It is not so long ago when the bank books were a treasured possession for banking account holders. The blue and white PUPS Founders Building Society Bank Book and the colourful POSB Bank Books quickly comes to mind. These among others, then were the epitome of ownership for most bank account holders. But all these are part of the banking history and since then the banking architecture has evolved. As a result of technological innovation bank books are now archaic and automated wire transfers rule in the new dispensation. Recently, we had the traditional banks fighting tooth and nail to resist the advent of mobile banking but the resistance is unsustainable. In the same vein, like the banking sector, the capital markets in Zimbabwe need to embrace the paperless dispensation where securities movement is managed in a book entry system. This evolving demands the implementation of the Central Securities Depository (CSD), which is a welcome development to enhance efficiency and reduce inherent risks associated with paper.
Historically, for several years, organized securities markets operated in much the same way as they always had and this was highly paper based inherent with inefficiencies and risks. But as trading volume grew and the variety of securities expanded, the paper based, labour-intensive processing became a huge and expensive burden. The solution was the development of CSDs. For instance, rather than firms or issuers having to deliver, reregister, and reissue individual certificates with every trade or every time a stock split, the CSDs immobilized, or secured, the certificates in a single location.
Demand for more efficiency in the capital markets, which resulted in the creation of CSDs, corresponded with the advent of increasingly sophisticated hardware and software that made electronic recordkeeping, automated trade settlement and electronic payment systems possible. Advances in technology and an increase in not only the volume but the pace of securities trading have gone hand-in-hand.
The current move toward dematerialization, or eliminating paper certificates and replacing them with electronic records as evidence of securities ownership, is another example of the dynamic nature of the capital markets. When this goal is fully implemented, securities will be issued only in electronic form, and the need for physical custody of paper certificates will be phased out.
In the quest to attract capital and make their economies more vibrant, most countries with active capital markets have central securities depositories (CSDs) to provide the custody and record keeping services that enable the electronic transfer of ownership when investors buy and sell securities and initiate settlement. With CSDs, settling the huge volume of securities traded every day in the world’s capital markets is fast, cost effective, and secure.
Eliminating a paper based environment in the capital market by implementing the CSD will bring many benefits to the investors, issuers, market participants and the economy. In this regard, the following benefits can be accrued:
- Paper certificates could be misplaced, lost, stolen, and damaged by water or fire. It is not so with securities in the CSD. Adequate back up facilities ensure that securities accounts can be retrieved if lost.
- Relieve the issuers and investors from cost, effort, time they take to print certificates for the original capital or any amendment thereon and print one certificate with total issuing value.
- A CSD eliminates the risk of fake certificates since only those certificates authenticated by the Transfer Secretary will be deposited.
- A CSD enhances service delivery and quality through improved operational efficiencies.
- CSD enables qualitative analysis and enhanced information delivery that is useful for investment decision making.
- The cost of performing transactions through a CSD is cheaper than performing transactions with certificates of ownership.
- A CSD also reduces the paper work involved in a trading of securities.
- Increase the securities turnover due to completion of ownership transfer within a specified timeframe.
- Increase the market liquidity.
- Trading while stock is out for registration involves a lot of risks.
- Risks of introducing duplicate certificates can bring down market integrity and reputation.
Like the changes that have happened in the banking sector, it is imperative to embrace capital market automation in pursuit of international best practice and the benefits will accrue to investors, market players and the economy at large. Certainly, the paper has to end here!
Gerald G. Katerere