maturity and interest payment There will not be an advance reminder regarding payments. However, the account holders will be informed individually by the CDS about payments that will be made to a system’s participant

(i.e. primary dealer or a licensed commercial bank) on account of each investor. The respective primary dealers and licensed commercial banks will issue advance notices regarding payments to their customers.
Re-investment of maturity proceeds and coupon interest payments An investor can advice the primary dealer or licensed commercial bank with whom the maturing securities are held for reinvestment of maturity proceeds and coupon payments. The investor/ customer can make prior arrangement with a primary dealer or a licensed commercial bank regarding the reinvestment of maturity proceeds or coupon payments on the same day on which maturity proceeds/coupon payments are received, thus maximizing the benefits.
Death of a holder of securities There is no change to the procedure adopted at present in regard to an investment of a deceased party. Claims regarding an investment of a deceased should be sent to the primary dealer or licensed commercial bank with whom the deceased party maintained the CDS account.
Safe investment and documentation The security features of the CDS are very advanced. Accessing the system will be restricted only to authorized officers of the Nepal Rastra Bank. In addition, there will be a Disaster Recovery (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 the world.
System failure or disaster The Nepal Rastra Bank will have a disaster recovery plan for the SSSS and the CDS. In the event of a failure of the system, facilities will be available to continue operation from the back-up site.
Stolen/lost securities In the CDS, records are maintained electronically and they cannot be stolen/lost. The records are updated concurrently in real-time, as and when the transactions are carried out. Transmission of information on transactions from the participants to the CDS takes place within a matter of 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.
Responsibility for maintaining confidentiality of information in the CDS Participants of the CDS will sign an agreement with the Nepal Rastra Bank for maintaining strict confidentiality of the information. The information for which the system’s participants have access will always be treated as confidential. As mentioned earlier, each CDS participant will have limited access to information relating to the accounts that are maintained by that participant on his own account and on behalf of his customers’ accounts.
Operating hours of Operation of Business NepagovSecure will be available for operations on all business days from prescribed banking hours (10 a.m. to 2.30 p.m.). The participants of the system and their clients must ensure that they complete the day’s transactions before the prescribed bank closing time. ‘NepagovSecure’ will not be open for business on public and bank holidays. The operation time can be announced and modified by Nepal Rastra Bank, Public Debt Management Department.
Minimum value of investment It is suggested that scripless securities will be issued with minimum face value of Rs. 10,000/- and any higher 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 i.e. Rs. 10,000/-. The minimum marketable parcel of securities will also be one unit i.e. Rs.10,000/-.
Scrip securities if required There will not be scrip securities once ‘NepagovSecure’ has commenced operations. The Nepal Rastra Bank will start issuing securities only in scripless form when ‘NepagovSecure’ is scheduled to be fully operational. Transactions in the CDS will be possible only in scripless form
Transferring securities in the CDS Securities will be moved from one account to another in the CDS on a request made by a customer through the relevant CDS participant. Once the deal is agreed upon by the counter parties involved, transaction will take place on any of the following basis as the case may be i.e. Delivery Vs Payment (DvP), Receive Vs Payment (RvP), Deliver Free (DF), Receive Free (RF) and Repositioning Investors have to go to a primary dealer or a licensed commercial bank in order to initiate a transaction in the System. Trading can be initiated by originating a message from the computer-based terminal of a participant. If the transaction is between two parties, both parties have to agree with the terms and conditions of the transaction. Once the transaction is matched, the securities will be moved from the seller’s account to the buyer’s account. The corresponding funds transfer will take place through the normal banking procedures.
Settlement of funds and securities Whenever there is a securities transaction pending, the system will check whether funds are available in the respective account. To enable the securities transaction to take place, funds should be available in the respective account.
Do other countries do have SSSS and CDS Yes. Almost all countries are using this system and technology including Bangladesh, India, Pakistan and Sri Lanka in South Asia.
How can we start ? We need to avail the budget for commissioning this system. We may require more documentation on a new state-of-the-art system and to change or make new regulations to recognize nominee ownership of securities, held by ‘NepagovSecure’.

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