Why risk management in equity clearing and settlement is critical for market stability

IN today's dynamic world of equity markets, every trade represents an agreement between two parties to exchange of cash and securities on a future date.

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This agreement ensures that trade is not only executed but honoured, settled, and risk-free. In this context, the importance of risk management in equity clearing and settlement cannot be overstated. It is the unseen safeguard that ensures the visible trust investors place in the market. That's why risk management in clearing and settlement plays a vital role in maintaining the safety and integrity of the financial system.

The risks associated in the trade to settlement process

In Sri Lanka every time equities are bought or sold; there's a time gap between trade execution and final settlement of two days with T+2 settlement cycle. This gap might seem short, but it introduces several layers of risk:

■Counterparty risk: The risk that one party in a transaction default on its obligations.

■Market risk: The risk of market prices moves unfavourably prior to the settlement.

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