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The securities regulator has urged caution over a proposal by the Dhaka Stock Exchange (DSE) to introduce share netting, saying the market lacks the risk-management infrastructure needed to protect investors.

Share netting would allow investors to buy and sell the same security multiple times within a single trading session and settle only the net position, a mechanism often used to boost liquidity in the secondary market.

The Bangladesh Securities and Exchange Commission (BSEC) said it agrees in principle with the idea but is unwilling to move forward without proper safeguards, particularly in light of past financial fraud and weak risk controls at some brokerage firms.

“We agree in principle about the necessity of scrip netting. But the introduction of scrip netting before ensuring infrastructure may harm investors,” a BSEC commissioner said, adding that the proposal has not been rejected but remains under review.

Regulators pointed to unresolved issues in the brokerage industry, including failures in managing margin loans, negative equity positions and delayed compensation to clients affected by share and cash embezzlement.

“In such a situation, the regulator is unwilling to allow scrip netting unless brokers put in place a risk management mechanism,” said BSEC spokesperson Md Abul Kalam.

Share netting is closely linked with short selling, where investors sell borrowed shares in anticipation of a price fall and buy them back later at a lower price. While profitable in declining markets, losses can escalate sharply if prices rise, especially in bullish conditions. Such transactions require clear agreements, robust monitoring and effective risk controls.

BSEC officials said efficient risk management, along with functional short-selling and market-maker systems, is essential for safe implementation of share netting. Although the regulator issued rules for short selling in 2021 and for market makers in 2018, the DSE has yet to roll out its own regulations to operationalise these frameworks.

Market makers—typically large financial institutions—provide liquidity by continuously offering to buy and sell securities, helping stabilise prices and facilitate smoother trading.

The regulator believes the market and its participants are not yet ready for share netting. While the practice was allowed for about three years after automated trading was introduced more than two decades ago, market turnover was then small and settlements were easier.

With the market now far larger and more complex, BSEC officials say netting cannot be allowed without modern risk-management systems and settlement safeguards.

“Investors will be affected if scrip netting is allowed without the necessary arrangements in place,” a BSEC official said.

Sources at the DSE also acknowledged that the exchange currently lacks the required infrastructure, reinforcing the regulator’s cautious stance on the proposed reform.