CSE Trade Settlement (T+2) & Transaction Costs

Part 1: The Trade Settlement Lifecycle

When you buy something at a store, the exchange is instant: you pay money and walk away with the item. In the stock market, the process is slightly different. The transfer of ownership (shares) and payment (cash) is not instantaneous. This formal, post-trade process is called settlement.

For the Colombo Stock Exchange, this process follows a T+2 settlement cycle. This is a standard notation in finance:

• T: Represents the Trade Date—the day your order is executed.
• +2: Represents two business days after the trade date.

So, T+2 means the final settlement of your trade will complete two business days after you bought or sold the shares.

Let's look at a high-level map of what happens on these days.

This diagram gives us a framework: T, T+1, and T+2 are distinct stages. Now, let's explore the detailed steps and the key players involved, such as the Clearing House and the Central Depository System (CDS).

The video gives you a strong conceptual model. Now, let's map it precisely to the Sri Lankan T+2 process.

Based on what you've just studied, here is a summary of the CSE's T+2 settlement process, connecting the concepts from the video to the facts from the RBC document:

• T (Trade Day):

  1. Execution: Your order is matched on the CSE's Automated Trading System (ATS).
  2. Confirmation: Your broker sends you a contract note (the "confirmation" from the video) detailing the trade.
  3. Reporting: The CSE reports the trade details to the Central Depository System (CDS), which acts as the clearing and settlement facilitator.

• T+1 (Confirmation/Affirmation Day):

  1. Affirmation: By 1:30 PM on T+1, your broker (acting as or through a custodian) must formally affirm the trade details with the CDS. This is the official "agreement" that the trade is correct and will be settled.

• T+2 (Settlement Day):

  1. Clearing: The CDS finalizes the net obligations—calculating which brokers need to pay money and which are due to receive money, and which accounts need to deliver or receive shares.
  2. Settlement: The final two-way transfer happens. The CDS performs a Delivery versus Payment (DvP) settlement. This means the transfer of shares and the transfer of money happen simultaneously.
     • The CDS debits the shares from the seller's CDS account and credits them to the buyer's CDS account.
     • The money is moved from the buyer's broker to the seller's broker through the Central Bank’s Real-Time Gross Settlement (RTGS) system.

This systematic, automated process ensures that every trade is completed safely and efficiently, without either party having to trust the other directly. The Clearing House/CDS acts as the central guarantor.

Part 2: Transaction Costs on the CSE

As we've seen, executing and settling a trade involves a complex infrastructure. These services are not free. Every time you buy or sell shares, a small percentage of the transaction value is charged to cover these costs.

These costs will be clearly itemized on the Bought or Sold Note you receive from your broker.

As you can see from the resource, for a standard trade up to LKR 100 million, the total cost is 1.12%. This is split between several parties:

Let's do the math:

This 1.12% is applied to both buy and sell transactions.

• When you buy, the cost is added to your purchase amount.
• When you sell, the cost is deducted from your proceeds.

Example: You buy 1,000 shares of a company at LKR 50.00 per share.

• Transaction Value: $1,000\times 50.00=\text{LKR }50,000.00$
• Transaction Costs: $50,000.00\times 1.12\%=\text{LKR }560.00$
• Total Amount Payable by Buyer: $50,000.00+560.00=\text{LKR 50,560.00}$

If you were the seller in this transaction:

• Total Amount Received by Seller: $50,000.00-560.00=\text{LKR 49,440.00}$

Other Related Taxes and Fees

Beyond the main transaction cost, there are a few other tax-related points to be aware of:

• Withholding Tax (WHT) on Dividends: If you receive dividends, a 10% tax is automatically deducted before the money is paid to you.
• Capital Gains Tax: Currently, there is no capital gains tax on the profits you make from selling shares of listed companies on the CSE. This is a significant advantage for investors in Sri Lanka.
• Stamp Duty: Not applicable on investments in listed equities.
• Value Added Tax (VAT): VAT (currently 18%) is applicable on service fees, which includes your brokerage fee. This is usually calculated by your broker and itemized on your contract note.

Conclusion

You have now completed the final lesson in our module on the practicalities of the CSE. You have journeyed from opening an account to placing an order, and now you understand the entire post-trade process.

Key Takeaways:

• The CSE operates on a T+2 settlement cycle, meaning trades are finalized two business days after execution.
• The settlement process involves the Broker, CSE, and CDS, ensuring a secure Delivery versus Payment (DvP) of shares and cash.
• The standard transaction cost for trades up to LKR 100 million is 1.12%, which covers fees for your broker, the CSE, the CDS, the SEC regulator, and a government levy.
• When you buy, costs are added; when you sell, costs are deducted.
• Currently, there is no capital gains tax on profits from listed shares, but a 10% withholding tax applies to dividends.

Preview of the Next Lesson:

Now that you have mastered the "how" of trading, you need to start thinking about the "what". What information will you use to decide which companies to invest in? In our next lesson, we will begin a new module by exploring reliable sources of financial news, data, and research for the Sri Lankan market. This will equip you with the tools to start identifying potential investment opportunities.