JOHANNESBURG – Aligning itself with global standards, the JSE on Monday reduced the time to settle trades from six days to four days, substantially lowering risks for market participants and leading to expectations of increased liquidity.
One of the only exchanges in the world to have still been on a T+5 settlement cycle (i.e. trade plus five days) – due to the complexity involved in reducing the cycle – the shift to T+3 (trade plus three days) will be key in attracting more foreign flows into the local market.
Roughly a third of the JSE is in foreign hands, with foreign investors trading some 37% of daily value, according to Dr Leila Fourie, director of post-trade and information services at the JSE
The shorter settlement cycle will reduce systemic and operational risk in the market since it means there are fewer unsettled trades at any point in time.
“The longer an unsettled trade is out in the market, the greater the risk that the commitment won’t be delivered on,” explained Charl Bruyns, head of investor services for South Africa at Standard Bank..
Equally, when banks commit to a trade in the market, they take on the settlement risk.
Banks effectively underwrite or affirm trades made by stockbrokers, providing surety that the trade will be settled on the cut-off date in the event that the stockbroker is unable to settle it on that day.
The shorter time frame will mitigate banks’ exposures where they have committed to a settlement obligation on behalf of a client.
Where a bank doesn’t match the trade, the broker attracts a margin obligation from the JSE – essentially a levy to act as insurance for the trade.
“The shorter settlement timeframe means that all market players need to have trade affirmations done earlier to mitigate higher margining,” noted Louise Currie, general manager of Nedbank Investor Services.
“Banks may provide facilities or guarantees to stockbrokers, in order to cover the margin obligations that they may incur if there are any unmatched or uncommitted settlements prior to the official cut-off time,” Currie added.
Wednesday morning will see the first broker margining flows under the T+3 framework, according to Bruyns. “We’ve worked closely with brokers to ensure they have adequate financial resources to meet the margining obligations. The shorter time period in the settlement cycle to confirm trades and secure stock, will impact brokers margining on T+1,” he said.
Where trades are unmatched and margining obligations not met, trades may roll or fail altogether.
“As you reduce the settlement cycle, you would expect to see approximately 5% to 8% of trades rolling or not settling in the three-day cycle. Wednesday will be telling in terms of how we go through the new fails management process and whether sufficient stock is found to commit to those trades or they roll,” Bruyns said, referring to a situation where scrip is borrowed from securities lending desks to facilitate settlement.
“We expect the securities lending market to have increased demand for stock borrows following the implementation of T+3,” he observed.
“To the extent that trade rolls remain between 5% and 10%, we could look at T+2,” noted the JSE’s Fourie.
Global markets are in the process of moving to T+2 (trade plus two days), which is in the JSE’s short- to medium-term plans and will be significantly less complex than the jump from T+5 to T+3, according to Fourie.
“Experience from other international exchanges indicates that we could potentially be looking at a 7%-10% increase in daily liquidity, depending on current markets and other macroeconomic factors,” said Fourie.
Based on a daily traded average of R25 billion, T+3 is expected to release an additional R50 billion over the settlement cycle due to funds being released two days earlier.
Fourie described this as an “historic” change to the JSE’s equity market functioning, which has been on T+5 ever since it went electronic 20 years ago.
On Thursday and Friday this week, banks would be “double funding” the settlement obligations for the last of the T+5 trades (made on July 7 and July 8) and the first of the T+3 trades made on July 11, said Currie.