Central Securities Clearing System (CSCS): Functions and how it works

The securities industry entails a series of conjoined but technical processes to assist companies and investors in trading company assets. The major regulator of the Nigerian securities industry is the Securities and Exchange Commission (SEC); the Nigerian Stock Exchange is yet another vital agency in the business of a company’s asset trading. 

The CSCS is one of the agencies whose duty is to create ease in trading companies’ assets, primarily in the Stock Exchange market. The CSCS is a creation of the Nigerian Stock Exchange formed to handle central depository, settlement and clearing service transactions for the Nigerian Stock Exchange.

The CSCS is licensed by the SEC and acts as a capital market agent with operations being carried out at the Stock Exchange building since 1997 when the CSCS was established.

This article details all the information there is to know on the CSCS in Nigeria.

Functions of the CSCS

1. Deposit of share information

The CSCS established a central depository system for shares of quoted companies. The individual shareholder’s shareholdings are now captured on the CSCS database where all information relating to the ownership of company shares is now contained on the CSCS record and can be easily retrieved for investigation. 

The CSCS act of recording all shareholding in publicly quoted companies allows for ease in trading and credibility; investors can simply log into the CSCS platform to confirm the existence or non-existence of company shares.

The name of the shareholder, the address, email, and other required information is contained in the database; conducting due diligence on corporations becomes a lot easier with this innovation.

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2. Clearing of share transactions

When a shareholder of a public quote intends to sell his shares on the floor of the stock exchange, the CSCS acts as a middleman or an agent who clears each transaction or proposition from several bidders and subsequently moves them for settlement.

When clearing, the CSCS receives all information on the transaction of the day from the Stock Exchange for final clearing and further settlement.

The clearing function is perhaps the CSCS’s most significant, it helps cause an organized transfer of various transactions and clear which transaction is to move on to settlement.

3. Settlement of transactions

At settlement, the stockbroker’s account is charged and the price of the shares bought or sold is shown to them. Stockbrokers can subsequently make or receive payment for the transaction.

With this function, the task of stockbrokers having to interface with the intending company or investor who buys or sells is minimal. There is also the ease of trading in the market with this feature. 

The CSCS work closely with clearing banks to have transactions processed once settled. All stockbrokers are required to open accounts with clearing banks appointed by the CSCS, the account of the stockbroker would be credited with the funds and payment will for the shares purchased be debited from the clearing account; the same process sees the stockbrokers’ account credited if it is a share sale.

4. Dematerialization of share certificates

The process of dematerializing share certificates is an innovation introduced by the CSCS. Once a person acquires the shares of a company, the simple evidence to prove such acquisition is through the share certificate. This share certificate is a paper form certificate held by shareholders; the certificate serves as a form of receipt for the shares bought or allocated to the shareholder. 

The CSCS now converts the paper-form share certificates into electronic formats held in the CSCS depository. With this innovation, shareholders can offer their share certificates to the CSCS for them to be dematerialized. An advantage of this system is that it allows for greater ease in verifying the authenticity of a share intended for sale.

How the CSCS works

The CSCS’s primary aim is to allow transactions relating to trading company stocks on the Stock Exchange to be completed with ease. Through the processes and rules set by the CSCS, a shareholder intending to sell or purchase shares can receive his purchase sum or shares with ease following this step. The CSCS is obligated to ensure the smooth process of the transaction in share trade at the Stock Exchange.

The ease of transacting is the major factor attracting companies to quote at the Stock Exchange in the first place. A significant part of the CSCS process is the transfer of stocks to the purchaser; the CSCS ensures that against all odds the party paying for the shares receives them immediately.

For the shares to be delivered immediately to the purchaser, the seller must deposit the shares with the CSCS depository before trading. This invariably means that stockbrokers are not permitted to sell shares that are not in the custody of the CSCS. The CSCS places a three days time-frame for the delivery of the shares to the purchaser once the payment is made. 

Mostly the CSCS works hand-in-hand with the company’s registrars. The process of having detailed records for the sale or purchase of shares and the shareholding in the company begins with the stockbrokers sending to the company’s registrars the stock meant for sale for due diligence and verification of the shares.

Once verified, the registrars shall transfer the shares to the CSCS for depositing on account of the selling stockbroker. The CSCS transfers to the company’s registrars the record of depository and the certificates of dematerialization. 

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Conclusion

Aside from the functions of the CSCS detailed above, there exist varying innovative practices introduced by the CSCS for greater ease in transacting on the Stock Exchange. Technology also plays a significant role in the activities of the CSCS with strong indications that the CSCS may go completely remote in the coming future. 

The CSCS so far has lived up to expectations, showing transparency and efficiency in the trade of company shares. The CSCS has considerably grown its scope to further service offerings that stockbrokers, companies and shareholders can leverage to smoothly trade on company assets on the stock exchange market.